"The mighty Tesco, Britain's biggest retailer, a giant which has fallen from grace." "An oil tanker does not turn round overnight." "It will take years for them to get in a position where they can compete again." "Its sales are down and it's facing a criminal investigation into how it overstated its profits." "Tonight on Panorama, we look inside the workings of one of the UK's most important businesses." "It is a very macho, high-testosterone, kicking-arse-and-taking-names culture - that's what buying is all about." "We reveal why, as profits tumbled," "Tesco turned the screw on the people who supply its products... why the person charged with protecting those very same suppliers has had her hands tied by the government..." "The fact is, a year on, you're not actually able to fine a retailer as we sit here at the moment." "As we sit here at the moment, I can't fine a retailer." "..and the man who built Tesco into the third-largest retailer in the world speaks exclusively to Panorama about what's gone wrong." "In some way, they took their finger off the pulse of the customer." "People tried very hard to do the right thing - it clearly has not worked." "In the end, that's a failure of leadership." "MUSIC:" "Beardsman Ska by The Skatalites" "Tesco dominates our high streets like no other retailer." "30,000 people live here in Bicester in Oxfordshire." "And they can enjoy the services of six Tescos." "No wonder it's known locally as Tesco Town." "So, the sat-nav's telling me that, uh, somewhere near here is the first one." "Yep, there it is." "It's a big one, a superstore." " SAT NAV:" " After 200 yards..." "My sat-nav's taking me on the scenic route around Bicester, via the town's Tescos." "Oh, there's another one, actually." "Just there, not much less than a mile away." " SAT-NAV:" " Turn right, cross the roundabout..." "For 20 years, Tesco expanded relentlessly, increasing profits in a number of stores." "Its size matters." "It employs hundreds of thousands of people in Britain, pays millions of pounds in tax and its profits are used by our pension funds to support us in our old age." " SAT-NAV:" " You have reached your destination." "It's extraordinary, I mean I've been in the industry over 30 years..." "'The massive growth of Tesco was driven by this man.'" "..all of the challenges of the recession have meant that retailers can't stay the same." "'Sir Terry Leahy ran Tesco for 14 years from 1997." "'He says Tesco did well for a pretty simple reason - 'it listened to its customers.'" "We followed customers and their interests rather than slavishly following competition." "Customers began to feel that Tesco understood their lives better than others." "But the last three years have seen turmoil at the company." "NEWS REPORTER:" "Britain's biggest retailer, the supermarket giant Tesco, has reported its first fall in profits for nearly 20 years." " NEWS REPORTER:" " It's down 11.6%." " NEWS REPORTER:" " Another set-back for Tesco..." "NEWS REPORTER:" "All that bad news has sent its shares crashing down 54%." " NEWS REPORTER:" " Annual profits will be much lower than expected." "NEWS REPORTER:" "At Tesco, shares slump, profits halve and the chairman says he's going." "So, what's behind the trouble at Tesco?" "MUSIC:" "I Should Have Known Better by The Skatalites" "Well, there is one fundamental point - we've all changed the way we shop." "It's evident in Bicester." "Once a Tesco town, it's got a new Sainsbury's as well as discount supermarkets ALDI and Lidl." " Hey, what are you guys up to?" " Now, look..." "'In a not-very-scientific experiment, 'we asked the people of Bicester where they do their main shop.'" " Here are all your main shops in Bicester..." " Yeah." "..and a little bag of pounds there." " Yeah." " So, if you take a pound out of there and stick it in the jar where you do your main shop." " Here." " Excellent." " But I do know..." " Do you top up elsewhere?" "Go and have another pound for that." "ALDI?" "Yes." "In Bicester, we go to Tesco, Sainsbury's, ALDI and Lidl." "It's mostly Tesco, to be honest with you, and I go to Lidl a bit as well." "Tesco and Sainsbury's came out on top but ALDI and Lidl took a significant share of our pound coins too." "The discounters may have a small market share but they're growing rapidly." "I can't see any end to the growth in the discounters." "And the reason is that the price discount is just so big." "'Analyst Louise Cooper thinks that discounters 'have been out-manoeuvring the big supermarkets.'" "An oil tanker does not turn round overnight." "It will take years for them to get in a position where they can compete again." "And British consumers have changed their mentality." "I mean I think I see it in myself" " I am now, thanks to the recession, hard-wired for a bargain." "Just at the time Tesco needed to compete on price, it lost its reputation." "ASDA is now the cheapest of the big four supermarkets - 6% cheaper than Tesco." "How important was it being the cheapest out of the big retailers?" "Very important." "People could rely on Tesco." "More and more customers were coming into the stores." "As a result, we then invested the profits from those sales back into lower prices." " And how's the Tesco stuff doing?" " I think it's doing very well..." "The man who followed Terry Leahy as boss of Tesco was Philip Clarke." "A Tesco lifer, he had lots of initiatives to boost sales." "But sales went down, profits went down and many top executives left, with some saying the management that stayed were spread too thin." "There was a big team of experienced leaders and too many of those were allowed to go in too short a period of time and so there was a shortage, I think, of experience, the kind of experience you need to carefully navigate" "a business like Tesco through this very turbulent and difficult period." "There was tension in the boardroom." "We've been told of shouting matches between executives over how" "Tesco should sort itself out." "I think the culture did change under" "Phil Clarke and not for the better." "People tried very hard to do the right thing, it clearly has not worked." "In the end, that's a failure of leadership, not a failure of the business, cos when you're the CEO, if it doesn't go well, you must take responsibility and Phil Clarke has taken that responsibility and paid the price with his job." "In his first public statement since leaving Tesco, Philip Clarke told us that the business environment when he took over the supermarket was very different from the preceding 20 years." "He said the business faced critical challenges which had been building for some time." "Clarke said these challenges required a thorough review of the business strategy and culture and told us because of his new approach, several senior executives did leave the retailer." "But sales just kept on a downward curve." "Many believed Philip Clarke wasn't radical enough." "When new management took over, they carried on, really, with the similar strategy of the previous two generations of management, ie, let's push the brand everywhere we can." "But the world was changing." "Philip Clarke left Tesco in the summer of last year and, boy, was it abrupt." "So abrupt, they had to pack away the balloons and the champagne flutes here at the Victoria and Albert Museum where they were planning a party the very next day." "It was to mark Philip Clarke's 40th anniversary at Tesco." "A few months after he left came another huge blow to Tesco - its new chief executive Dave Lewis revealed it had overstated its profits by £263 million over three years." "The company had been counting money it was going to earn too early and had been delaying some of its costs." "It had the effect of making Tesco's profits look better than they were." "I will investigate and I will speak to everybody and anybody who can help me understand exactly what's gone on here." "Tesco's share price plunged." "The City was astonished." "Accounting is all about describing company performance properly over an accounting period." "And if the market gets the wrong information, then it can't compare you with your competitors so it's a real issue if the numbers are not right in the right period." "Nine directors were suspended." "The Serious Fraud Office has launched a criminal investigation into Tesco's accounting." "The revelation took everyone by surprise." "But Panorama has discovered that two years earlier," "Tesco's finance department found a problem in how the retailer was accounting for its trading." "We've seen an internal e-mail sent in 2012 from the very top of Tesco - the chief financial officer." "It's a warning to the senior finance team." "Now, what's interesting - it tells them not to count income before they are meant to." "It was sent because of an internal issue with the bringing-forward of money in Tesco in Poland in 2011." "Our sources tell us the finance department dealt with the problem." "Tesco said it's not able to comment on accounting issues because of the ongoing investigation." "So, how did Britain's biggest retailer get into such a mess over its profits last year?" "To understand what happened, you have to understand how big supermarkets like Tesco work." "You might think they make their money just from you or me buying their products but it's not that simple." "The people who make those products, the suppliers, also pay supermarkets to get them on the shelves." "The negotiations that go on behind the scenes are complex and they involve rebates based on the volumes that are sold, they can involve contributions towards advertising, contributions towards promotions, so there's a constant dialogue throughout the year" "between a retailer and a supplier." "These deals happen at most supermarkets, not just Tesco." "It's known as commercial income and it's what Tesco counted too early in its accounts." "So, what's this we see here?" "This is a ten-tonne shed, ten tonnes of compost." "'John Smith supplied mushrooms to Tesco until 2004.'" "This one will be ready to pick on Monday..." "'John made payments to Tesco based on how many of his mushrooms 'they sold." "'He said one manager told him Tesco expected it.'" "He said, "Look, John," ""Tesco's the best club in town." ""This is the membership fee." ""If you want to be in the club, you've got to pay the fee."" "So, I said, "Where do I sign?"" "'He says his fees back to Tesco totalled £200,000 over three years.'" "It was extremely irritating." "It halved my profit." "So, it was tough." "Why didn't you just say, "I'm not going to do that." ""Thanks very much, Tesco, and goodbye"?" "Tesco were two thirds of my business." "Tesco says these payments are... ..and are..." "..in return for generating increased sales." "These fees are just one payment suppliers make to big supermarkets." "Getting their products in the best position on the supermarket shelves can also cost them." "So, how does this complicated relationship between retailer and supplier actually work?" "It's to do with those promotions, like "Buy One Get One Free." To get products on promotion in a better location, the supplier can pay a fee." "'It's all about the psychology of shopping.'" "So, this is the sweet spot, this shelf here." "That's the one that the suppliers really want to be in?" "Eye level, that's what customers see first, that's what suppliers want, probably in the middle." "'Steve Dresser is an expert in the art 'of how supermarket shelves are stocked.'" "Customers might not realise that there's this battle going on around them for the kind of things that you can see here." "It really is like the dark arts of retail." "These fees count as commercial income and we've seen a confidential rate card which reveals the enormous amounts Tesco can charge for promoting products in a store." "This is the most expensive location - the end of an aisle where lots of shoppers pass." "We've been told that Tesco could charge suppliers over £50,000 a week just to put their products on shelves like these across their stores." "A bit unsure about that." "I think..." "'For suppliers, these payments are a way of increasing their sales, 'and many welcome the chance of extra business.'" "We have some new vintage wines that we sell to Tesco and it's from Hungary." "Robin Copestick has been supplying wine to Tesco for ten years." "If we hadn't dealt with Tesco in the early years... it would be very difficult to see how our business would've been." "In a way, you've got to think that we're really renting space from them to sell our product." "It would be to our benefit as well as their benefit." "Because these commercial income deals matter so much, the negotiations can be hard-nosed." "It is a very macho, high-testosterone, kicking-arse-and-taking-names culture - that's what buying is all about." "Steve Jones trained buyers at Tesco." "A buyer's job is to get the best possible deal for the supermarket." "Their pay depends on hitting aggressive targets." "They get into that market because they're highly-competitive and they enjoy the cut-and-thrust of the negotiation." "They're generally better at negotiating than the suppliers are and that's why the retailers do as well they do." "One former executive says buyers were expected to behave responsibly." "There was a culture of "you push as hard as you can."" "We're there to get a maximum deal out of this but within a level of integrity where the red line was quite clear." "But for years, there have been complaints from some suppliers that Tesco buyers certainly knew the meaning of the word "aggressive"." "But the main bulk of our stock that I'm holding now is in the shed..." "'What's in the shed is all that remains 'of Jonathan Halse's bath toy business.'" "All of them" " Instant Bathtime Fun, Splashy Dashies, and Squiddy - are all here." "I'll just quickly show you." "For example, we have the Splashy Dashies here." "'His products used to appear in hundreds of Tesco stores.'" "Tell us what it's like to get a deal with Tesco." "Well, it was so significant, it meant having a business or not having a business and the volumes, at that time, were so enormous with Tesco, they did sell." " Because they're so big?" " Yes, exactly." "In 2008, the supermarket owed his business £42,000 and then a buyer called him into a meeting." "She said, "We need you to forego this £42,000 in order for us" ""to continue to be a customer of yours."" "I thought it was unbelievable, really, and I said," ""Well, I can't possibly do that, I can't afford to do it" ""and even if I could, I wouldn't."" "She then warned me that if I didn't accept this then, as I go out that door, I would not be ever coming back through it." "So, I went through revolving doors and never came back again." "Jonathan's money was returned and he didn't deal with Tesco again." "Tesco said, "This has never been permitted practice"" "and they "can't comment on the specific claim without seeing" ""information in support of it."" "They say they review their suppliers periodically and can delist some - that's taking products off the shelves..." "But we've been told the threat of being delisted has been used as a tactic to make suppliers pay." "One former Tesco buyer agreed to talk to us anonymously." "He worked there until the mid-2000s." "Once, in my experience, I delisted my best-selling line purely to bring a supplier to the negotiating table." "And in that instance, making that decision brought nearly a million pounds in additional income." "Tesco says it is unable to examine or respond where allegations are anonymous." "At a time of growth at Tesco, hard-nosed negotiations could be seen as part of the rough-and-tumble of supplying a supermarket, particularly a successful one, but what happened when Tesco started struggling when profits started falling?" "Well, then it turned to this rich source of income - its suppliers - and ramped up the pressure." " So, are you going to support...?" " Dave, we don't need to do that." "Just talk through me the margin issue," "I need to understand what the issue was." "David Sables trains suppliers in how to handle supermarket buyers." "You actually have underperformed to the tune of 80,000 and that's what we need from you today before we plan next year." "Today, he and his colleague are giving me a taste of a Tesco-style negotiation." "Tesco are the toughest but then you'd expect that - they are the biggest." "I would say that there is bullying going on," "I would say there is highly-pressurised environments, there are threats constantly." "Has the recession meant that Tesco is actually getting more aggressive against its suppliers?" "Undoubtedly." "The behaviour has been extremely aggressive extremely frequently and, you know, often very, very creative." " Hello." " MAN SIGHS" "And, according to David, sometimes Tesco buyers don't even need to be creative." "Tell me about this very odd phrase - the "just gimme."" "I could list you 50 things that they could use as an excuse to charge you money as a supplier." "With a "just-gimme", this is me saying," ""I don't even need to justify it." "Just give me it."" "Now, we've spoken to a lot of people who work inside this industry and they have told Panorama that over the last two to three years," "Tesco's buyers were becoming more and more aggressive, demanding more money from suppliers every time they met them." "The amount earned from commercial income at Tesco is a closely-guarded secret." "But Tesco has now acknowledged it became too focused on it." "And it was the counting of some commercial income payments too early that's landed Tesco in hot water." "In Tesco's shops in the last 18 months, you could see how important commercial income is becoming." "If you wander round Tesco and look at certain categories, you can pick out who's giving them money just by looking at what's on promotion in the stores and I think also customers are getting increasingly tired and bored about trying to figure out what represents value." "The average number of products in its stores rose by 30%." "A new product means a new supplier fee for Tesco and the number of promotions it was running became dizzying." "They had more products on promotion at any one time, often conflicting, you know, not making any sense for customers who were trying to work out the best price." "And supplier income, obviously, has a big part to play in that." "Sir Terry Leahy agrees." "In some way, they took their finger off the pulse of the customer." "What they really needed were lower prices and they needed a price list that they could trust." "What they got instead, not just from Tesco but from all of the supermarkets, was too much reliance on short-term promotions." "Tesco says it is now working with suppliers to ensure it's bringing customers the right products at competitive prices." "It will need to." "Last year, Tesco surveyed its own suppliers." "Of those who replied, a third told them they were unhappy with how Tesco treated them." "One supplier agreed to talk to us anonymously." "Prices for things they sell to us like promotional sites, sales data, it feels like all these things have ratcheted up in the last year or two." "It feels like they're hunting around for ways to make money from suppliers." "Fines can be levied by Tesco when suppliers don't perform well." "But the supplier we spoke to said fines were starting to be applied arbitrarily." "We've been given a series of e-mails sent by Tesco buyers over the last three years." "In one, a buyer threatens to fine a supplier £20,000 if he makes a mistake on a document." "In another, Tesco fines the same supplier a five-figure sum over claims that a delivery was late." "It wasn't." "In 2013, there was another clash after sales of the supplier's products didn't meet forecasted figures." "So, he was asked by Tesco to pay £100,000 to make up for it." "I describe it as a" ""heads-they-win-tails-you-lose."" "If you undersell, they come after you for the cash that was predicted in the business plan." "If you oversell, then they say, "We see you've made extra money." ""We want some of that money."" "Following negotiations, the supplier did pay less." "Tesco said it's unable to examine or respond to anonymous allegations." "Where it had enough information on any of our cases, it said it was... ..and in line with industry practice." "That supplier was relatively small but we've been told of a much bigger player in the supply chain that hit back hard in response to money it said it was owed by Tesco." " MAN ON ADVERT:" " Want an extraordinary, natural-looking hair colour?" "L'Oreal, the world's biggest cosmetic company promotes its products through glossy ads like these..." "Reproducing natural colour full of highs and lows." "..and sells them in their millions at Tesco." "..you'll want to." "You're worth it." "We've discovered that in 2013, there was a massive fall-out between the two companies." "L'Oreal disputed almost a million pounds' worth of charges, fees and fines from Tesco." "It threatened legal action and said it would take its products off Tesco's shelves." "The two later came to an agreement to cover the amount." "Tesco said it values its relationship with L'Oreal." "It said differences sometimes occur in the course of commercial relationships and they always aim to resolve them amicably, as they did in this case." "So, if suppliers are being squeezed, why are so few of them speaking out?" "Well, for the answer to that, we go into this rather ornate building in central London." "It's the home of what's called the Groceries Code Adjudicator." "Since 2010, there's been a code of conduct setting out how" "Britain's biggest supermarkets should treat their suppliers." "For the last 18 months, the Adjudicator has policed it, but many suppliers are nervous about coming forward." "I would like more suppliers to come to me with evidence of what's going on." "I think that some of them are worried about doing so but I have a legal duty to protect their anonymity." "This would be the same as them telling the school teacher about the school bully when they know they've got to catch the bus home with the school bully later that day." "Christine Tacon says she's working with supermarkets and suppliers to improve relationships but she admits she has yet to launch any formal investigations into breaches of the code." "In 2013, she asked for powers to fine the retailers up to 1% of revenue." "For Tesco, that would be £400 million." "'But the Government has still not given her the go-ahead.'" "But the fact is, a year on, you're not actually able to fine a retailer as we sit here at the moment." "As we sit here at the moment, I can't fine a retailer." "I have the legal powers to do so but I don't have a maximum so therefore there's no figure." "We asked the Government why her request hadn't been approved and a cabinet minister told us the Coalition is split and the Treasury has been sitting on it." "It's a straight-forward political disagreement here." "I think it should have happened, it should happen, but my Conservative colleagues in Government haven't been willing to agree to it so we've not been able to make progress." "When we put this to the Treasury, they said they were unaware of any delay." "They pointed out the Government had introduced the code and were working through the details in the usual way." "With the arrival of their new chief executive," "Tesco insists it's been trying to rebuild trust with its suppliers and has been listening to their past experiences." "We've been really clear with them that we want to run the commercial part of our arrangement differently, that it's important to us that we work together in partnership and that we're willing and we want to sit down and think about our two businesses" "together and how it is we can create new value that we can share together." "The tough times aren't over for Tesco." "There are job losses and store closures ahead." "But one man thinks Tesco can fight back." "I really do believe that if they address, again, what really matters to customers, you'll see customers respond and there can actually be a strong recovery." "Back in Bicester, customers say Tesco needs to get back to basics." "What would encourage you to maybe be a bit happier with Tesco?" "What would they need to do to kind of...?" "Well, be honest would be nice." "Yeah, just probably being at the same price as everyone else." "Britain's biggest retailer matters to all of us whether we shop there or not." "It's had a nightmare three years." "The big question is will this bruised giant find its way back to success?"