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Retailers don’t set out to break GSCOP - why does it happen?

Ian Hall, COO

With the forthcoming changes to the GCA, now might be a good time to take stock - and see what they have achieved so far, and to set out a pathway to future improvements.

Logic dictates there are 2 reasons why retailers may continue to break GSCOP guidance - Malice, or Incompetence. More and more it seems that there is a third reason  - Complexity.

Retail is a complex industry - the large supermarkets have trading agreements in place with around 3,000 suppliers, for upwards of 50,000 SKUs. These products all go through complex depot networks on a daily basis, and get promoted regularly. Keeping accurate records for the price, ranging, delivery, movement of products, and the numerous conversations and negotiations that buyers and suppliers have, is almost impossible. There is a whole industry in processing invoice queries.

In addition to running the day to day business, the GCA expects retailers to provide accurate demand forecasts to suppliers. This is a complex business, and many antiquated retail systems are not up to the job. It’s no wonder mistakes are made, or that there is some ambiguity on what some retailers should be doing to improve.

First of all, let’s have a quick refresher on what GSCOP is, and why it came about:

The GCA was formed to regulate the power of UK supermarkets over their direct suppliers. 

It’s role is to stop unfair practices, provide guidance to retailers and suppliers, to investigate complaints and breaches of the code, and ultimately punish and fine retailers who do not comply.

Following recommendations from the Competition Commission in 2009, The Groceries Code Adjudicator (the GCA)  was formed in 2013 and is the independent regulator ensuring that regulated retailers treat their direct suppliers lawfully and fairly. 

The Grocery Supply Code of Practice (GSCOP) is the guidance that the UK’s largest retailers must follow. In January 2013 Christine Tacon was appointed as the first adjudicator.

As well as the actual Code of Practice (published in 2009), the GCA publishes numerous more detailed guides on topics such as De-listing - to expand on the principles outlined in GSCOP. The GCA also runs annual surveys to assess the impact of the Code, and to establish areas that still require focus.

Whilst many enquiries over the years concluded that supermarkets do not hold undue power over their suppliers, there were many concerning practices across the industry. There were examples of suppliers being asked to pay unwarranted fines, listing fees, being paid late, being asked to sign retrospective trading terms. Retailers were rarely doing everything they could to help suppliers - by providing better access to data, robust forecasts, collaborative trading agreements, and proper paper trails for ‘agreed’ deals and terms.

What does GSCOP mandate?

GSCOP is a 17 point guide to the Dos and Don’ts of how UK Supermarkets should treat their direct suppliers. It covers topics such as unjustified charges and payments, unfair practices (arbitrary charges for example, or late payments), variation of agreements, as well as fair notice of product de-lists, and provision of information, such as robust forecasts - all under a general principle of ‘fair dealing’.

GSCOP is a way of working, and should be pervasive across the numerous touch-points that a supplier has with a retailer (supply-chain, marketing, finance, IT etc) - it does not just apply to the relationship between the buyer and account-manager.

What does it ask retailers to do? 

  • Treat suppliers fairly
  • Don’t vary trading agreements
  • Don’t levy charges that have not been agreed
  • Pay suppliers in full, and on time
  • Give suppliers accurate forecasts:

In addition, each retailer now has a dedicated GSCOP Officer, responsible for implementing the code, complying with it, monitoring, and reporting each year to the GCA.

Has GSCOP been enforced?

The theoretical fines that the GCA can impose on retailers are hefty, but in reality many observers feel that the GCA has been lenient over the past 6 years.

They have the power to fine the major UK supermarkets up to 1% of their annual UK turnover, depending on the seriousness of the breach. In an environment where many of these retailers are making low single digit percentage net profit, this is serious! For Tesco, this could mean a fine of circa £639M in 2019, or half of their net profit.

You would think, therefore, that this would be enough for retailers to take it very seriously (and on the whole, they do).

We are, however, yet to see any retailer being fined for anything approaching the maximum amount, despite numerous reports of breaches of the code. There have been only 2 full investigations since inception:

  • Tesco - 2013 - found to be breaching the code in many areas. Recommendations were made. As for financial penalties “As set out above, the Financial Penalties Order giving me the power to fine did not come into force until 6 April 2015 and applies only to breaches of the Code occurring on or after that date. The period under investigation ends on 5 February 2015. Had I the power to impose a financial penalty for the behaviour identified in this report, I would have considered whether it was appropriate in all the circumstances and, if it was, what level of penalty should be imposed.” Fair enough, but there was no real penalty to Tesco.
  • Co-op - 2018 - found to be breaching the code. Recommendations were made. As for financial penalties: “58.1 As set out above, one of the enforcement powers given to me by the Act and the Financial Penalties Order is to impose a financial penalty up to a maximum of 1% of a Retailer’s annual UK turnover where I find a breach of the Code has occurred. 58.2 The Guidance states that I will use the power to impose financial penalties to reflect the seriousness of the breach and that financial penalties may also be used where I consider that they would constitute a serious and effective deterrent to the Retailer concerned and more generally to other Retailers who may be considering activities contrary to the Code. The Guidance also states that in deciding whether to impose a financial penalty and the amount, I may take into account any evidence relating to whether infringement was committed intentionally or negligently. I have considered each of these factors. I do not consider the nature and seriousness of the breaches by Co-op to merit a financial penalty. I believe that recommendations are the most effective and proportionate use of my enforcement powers in this investigation. ”

This may well be the best, most proportionate, and collaborative approach to long-term systemic changes to the industry - but it does not provide much of a deterrent to others.

A self-fulfilling prophecy?: 

Unsurprisingly, many in the industry feel that there is a reluctance from suppliers to report instances of code breaches. Despite the fact that the GCA offers anonymity to suppliers, and that retailers are not allowed to penalise suppliers for reporting breaches, most feel that it would not be the making of a healthy relationship. The fear of long-term loss of business is enough for most suppliers to just put up with any remaining unfair practices.

Is GSCOP still being broken?

The short answer is yes.

I honestly believe that the GCA has been a force for good - if nothing else it has raised the issues, it has built awareness, it has (on the whole) changed retailer practices, and provided a framework for a much better way of working. In addition to educating retailer teams, many suppliers are also now aware of their rights, and it provides a framework and language for retailers and suppliers to be more collaborative and open.

Buyers receive comprehensive training on what they can and can’t do, and suppliers are more aware of their rights.

The GCA talk to suppliers, gather feedback, and produce the annual survey. The results of the annual survey have shown improvements in a number of areas, although many suppliers still report issues with late payments, and provision of accurate forecasts.

gscop article

Why?

Why do retailers break GSCOP? / Why is it still happening?

I don’t believe it is deliberate or malicious. But the main reasons are:

  • Lack of good quality training - some buyers just ‘forget’ the detail
  • Lack of process - deals are still done verbally, or by email - leading to ambiguity, and lack of audit trail
  • Poor systems - many retailers do not even share EPOS sales data in a systemised way, let alone forecast and supply-chain data (a process that the supplier should be fully involved in, and have the right to challenge)
  • Lack of clarity - what is meant by ‘provide forecast data’ - retailers deal with this in different ways - which means by definition there is no uniform ‘best-practice’. Fair notice for product delists is still ambiguous, and is regularly challenged.

How could things be improved?

  1. The GCA could give clarification on a number of areas - Forecasting being the most obvious. What is meant by a forecast? How often should it be shared with suppliers? How accurate should it be? What action will be taken if retailers consistently get it wrong?
  2. The retail Industry could learn from best practice in other industries. For instance, the building supplies sector seems to be leading the way when it comes to cost-price transparency, price change and rebate management. The building supplies sector is complex - there are over a million SKUs, and a high proportion of retailer profit is derived from rebates and promotional funding. It is critical to get it right, and to have ongoing accurate views of accruals. In comparison, grocery retail is a simple industry, and yet many supplier funding deals are still recorded on emails and spreadsheets, and rebate reconciliation is opaque.
  3. Put the suppliers first. There are still a number of retailers who provide no data to their suppliers, and very few (if any) who supply granular, accessible, usable data and robust forecasts. The retailers have enormous amounts of data, and so are much better placed than their suppliers to be able to provide robust forecasts. There are numerous cloud-based solutions for sharing data in a way that suppliers can use, and advances in machine-learning techniques are making astonishing improvements in meaningful demand  forecasts.

Working within a consistent framework, using the best available technology, and fostering an environment where suppliers are genuinely treated in a collaborative way could have enormous benefits to both retailers and suppliers. The GCA has been a force for good, and could be the independent body that could help retailers to get this final piece of the jigsaw completed.

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Appendix - GCA guidance on Forecasting:
10. Compensation for forecasting errors
(1) A Retailer must fully compensate a Supplier for any cost incurred by that Supplier as a result of any forecasting error in relation to Grocery products and attributable to that Retailer unless:
(a) that Retailer has prepared those forecasts in good faith and with due care, and following consultation with the Supplier; or (b) the Supply Agreement includes an express and unambiguous provision that full compensation is not appropriate.
(2) A Retailer must ensure that the basis on which it prepares any forecast has been communicated to the Supplier.


June 2018 - revised guidance on forecasting: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/718357/GCA_Forecasting_and_Promotions_best_practice_statement.pdf

Understanding that the due care test is unlikely to be capable of being met by a retailer that provided no way for a supplier to contribute to the forecasting process, whether collaboratively in reaching agreed volumes to be ordered or by ensuring suppliers can raise questions and queries if a forecast seems to them to be inaccurate or to have resulted in an excessive order;
Ensuring that suppliers are able to access adequate sales data to verify the accuracy of any deduction proposed for retrospective or trigger funding.

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