Code clarification: variation of supply agreements
GCA points of Code clarification arising from Asda Stores Limited implementation of Project Renewal in early 2016.
Theme of case study
Asda Stores Limited implementation of Project Renewal in early 2016, designed to deliver cost price savings and range reduction and resulting in variation of Supply Agreements and behaviour contrary to the overarching principle of fair dealing.
Code reference(s)
Paragraph 3 of the Code – Variation of Supply Agreements and terms of supply; together with paragraph 2 of the Code – Principle of fair dealing.
Retailer(s) involved
Asda Stores Limited (Asda).
Summary of the issue
Project Renewal was commissioned in 2015 and implemented by Asda in early 2016. It followed a difficult trading period and was designed to deliver cost price savings and range reduction.
The GCA received information from suppliers between March and July 2016 that indicated they were being asked for significant financial contributions to keep their business with Asda. In some cases, this was as much as 25% of the annual turnover of the stock keeping unit (SKU). If they were not successful in negotiating terms on which to remain listed, some reported being given non-negotiable periods of notice of de-listing, with periods of between four and eight weeks being reported to the GCA. Changes to terms of supply, including cost price reductions and routes to de-listing were presented to suppliers during the course of their existing agreements with Asda, as variations to agreed terms. Suppliers reported being given very little time to agree to any proposed changes, sometimes as little as 24 hours; in one case, overnight.
The GCA raised the issue with Asda at a meeting with the Code Compliance Officer (CCO) in March 2016. The GCA requested more information from Asda about Project Renewal.
The GCA annual survey conducted during April 2016 indicated that issues with Asda were widespread among suppliers.
The GCA raised the issue again in the following CCO meeting. Asda promptly commissioned an internal review into why it didn’t perform better in the GCA annual survey, including into de-listing and other activity associated with Project Renewal. Asda’s internal review was extensive, starting from a base point of 15 million e-mails and correspondence and interviewing employees. In the meantime, the GCA met with the Chief Executive of Asda, to escalate her concerns.
In the next CCO meeting, in September 2016, Asda updated the GCA on progress with its internal review.
There followed in November 2016 an interim report and a final report in January 2017. Asda had by this time proactively engaged with all its affected suppliers to rectify any lump sum arrangements which should not have been made and to determine appropriate notice periods for any de-listing. It became clear from this final report that much of the Project Renewal strategy had been designed by third party consultants commissioned by Asda to achieve significant cost savings for the business.
The GCA continued to receive supply-side information about the way Project Renewal had been designed and implemented and in March 2017 held a further meeting with Asda to further intensify her approach to the issues raised. In particular, the GCA raised points relating to behaviour and culture which directly contributed to the retailer’s compliance risk during the exercise.
Two further meetings followed in May and June 2017, both with the Chief Executive of Asda and his senior team. Asda further intensified its internal work to understand what had happened and to put systems and processes in place to ensure it was not repeated. It became increasingly clear that the role of third party consultants was closely bound up with the issues raised. The consultants were able to achieve bonus payments the more money they saved for Asda. Although Asda had trained its buying teams; put contractual safeguards in place to mandate Code compliance when designing the cost savings package; and tasked its buying teams, not the consultants, with direct contact with suppliers to negotiate revised terms, none of this was enough. It is not clear why certain material produced by the consultants was not challenged at any level within Asda, at design, delivery or implementation stages.
The GCA annual survey results, released in June 2017, showed Asda to be the worst-performing of the 10 retailers regulated by the GCA, in terms of Code-related issues experienced by direct suppliers. Asda suppliers, more than those to any other regulated retailer, reported having raised Code-related issues over the past year. Asda assured the GCA the lessons had been learned, and the results were a low point from which it now wanted to measure significant improvement. The GCA continues to require enhanced engagement from Asda while improvements are made.
226 suppliers took part in Project Renewal.
Outcome and/or GCA decision
Variation of Supply Agreements was the subject of the GCA case study about Wm Morrison Supermarkets plc (Morrisons), published in June 2016. Cultural and behavioural aspects of Code compliance were referred to in the report of the investigation into Tesco plc, published in January 2016. They have been very much part of GCA interaction with regulated retailers since then.
The GCA raised with Asda issues of concern about Code compliance in connection with Project Renewal in March 2016, and maintained her focus as more information became available to her. The GCA specifically raised concerns about culture and behaviour in March 2017, when the role of third party consultants in the exercise began to come to light.
The GCA concluded that Asda appeared to have breached paragraph 3 of the Code, Variation of Supply Agreements and terms of supply, by directly or indirectly requiring suppliers to agree to prospective investments that were not provided for in the relevant Supply Agreement. Many of these were effectively unilateral variations because of the way they were presented to suppliers; others were made without reasonable notice being given.
It was clear to the GCA that even the more nuanced conversations with suppliers were designed to carry an implication of detriment if any supplier declined to agree to requests from Asda buyers. These were accordingly to be understood to be indirect requirements contrary to paragraph 3 of the Code, read with paragraph 2 of the Code, which establishes the overarching principle of fair dealing in interpreting the specific practices covered by the Code.
While the GCA case study published in June 2016 about Morrisons specifically addressed issues of requests for retrospective lump sums, the requests made by Asda were prospective. In common with Morrisons approach recorded in the case study, Asda proactively engaged with suppliers to rectify any lump sum arrangements which should not have been made and to determine appropriate notice periods for any de-listing. Much work has been done by Asda to understand what went wrong and to improve its systems and processes to ensure problems do not reoccur.
The GCA concluded that Project Renewal was not conducted in a wholly Code-compliant way. Asda accepted this. The GCA further concluded that because Asda accepted it had breached the Code and had carried out detailed internal work to ensure lessons were learned and safeguards put in place to prevent any repetition of the issues brought to light, there was no need to conduct an investigation to establish the facts of what happened; nor to better understand the situation in order to require suitable remedial measures to be put in place. It was better promptly now to share the learning from the work with the whole sector.
Key points of clarification are accordingly:
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Requests for prospective investments not explicitly agreed in the Supply Agreement are potentially an attempt by the retailer to vary the Supply Agreement. While retailers retain the right to vary a Supply Agreement unilaterally, there must be provision for this in the Supply Agreement and reasonable notice must be given to the supplier.
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In this situation, the negotiation was not positioned as such.
a. Aggressive tactics, such as inflexible demands to be made by Asda buyers and very short time periods for suppliers to respond, with the threat of de-listing in the background, all point to its being more unilateral than consensual;
b. This was underlined by the threat of de-listing felt by suppliers and supported by the Project Renewal materials seen by the GCA, in which it was clearly implied if not expressly stated.
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Retailers need to be particularly careful when engaging third parties to work on their behalf. The reputational and compliance risks remain with the regulated retailer in these circumstances. Providing incentives to third parties to generate income or cost savings for the retailer may encourage behaviour inconsistent with Code compliance and the retailer’s values. Retailers need to balance these competing interests and ensure robust governance is in place to mitigate Code-compliance risks, in particular.
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Retailers should ensure that their legal, compliance and audit functions are sufficiently connected to commercial initiatives that they work effectively together to ensure Code compliance.
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Individuals within retailers should be sufficiently aware of the Code and empowered in their roles meaningfully to challenge any commercial or other initiative by the retailer which may put them in breach of the Code. This extends beyond the Code Compliance Officer role and the legal and compliance function of the retailer, and includes individuals at all levels in the business.
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Initiatives which are in breach of the Code can be halted quickly and rectified promptly if referred to the GCA by suppliers and others. In this situation specifically, GCA progress in understanding and reaching a view about what happened was slower than it had been with Morrisons because suppliers did not provide information promptly or in sufficient numbers. Much of the insight gained by the GCA into Project Renewal was from Asda itself, by enhanced engagement under the collaborative approach but distinct from business as usual.
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Swift action by the retailer in response to regulatory interest from the GCA can in some circumstances avert an investigation, because to investigate may become disproportionate in the circumstances, especially if things have largely been put right; provided the learning points can be shared with the sector as a whole for the benefit of suppliers and consumers.
Handling
The GCA received information from suppliers between March and July 2016 that indicated they were being asked for significant financial contributions to keep their business with Asda.
The GCA raised the issue with Asda at a meeting with the CCO in March 2016. The GCA requested more information from Asda about Project Renewal.
The GCA annual survey conducted during April 2016 indicated that issues with Asda were widespread among suppliers.
The GCA raised the issue again in the following CCO meeting. Asda indicated it had commissioned an internal review into why it didn’t perform better in the GCA annual survey, including into de-listing and other activity associated with Project Renewal. In the meantime, the GCA met with the Chief Executive of Asda, to escalate her concerns.
In the next CCO meeting, in September 2016, Asda updated the GCA on progress with its internal review.
There followed in November 2016 an interim report and a final report in January 2017. It became clear from this final report that much of the Project Renewal strategy had been designed by third party consultants commissioned by Asda to achieve significant cost savings for the business.
The GCA continued to receive supply-side information about the way Project Renewal had been designed and implemented and in March 2017 held a further meeting with Asda to further intensify her approach to the issues raised. In particular, the GCA raised points relating to behaviour and culture which directly contributed to the retailer’s compliance risk during the exercise.
Two further meetings followed in May and June 2017, both with the Chief Executive of Asda and his senior team. Asda further intensified its internal work to understand what had happened and to put systems and processes in place to ensure it was not repeated.
The GCA annual survey results, released in June 2017, showed Asda to be the worst-performing of the 10 retailers regulated by the GCA, in terms of Code -related issues experienced by direct suppliers. Asda assured the GCA the lessons had been learned, and the results were a low point from which it now wanted to measure significant improvement.
The GCA met Asda again in August 2017 and proposed publication of a case study, to bring her enhanced engagement on Project Renewal to a close and to share points of clarification and lessons learned. This was agreed with the Chief Executive of Asda.
Date concluded: 4 September 2017