Tesco puts the squeeze on suppliers

Major drinks suppliers are in turmoil after being given what some are calling an ultimatum by Tesco. They say they have been given new “take it or leave it” terms by Britain’s biggest retailer that include an immediate 20% cut in the price Tesco will be charged, a doubling of promotional activity to be funded by suppliers and a ban on any price increase to Tesco for the next year, no matter what the reason.

One supplier, who declined to be identified for fear of reprisals, said he had been given until this weekend to accept the terms, which were presented on plain, unheaded paper so as to prevent Tesco being identified.

Suppliers are doubly angry because only a week ago, Gordon Brown and Lord Mandelson, the Trade Secretary, asked the supermarkets not to put further pressure on their suppliers, but, they claim, Tesco’s unilateral price cuts will result in immediate demands for the same terms from other supermarkets and big retailers.
Tesco declined to comment on the specific allegations when put to the company by the drinks business, saying the only people who could comment were “on holiday”, including Dan Jago, its director of beers, wines and spirits.

Today the company issued a statement which said: “Our customers are facing tough times as a result of the current economic slowdown and they are looking to Tesco to help. We have already launched hundreds of new products but they also expect us to continuously negotiate the very best deals on their behalf. This is what we have been doing with some of our most significant suppliers this week. Commodity prices have started to fall easing the pressure a little on businesses and offering the opportunity for us to work with suppliers to do even more for customers."

Tesco’s action against suppliers follows the news that it is cutting its sales growth guidance for its UK business for the first time in a number of years. Andrew Higginson, the finance director, revealed to the City earlier this month that the retailer was internally budgeting for 2% underlying sales growth in the UK, ending its long-standing position of targeting sales growth of 3% to 4%. This comes as Tesco is fighting an intensified battle against low price rivals such as Aldi and Lidl.

The supermarket group also announced unilaterally earlier this month that it was extending to 60 days the time it would take to pay all non-food suppliers by 30 days.

Yesterday, Bart Becht, the chief executive of  Reckitt Benckiser, the giant consumer goods company, warned that this could drive smaller companies out of business. The only reason he could see for Tesco’s aggression was “to squeeze more out of suppliers."

db Finance on Friday 31.10.08