TSCDY Tesco PLC (PK)

By Saabira Chaudhuri 

LONDON-- Tesco PLC unreasonably delayed payments to suppliers and must "make significant changes," a U.K. regulator said on Tuesday following a year-long investigation into the supermarket chain's payments practices.

The Groceries Code Adjudicator Christine Tacon said Tesco "seriously breached" the Groceries Supply Code of Practice, aimed at protecting suppliers.

Ms. Tacon said Tesco "had acted unreasonably when delaying payments to suppliers, often for lengthy periods of time."

Tesco said it accepts the findings of Tuesday's report, adding that it "will continue to work collaboratively with suppliers to further build trust."

The GCA said it is requiring Tesco to stop making unilateral deductions from money owed for goods supplied, allowing suppliers to challenge a proposed deduction.

Tesco will also have to correct pricing errors within seven days of notification by a supplier and improve its invoicing practices. The company has four weeks to outline how it will implement the recommendations.

"The absolute focus on operating margin had damaging consequences for the business and our relationship with suppliers. This has now been fundamentally changed," said Tesco Chief Executive Dave Lewis in a statement. "We are sorry," he added, characterizing previous practices as "both unsustainable and harmful to our suppliers."

Ms. Tacon's investigation revealed payments delays arising from data input errors, duplicate invoicing and deductions to maintain Tesco margin among other things. "The sums were often significant and the length of time taken to repay them was too long," said Ms. Tacon.

She said one Tesco supplier was owed a multimillion pound sum as a result of price changes being incorrectly applied to Tesco systems. This was eventually paid back by Tesco more than two years after the incorrect charging began.

The GCA noted that Tesco's relationships with suppliers have recently improved.

It began its probe in February 2015, following an accounting scandal that rocked Tesco the prior year, culminating in a slew of high-level departures, including the resignation of Chairman Richard Broadbent.

Britain's largest retailer first flagged issues with its accounts in September 2014, revealing a GBP263 million profit overstatement. The supermarket chain continues to be investigated by the U.K.'s Serious Fraud Office, which has the jurisdiction to criminally prosecute entire companies and individuals on matters relating to fraud, corruption and bribery.

The GCA's powers are far more limited, with the agency currently unable to fine supermarkets. The body was created in 2013 to oversee the relationship between U.K. supermarkets and their suppliers and the probe into Tesco marked the first of its kind by the regulator.

Ms. Tacon on Tuesday said she has asked the Competition and Markets Authority to explore whether companies should be allowed to pay for "category captaincy" which allows suppliers to manage the selection and display of products across a category with the aim of driving sales. She said the practice could hurt smaller suppliers who can't effectively compete for these positions or negotiate for shelf space.

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com

(END) Dow Jones Newswires

January 26, 2016 06:12 ET (11:12 GMT)

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