The key questions to be answered in the Tesco fulfilment fee fiasco

Tesco’s audacious attempt to start charging suppliers fulfilment fees for the privilege of using its online grocery and Booker wholesale arms is a subject dominating many debates this week, and not just in fmcg circles either.

One school academy has even given details of the move, revealed by The Grocer last week, as homework for sixth formers who are studying ‘monopsony’ power in economics.

In fact, with just the trifling 30% of the market, Tesco doesn’t technically have a monopoly, but the outcome of this landmark clash between the UK’s largest retailer and its supply chain nevertheless looks set to have enormous implications.

The letter from Tesco’s chief product officer Ashwin Prasad pinged into supplier inboxes last Thursday afternoon, just hours before The Grocer went to press. It was a hand grenade and threatens to fracture an already uneasy relationship between suppliers and supermarkets in the frontline of the cost of living crisis.

It’s also an admission from Tesco that its online business model is not proving profitable enough for the liking of Prasad and the wider Tesco exec team, and it would obviously rather go to suppliers to make up the difference rather than ask consumers to pay the price.

Citing the growth in “customer count and complexity”, Prasad says Tesco no longer feels it should “shoulder” such a burden when it comes to its online DCs and Booker warehouses.

It’s a far cry from the summer of 2021, when Ken Murphy’s first set of results as CEO saw him reveal booming profits and a doubling of online orders during the pandemic, while supermarkets were falling over themselves to expand their online reach.

Fast-forward to January this year, and Murphy was instead scaling back Tesco’s plan for a network of urban fulfilment centres, with online sales “stabilising” at a higher level than pre-pandemic but still significantly lower at their peak.

The first obvious question posed by Tesco’s powerplay – with The Grocer revealing the proposed cost of the new fees was 12p for every unit sold on branded goods and 5p per unit on own label – is whether suppliers will play ball. Judging by the stream of angry suppliers that contacted The Grocer on Thursday and those who took to social media, it would appear the supermarket will have a major battle on its hands.

“Outrageous”, “appalling” and “bonkers” were just three of the printable words used to describe the demands. And with Tesco already in the thick of a battle with suppliers trying to get through CPI requests, it’s hardly surprising the request has many up in arms.

And Tesco wasn’t exactly subtle in its message about what would happen to suppliers if they did refuse to sign on the dotted line.

“Without introducing a supplier contribution, we would need to take additional decisions on range optimisation, differentiated price and trade plans. It is important you work with us on the fulfilment fee as we both look to benefit from the investment into serving customers,” the letter from Prasad says.

Clive Black, analyst at Shore Capital, advises Tesco “absolutely not [to] be undertaking a supplier satisfaction survey, which is frequently referenced in [Tesco’s] preliminary results narrative”.

Speaking of surveys, the timing of the letter has also raised questions, coming just a week after the Groceries Code Adjudicator Mark White closed his survey into supplier views on retailer behaviour, a poll that last year saw Tesco finish a narrow second to Aldi. It would be interesting to see how the next table would have looked had that deadline not passed, though there are some already within Tesco who fear the comments of chairman John Allan may have blotted their copybook.  

Clearly another key question is whether Tesco’s move will be enough to prompt White to intervene.

The vagaries of the code are such that those experts The Grocer has sounded out pretty much divided equally over whether Tesco has broken the letter of the code, even if it has broken it in spirit.

What is certain, however, is that the UK’s biggest retailer is now back under GSCOP scrutiny in a way it has not been since the 2014 accounting scandal and the subsequent investigation by former adjudicator Christine Tacon.

And the outcome of the current standoff with suppliers might have just as much of an impact for the next decade especially if, as many suppliers fears, other supermarkets feel that they too need to rebalance the books.