Tesco's revised payment terms may prompt change in market practice, says expert

Small suppliers who deliver up to £100,000 of product a year will now be paid within 14 days, while medium sized suppliers, categorised as those supplying up to £10 million in product value, will be paid five days earlier than larger companies in their category, Tesco said in a statement.

Small suppliers will typically be paid 34 days sooner than previously, Tesco said.

The changes are part of a larger "simplification" of Tesco's business model that aims to encourage collaboration between the company and its suppliers, Tesco said.

The current complex and varied terms for suppliers will be replaced with a new standard approach with the shorter payment terms included as concessions for smaller suppliers, Tesco said.

For most categories the new payment terms will see all suppliers paid faster, and they will in turn be able to pass this on to their own suppliers, Tesco said.

Suppliers of fruit, vegetables and meat will all be paid in a maximum of 28 days under the new system, while chilled and frozen goods will wait for 35 days. Alcoholic drinks and clothing suppliers will be paid in 60 days, for large suppliers, 55 for medium and 14 for small companies. Clothing and general merchandise from overseas will remain on 90 day terms, Tesco said.

The changes will be in place by June 2016, Tesco said.

The changes may have repercussions across the whole industry, and prompt Tesco's competitors or larger suppliers to follow suit, said supply chain expert Ben Gardner of Pinsent Masons, the law firm behind out-Law.com.

"Long payment terms are increasingly likely to be viewed as unjustifiable and unreasonable. This could particularly be an issue where businesses at the top of the supply chain make their payment terms publicly known," he said.

"If other businesses at the top of the supply chain follow suit Tesco's lead and publicly announce revised payment practices this will make any disparity in payment terms throughout the supply chain obvious. This could lead to challenges and adverse publicity for those that do not flow these revised payment terms down to their own supplier base, particularly SMEs," Gardner said.

"In any event, the UK government announced in April that large businesses will be required to publish information about their payment practices twice a year. When issuing such reports, large businesses will not want to be seen as profiting from any disparity in the payment terms they have in place with their supply chain," he said.

"Large business should therefore be minded to review the payment terms they have in place with different types and sizes of supplier. Doing so may allow large businesses to steal a march on their competitors and put in place payment terms that are consistent with their supply chain, and are otherwise fair, reasonable and can stand up to public scrutiny," he said.

It is likely that the payment terms of large businesses are going to become subject to increased scrutiny from a range of stakeholders, including the supply chain and members of the public, Gardner said 

"This will particularly be the case as large businesses are required to publicly report on their payment terms from April next year, as a small business commissioner is appointed in the UK and as the Groceries Code Adjudicator becomes more active in investigating market practices within the grocery sector," he said.

A small business commissioner is to be established to help small businesses settle disputes and to give advice and information, the UK government announced last month. One of its roles will be to consider complaints from smaller suppliers about payment issues with larger businesses.

The Groceries Code Adjudicator, established in 2013, is an independent adjudicator set up to oversee the relationship between supermarkets and their suppliers. It aims to ensure that large supermarkets treat their direct suppliers lawfully and fairly, to investigate complaints and arbitrate in disputes.