Tesco confirmed yesterday (Thursday October 23 2014) that the overstatement of profits involving commercial income (known as ‘supplier contributions’) from their suppliers has been going on for several years.
Partner, Duncan Swift, who leads our Food Advisory Group, comments:
“What shareholders and customers of the top 10 supermarkets do not realise is the extent of the buyer bonus culture that underpins demands for suppliers to pay commercial income.
“This bonus culture is comparable to the bank bonus culture, with supermarket buyers, operating in trading rooms similar to those operated by the banks and investment companies.
“The main part of a supermarket buyer’s annual bonus is based on the total amount of supplier-paid commercial income they have extracted from the suppliers in the food category (e.g. eggs, cheese, fresh produce, beers, wines and spirits etc.) for which they have responsibility.
“Tesco’s overstatements of profit means their buyer bonuses will have been similarly overstated and already paid over a number of years.
“As with the banks, someone must ultimately pay for these bonuses and although on the face of it the supplier seems to be footing the bill, we must ask how much of this cost the consumer pays for at the checkout.
“It is also important to consider the impact on the supplier’s business in as much as what pressure that business is under to be able to afford to pay these supplier contributions. Also, the impact this has on the treatment of supplier staff and the quality of our food that we are paying for at the checkout.”
We calculate these financial contributions are worth several billions of pounds per year to the top ten supermarkets.
Duncan continues: “You would think the amount of price reductions that a supermarket can get through supplier contributions is going to be nothing like what we as consumers spend at the tills and relatively you are right. But in profit terms, at the margin, it's 15 times more attractive for a supermarket to get an extra £1 of supplier contribution than it is to encourage the likes of you and I to spend an extra £1 at the till.
“It is very easy for a supermarket to levy these supplier contributions directly against what they owe in debt to the supplier for goods already supplied.”
An analysis by our team found that the top ten supermarkets owe suppliers approximately £15 billion in supplier debt at any one time.