Tesco threatens range reviews unless suppliers pay new fulfilment fee

Tesco has been accused by suppliers of an “outrageous” money grab, after announcing it plans to introduce new Amazon-style ‘fulfilment fees’ for its online and Booker wholesale operations.

The supermarket has written to suppliers saying the new charges will be brought in to help it shoulder the cost of serving customers online as its digital operations become bigger and more complex.

It also warns suppliers could face the threat of range reviews or reduced prices if they don’t agree to take part.

The Grocer has also seen another communication between Tesco and suppliers which suggests the new charges could be applied from as early as 13 March. However Tesco insisted it had not provided any official deadline for suppliers to agree but rather that the fees will apply from the following Monday after a supplier signs the new agreement. 

Although details of the fees were not disclosed in the letter, The Grocer understands the cost will be 12p per unit on branded goods and 5p per unit on own-label. Tesco has said its “smallest suppliers” will be exempt.

But the move was slammed as “outrageous” by retail experts, who warned Tesco risked the wrath of the Groceries Code Adjudicator.

A letter from Tesco’s group chief product officer, Ashwin Prasad, seen by The Grocer, claims Tesco needs to start charging the fee so suppliers share a fairer burden of the costs for online fulfilment.

“Today, we operate the UK’s leading wholesale business, as well as the largest UK online grocery home shopping service,” he says.

“Over the last three years, our businesses have grown significantly, both in customer count and complexity as we look to serve customers in the way that they choose. 

“Tesco shoulders the majority of fulfilment costs – whether it’s serving more than one million online orders a week in the UK or getting essential products to thousands of independent retailers and catering customers. We need to achieve a more balanced approach.”

Tesco said it intended the new fee to be applied across the whole Tesco Group, with an initial rollout to the Tesco UK on a pence per unit basis on all products sold via Tesco.com or on the app. Meanwhile, it is to contact Booker suppliers and those for the Republic of Ireland separately, and a different fee structure may apply.  

The letter goes on to say that suppliers who don’t continue will face a series of potential measures.

“This fee is essential as we work to fulfil more orders for our customers across the group and we are asking suppliers to engage on this request and to support us.

“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.”

‘Outrageous’

The Retail Mind founder Ged Futter said: “The word I would use for this is outrageous.

“Tesco have had online for how many years and now all of a sudden they want to start charging for fulfilment.

“This is not a way to be working collaboratively with suppliers, especially when you give them three days’ notice and I’m pretty sure the the GCA will have something to say about this.”

Under GSCOP, supermarkets must provide “reasonable notice” before any delist, though what that entails is a contentious grey area, and Tesco said it had not provided a deadline, as the letter was intended to be the start of conversations with suppliers. 

“The reason they are doing this is because they are not making enough money,” added Futter.

“But I don’t understand Tesco’s logic. They are already losing shoppers.

“If they follow through with this threat and take products and brands offline, they are just encouraging shoppers to go somewhere else.”

One angry supplier told The Grocer: “Clearly online sales are margin-diluting for Tesco. But I wonder where this sits with GSCOP. Will we be allowed to increase our prices by the same amount? We are going to politely ask if they can remove our products from the online shop.”

They added they were worried that other supermarkets may also look to follow Tesco’s lead. “It’s probably going to start a trend and everyone will try to roll this out.”

Martin Heubel, founder of Consulterce and a former Amazon executive, said: “Tesco is clearly looking to take a page out of the Amazon playbook, but it will be very interesting to see the reaction as it looks as if they are looking to cherry-pick so they can have the best of both worlds.”  

Heubel said while suppliers who paid to be on Amazon’s premium Vendor Central marketplace did not have to pay a fulfilment fee, third-party sellers were charged an average of 15% of the price of products sold, if they sold from their own warehouses. This figure was higher if the order was fulfilled by one of Amazon’s own DCs.

Paul Stainton, a partner at IPLC, said the move would go down “like a lead balloon” with suppliers.

“It’s the last thing I would expect the number one retailer to do when we are now at a time when collaboration has to be at a higher level to make sure everyone is winning.

“It all absolutely harks back to the Phil Clarke days. They are clearly looking at the year-end accounts. It smacks of a panic action without thinking of the negative PR.”

A Tesco spokeswoman said: “Over recent years, the way we serve our customers has grown in both capacity and complexity. Our customers expect us to serve them wherever, whenever and however they want to shop.

“As we respond to changing shopping habits and our fulfilment costs continue to grow, we are talking to our suppliers about how we can work together to create a more balanced approach and ensure we can continue to invest in our customers.”