Guest blog: GSCOP – Transformational regulation

by | 15 Apr, 2019 | General

The Groceries Supply Code of Practice (GSCOP) has fundamentally transformed relationships between large grocery retailers and suppliers. No longer can such a retailer simply ignore an issue brought to its attention where it can be shown to be in conflict with GSCOP, nor, and crucially, can it deduct monies where a supplier expressly asks them not to do so. These are significant and welcome changes to a relationship that has often felt unduly weighted in favour of the retailer.

This blog:

  • reminds suppliers why it is essential they fully engage with and support the GCA and GSCOP;
  • demonstrates how they have transformed a long-established retailer ‘bad practice’– the retrospective audit;
  • identifies further areas for potential focus and development.

What is GSCOP and the GCA and are they worthwhile?

GSCOP sets out how a relevant retailer is expected to behave in relation to key elements of their trading relationships with their direct suppliers. It regulates a range of practices which, if unchecked, would bring sufficient uncertainty to suppliers that shoppers would be harmed. It also requires such suppliers be treated lawfully and fairly.

The Groceries Code Adjudicator (GCA) was appointed in 2013 and is the Government’s regulator tasked with ensuring that regulated retailers (those with a grocery turnover over £1 billion) comply with GSCOP. It is funded by a levy on those retailers. The GCA has the power to levy fines of up to 1% of a retailer’s UK turnover for non-compliance.

The retrospective audit, a practice transformed

‘Forensic Auditing’ is where retailers use third-party auditors to review historic trading activity with suppliers, checking to see if promotional funding has been paid correctly, deal mechanics are as agreed and Joint Business Plans (JBPs) have been executed in accordance with their terms.

Historically, it has been a one-sided reconciliation conducted by the retailer, identifying errors in their favour but ignoring those that might benefit the supplier, even where this leads to claims with no financial merit. For suppliers it has amounted to little more than a process of validating the claims presented to them in isolation of the trading context at the time of the activity.

When Salitix started operating in 2012 providing a counter ‘sales’ audit to address this imbalance, it was clear that retailers neither wanted to acknowledge or facilitate a supplier’s audit. For example, retailers’ supplier portals were unable to receive an audit claim or provide a clear explanation about how a claim would be processed (i.e. by whom, in what timeframe etc). In some instances, they would not even acknowledge certain types of error (like promotional overfunding), instead referring to bad precedents set by their partial review to insist that a claim was not valid. A supplier sales audit would instead be directed to the buying team, with all the commercial sensitivity and potential ramifications that this tactic was designed to exacerbate.

The GCA and GSCOP changed this:

(1) The GCA’s report of the Tesco investigation stated, “Where a supplier challenges a proposed deduction, Tesco is not entitled to deduct the disputed sum from the supplier’s trading account or otherwise from money owed to the supplier for goods supplied.” (paragraph 58.2.2, Recommendation 2).

The retailer auditor’s unauthorised ‘deduction’ was no more. In a stroke, if a retailer wanted to get its audit claims settled, it had to engage with any sales audit claims that quite properly should form part of this settlement calculation.

 

 

(2)  GSCOP set out clear expectations about how retailers should treat suppliers, the principle of ‘Fair Dealing’. Where a supplier could show a Code Compliance Officer that a practice or process did not lead to what might be considered a fair outcome, this could be challenged via a new (non-commercial) channel within the retailer that was duty-bound to review and respond using GSCOP to inform their opinion.

GSCOP also provided specific insights on when ‘Compensation’ should be paid to a supplier, for example for ‘forecasting errors’ (paragraph 10 and14(1)), which enabled suppliers to reconcile and present claims that would have previously been rejected.

(3)  By encouraging retailers to provide a single point of contact for the submission of financial queries (which was clearly distinct and separate from the commercial arena), the GCA made it possible for sales audit claims to be submitted without fear of any distorting influence a supplier’s ‘buyer’ might have on resolving an old trading query.

In six years, a supplier sales audit has gone from an unproven concept to a standard process that can and does yield significant financial wins for suppliers, without the commercial fallout that would have been feared historically.

Amazon, Boots and the future landscape of grocery retail

Complacency amongst suppliers would be unwise given that the grocery market place is changing fast, with new trading relationships emerging alongside traditional channels. Suppliers should want the GCA overseeing these changes in order to avoid the unfair and discretionary practices that blighted the grocery sector prior to the existence of GSCOP.

For example Amazon, despite having a small grocery footprint currently, already engages auditors to conduct a retrospective review, with behaviour that falls below what can be expected from a GSCOP-regulated retailer (i.e. submitting claims and then specifying the deduction of those claims if they are not validated within a timeframe it prescribes). If not checked, such behaviour could cost suppliers substantial and increasing sums as the channel grows, with little or no redress.

Elsewhere, other distributors such as Boots, B&M, forecourts and wholesalers also look set to take an increasing share of the grocery market. Boots has long employed retrospective auditors that use dubious tactics to extract payments from suppliers, practices that were eradicated long ago at the GSCOP-regulated retailers.

The cost to suppliers is difficult to quantify but is in the £10s of millions every year in trading areas not subject to GSCOP.

Conclusion

 Ultimately the GCA is the regulator best placed to encourage better ways of working and doing business between suppliers and designated retailers. However, it is down to suppliers to engage with and report issues to the GCA, who relies almost entirely on direct input from suppliers to understand their concerns. This can be done through the GCA’s annual supplier survey or directly to her office either face-to-face, by email or phone, all in strictest confidence. Failure to report and bring to the GCA’s attention suppliers’ experiences and concerns will not deliver improvements and will undermine future efforts to broaden the GCA’s net to cover those retailers not subject to GSCOP at present.

At Salitix, we can say with certainty that the GCA and GSCOP have been instrumental in transforming one area of trading practice within the grocery retail sector, resulting in significant financial benefits being delivered to those suppliers who decide to conduct their own retrospective reconciliations.

Ben Lewis is Client Relationship Director at Salitix.

 The GCA’s annual supplier survey is open until 23rd April. For suppliers wishing to build core competence in GSCOP, training courses can be found here.

The views expressed in this blog are not necessarily those of the British Brands Group.

 


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