The Tesco leopard can change its spots - but can it still hunt?

There are four rules to rebates,” an ex-buyer once told me. “1. Get a rebate. 2. If you have one increase it. 3. If you can’t increase it add it into net pricing. 4. Start again at 1.”

In the past seven days, the issue of rebates (and bonuses and kickbacks and overriders and all the other various fees imposed/negotiated) has once again been in the spotlight.

It all kicked off last Thursday night, when a supplier to Premier Foods leaked to the BBC a note it had received promising to “delist” it if it didn’t stump up money for what Premier termed an “investment fee.” It was tantamount to bribery, the supplier claimed. As well as being old news (we first exposed plans by Premier Foods to streamline its supply chain and renegotiate its terms with suppliers in July 2013), the coverage illustrated the naivety of politicians, the media and, arguably, some of Premier’s suppliers, over exactly how business is done in the fmcg world. Shadow business minister Toby Perkins said it was illegal under GSCOP. As every supplier to the multiples knows, it’s perfectly legal. Between supermarkets and suppliers, at least, it is common practice. And there are fears the practice will spread (pxx).

“Of course the Tesco leopard can change its spots. But can it still hunt?”

Is it fair? It depends if the supplier is as good as its word, and if it grows the business of the supplier as a result. Writing in The Grocer, Premier Foods CEO Gavin Darby admits to mistakes (p20). But Premier’s biggest mistake in introducing the practice has been a consistent failure to grow as a result. Indeed, with sales going backwards, the story probably resurfaced because it’s gone back to its suppliers a second time, as sales from its big four customers deteriorate.

It’s certainly a failure to grow that was at the heart of Tesco’s previous profits warning: a £263m black hole of misaccrued kickbacks and accelerated trigger payments.

Early accruals can be massaged into a growing business. It’s a cashflow play. And irritating as it can be when a trigger is not hit but the retailer demands the bonus payment anyway, all is forgiven if the supplier knows there’s a pipeline of future growth from the retailer.

But when sales go backwards - and at an alarming rate - the practice exposes the perpetrators to more sinister calls. Instead of merely boosting cashflow and profits, it’s covering up a multitude of sins.

Now comes a new twist in the tale. As new CEO Dave Lewis announced another, even bigger, profits warning this week (p4), one of the explanations he offered was a determination to wean the business off the margin drug. In other words: rebates.

Earlier this year we outlined the sheer number of tricks of the trade employed by Tesco (and its rivals) in painstaking detail, with a whole lexicon from admin fees to zone fees, via charity donations, cost of doing business allowances, and the now notorious ‘just gimme’.

So the idea that Tesco is about to abandon all these practices is potentially a Damascene moment. As we ask on p12, can a leopard really change its spots? Not surprisingly, the response from suppliers to the new regime has been (mostly) positive - albeit tinged with cynicism and a touch of fear over the unknown.

But the more pertinent question is whether employing a front-margin approach can yield a transformation in terms of volumes. That’s what Dave Lewis is evidently banking on. And I can see the logic. Basing a business model on back margin makes the buyer focus on deals at the expense of simplicity and consumer need. Quite apart from the potential for fraud, it’s why a) the number of SKUs in Tesco has soared; b) availability is poor; and c) Tesco needs so many buyers and shop floor staff to manage and administer constant back and forth.

The contrast to negotiations with, for example, Aldi, are instructive. As one leading supplier told me: “I have seven people managing my business with Tesco every day. My negotiations with Aldi take place once a year. And that’s it.”

In our article on the tricks of the trade earlier this year, a supplier suggested, with a strong undercurrent of sarcasm: “Perhaps the new man thinks Tesco should make its money by putting products on shelves and selling them.” 

That’s exactly what he appears to think. The question is not only whether he will be true to his word. It’s whether, as investors breathe down his neck, and the spectre of a rights issue looms, the new front-margin approach can have the desired effect. Of course, the Tesco leopard can change its spots. But can it still hunt?