Tesco standardises supplier payment terms

Tesco has pledged to deliver a simpler business model for suppliers, by standardising its payment terms.

The UK's largest retailer committed to no longer use a combination of complex and varied terms, but will instead introduce a new approach which will offer specific concessions that it says will help small and medium-sized businesses. It is hoped the move will allow suppliers to focus on more customer-focused matters, and Tesco will be writing to its supplier base to inform them of the changes.

Smaller suppliers, who deliver up to £100,000 worth of products in a year, will now be paid within 14 days. Tesco also said that those companies that deliver up to £10 million in product value per year will have their accounts settled five days quicker than larger suppliers in their category.

Dave Lewis, Tesco CEO and the former boss of major supermarket supplier Unilever, revealed the new arrangements at IGD's The Big Debate event in London on Tuesday.

"We want to work with our suppliers to get back to innovating on behalf of our customers and these changes will make it easier for us to do that," he explained.

"Our customers want value, great availability and new choices. If we think about that from one end of the supply chain to the other we can collaborate with suppliers on ideas and grow together. That's good for customers. Good for suppliers. And good for Tesco."

The supermarket's new initiative means that in the majority of categories, it will be offering shorter payment terms to its suppliers than it in turn passes onto its own suppliers. It says that the smallest suppliers will typically be paid 34 days quicker than before. 

For all partners, the terms refer to the day when they will receive cash and not the day the payment is sent for processing. All changes will be in place by the end of June 2016, which Tesco says will enable suppliers to build plans into their annual financial planning cycle.

In addition, Tesco has said that it "will make no financial gain from this and in some cases this will mean additional short term investments to improve cash flow right across the supply chain".

Since Lewis's arrival at Tesco just over a year ago, a number of moves have been made to change retailer-supplier relationships, including creating a single product team responsible for the entire lifecycle of a product and launching a helpline, where any issues raised by suppliers are aimed to be resolved within 48 hours.

These changes came in the aftermath of the revelation that Tesco had overstated profits by £263 million, which prompted an ongoing Serious Fraud Office probe into dealings at the business.

During Lewis's presentation at the IGD event, he also apologised to customers and suppliers for some of the decisions Tesco had made in the past while chasing margin gain, although he clarified that the team now sitting under his stewardship is a completely different team to previous regimes.

"We've started to change our business," he remarked.

"Customers: put really simply are our magnetic north. We have put the customer right back at the centre of every single thing we do."

Lewis added: "We want to be competitive on the things that are available across a whole range of outlets [and] from a supplier point of view, we've redefined the business model we want to run."

Update (7 October 2015, 07:00)

Tesco has announced interim results for the first half of its financial year, with group operating profit effectively halving year on year to £354 million. The statement follows a period of significant change at the supermarket group, which has included the shifting a number of assets including the £4 billion sale of its South Korean operation Homeplus.

UK like-for-like sales dropped by 1.1% and international comparative trading was up by 1%, which mark a top-line improvement on the company's first quarter performance while also highlighting the hugely challenging environment UK grocers currently find themselves in.

John Ibbotson, director of the retail consultancy Retail Vision, commented: "Tesco is not alone in its pain. Two of the other big four supermarkets are seeing sales slide at a faster rate. But with all the big players reducing prices and consistently low food inflation, no-one should expect a quick return to sales growth.

“But Tesco’s size remains its trump card. At nearly twice the size of its nearest rival, and with the highest margins of any of the big four, it can use its scale to hold down prices longer than anyone else."