SIMON WATKINS: Prepare for revolution in the aisles as Tesco scraps supplier fees
Tesco's rivals would be forgiven for having enjoyed a moment of schadenfreude when the group was forced to admit a huge £260million error in its profits. But it looks like that blow to Tesco could now end up spreading to the supermarket sector as a whole.
Drastic Dave, as Tesco’s new chief executive Dave Lewis is known, could be about to shake up the sector more significantly than anyone could have guessed. Scrapping the system of hidden fees and charges on suppliers that lay at the root of the profit error, is a dramatic move and one that could force others to follow suit.
Two months ago The Mail on Sunday reported how Britain’s supermarkets derived as much as one third of their profits from these fees, which involve charging suppliers for everything from late delivery to flat fees just to get their products on the shelf.
Overhaul: Tesco’s new chief executive Dave Lewis could be about to shake up the sector more significantly than anyone could have guessed
Abandoning this system will amount to a revolution in the way supermarkets work. It will involve huge initial costs – Tesco itself is expected to make a loss in Britain next year as a result. It would costs rivals heavily as well.
Dave’s gamble is that a similar model in which supermarkets buy goods from suppliers, add a few pence for profit and then put them on the shelves will be more sustainable and indeed fairer. It is, of course, what most of us thought was going on already.
The model of a complex range of fees imposed on suppliers – know euphemistically in the business as ‘back margin’ – has emerged as the dirty secret of the whole retail supply chain. The scandal of Premier Foods’ demand for fees for suppliers, also first reported in The Mail on Sunday last year, is another example.
Tesco’s move to abandon this model altogether is courageous. It is not without risks: it will require widespread renegotiation of terms with suppliers not all of which will necessarily go Tesco’s way. But if rivals do find they have to follow suit, then Dave will have managed to turn an accounting disaster into a positive by giving Tesco the advantage for being first mover in a supermarket revolution.
There may, however, be losers among smaller suppliers. These are often the companies that have been asked to pay one of the fees to get on supermarket shelves. Without those kinds of fees, will Tesco be able to justify stocking those products?
Supermarkets in the future may have to stock a narrower range of products in order to be able to offer the prices that customers are willing to pay.
Supermarketing is now in the midst of a major revolution in its business model. It is going to be painful for the companies and their shareholders. But I think there is every chance it will mean better value for shoppers.
Most watched Money videos
- The new Volkswagen Passat - a long range PHEV that's only available as an estate
- BMW meets Swarovski and releases BMW i7 Crystal Headlights Iconic Glow
- 2025 Aston Martin DBX707: More luxury but comes with a higher price
- 'Now even better': Nissan Qashqai gets a facelift for 2024 version
- MailOnline asks Lexie Limitless 5 quick fire EV road trip questions
- Land Rover unveil newest all-electric Range Rover SUV
- BMW's Vision Neue Klasse X unveils its sports activity vehicle future
- Mercedes has finally unveiled its new electric G-Class
- Mini celebrates the release of brand new all-electric car Mini Aceman
- Mini Cooper SE: The British icon gets an all-electric makeover
- How to invest for income and growth: SAINTS' James Dow
- Tesla unveils new Model 3 Performance - it's the fastest ever!
- Hundreds of jobs at risk as Anglo slashes funding for...
- Why 16 to 24-year-olds are putting their parents to shame...
- Axe stamp duty on British shares, says Flutter boss as...
- I don't want smart meters, so Eon is charging me £316 to...
- Experian shares rise sharply as credit data giant lifts...
- Golden Virginia owner Imperial Brands bolstered by higher...
- Tesco boss pockets £10m in biggest ever pay deal at a UK...
- Compass Group ups guidance thanks to major sporting events
- BUSINESS LIVE: Burberry hit by luxury slowdown; Imperial...
- Royal Mail's future hanging in the balance as bid...
- My neighbour has started keeping bees - can I stop him?...
- Burberry profits plummet amid luxury slowdown and China...
- I believe prenups are so vital every couple should be...
- MARKET REPORT: Vodafone shares rally as investors cheer...
- ANOTHER UK tech star is bought by US private equity: KKR...
- De Beers eyes £4bn London float as Anglo bids to fend off...
- Savers rush to open new savings accounts paying up to...
- How refreshing that Anglo has chosen not to grab the...