You know it is bad when Tesco’s financial results are pivoting on rebates paid by suppliers.
Tesco informed investors in a “trading update” Sept. 22 about the issue:
During its final preparations for the forthcoming interim results, Tesco has identified an overstatement of its expected profit for the half year, principally due to the accelerated recognition of commercial income and delayed accrual of costs.
From Reuters coverage, it was reported that Tesco revealed earlier this week that the retailer had overstated its profit forecast for the first of the year by $409 million.
The Telegraph expanded on the problems at Tesco, asking…
So how can £250m seemingly disappear from one of Britain’s biggest companies? The answer is in the complex, diverse and daily dealings that take place between a supermarket and the hundreds of companies that supply it with food.
Tesco said the shortfall in its profits is due to the “accelerated recognition of commercial income and delayed accrual of costs”. In other words, Tesco has been paying suppliers later and taking monies from them earlier than it should. The size of the black hole suggests this practice was widespread.
TK: So apparently Tesco was deducting cash from suppliers’ trading accounts or extending the number of days it took to pay suppliers. Other sources have indicated the revenue discrepancy was related to promotional funds provided by suppliers. Supplier funded promotions were apparently adding to the Tesco bottom line, but not as much as the chain had estimated. Perhaps Tesco was promised a bigger sum from suppliers if sales increased a certain percentage, but that goal was not reached.
The latest news from across the the Atlantic is this report from The Independent, which states that the House of Commons is considering an investigation of Tesco’s dealings with suppliers.
In any case, the industry practice of paying slotting fees or promotion allowances to U.S. retailers has not been in the news lately. For a treatment of slotting fees in the U.S. industry, check out this dated document from FMI.
That 2002 document said this about slotting fees and produce:
10. Is the use of slotting allowances increasing?
The 2000 paper “Slotting Allowances and Fees: Schools of Thought and the Views of Practicing Managers” reported that it was the perception of the managers interviewed that the use of slotting allowances was increasing. At the same time, some of the nation’s largest and fastest-growing supermarket chains, along with some regional food retailers and alternative-format retailers, do not charge such allowances. Many major manufacturers have a firm policy of not paying allowances because of the extensive market research they perform and the advertising they provide to support new products.
Also some produce suppliers have complained about an increase in slotting allowances for fruits and vegetables. In the produce industry, however, the practice is limited to ready-to-eat packaged items such as fresh-cut vegetables and bagged salad, according to a 2001 report by the Economic Research Service of the U.S. Department of Agriculture (U.S. Fresh Fruit and Vegetable Marketing: Emerging Trade Practices, Trends and Issues). The report found that such allowances are not charged for the commodities that account for the vast majority of produce sales. It also noted that produce shippers, not retailers, initiated the practice of paying slotting allowances for such packaged items.
TK: Bruce Peterson, a produce industry consultant and a veteran of both the supply and buying side, told me the issue of “business development funds” provided by suppliers to retailers can be full of nuance. For example, retailers want to have as much flexibility as they can with the funds, but the general regulatory oversight to those funds restricts the activities that advance the marketing of that commodity or the company which provided the funds.
Publicly held companies are held to greater scrutiny in their disclosure of their financial dealings by the Securities and Exchange Commission, but how the business development fund is reported can be quite variable.
Commodity boards still collect and provide funds for these types of retail promotional efforts, Peterson said.
But there could be gray areas. For example, does the appropriate use of the funds by retailers include putting in new merchandising fixtures to make more attractive displays for that commodity? If new in-store signage is created, is that marketing?
There is a potential for misuse of the funds if there is not strong corporate governance, Peterson said.
“When you have monies going through the system that have loose governance to it, you always run the risk they were not being applied the way they were intended, or even worse, that you have individuals that find the money a way into their own pocket,” he said.
When he was at Wal-Mart, Peterson said that the chain negotiated net-net, meaning that the retailer did not want promotional funds, but only the lowest possible price for the goods.
So how suppliers relate to retailers, and how retailers want suppliers to relate to them, can vary widely.
Just this week, the Federal Trade Commission issued a news release speaking broadly to this issue.
From the FTC:
The Federal Trade Commission has approved final changes to its “Fred Meyer Guides,” which explain how suppliers can provide advertising allowances and other promotional payments and services to retailers without running afoul of certain provisions of the Robinson-Patman Act.
In December 2012, as part of its systematic review of all FTC rules and guides, the FTC sought public comment on the Fred Meyer Guides. The Guides explain how suppliers can provide promotional allowances and services to retailers on “proportionally equal terms” in compliance with the Robinson Patman Act, which prohibits anticompetitive price discrimination and certain other kinds of business discrimination.
In response to comments received, the FTC has approved modest changes to the Guides to bring them up to date with technological developments and with current Commission enforcement priorities.
TK: The FTC document is 48-pages, and provides a plethora of head-spinning examples about acceptable and unacceptable behaviors. Also see this analysis of the development of slotting fees, written more than ten years ago but still insightful. More intelligence is needed about advertising allowances, slotting fees and other considerations are provided by suppliers to buyers in the fresh produce industry. Perhaps PMA or United Fresh could help us out with that....