GCA critical of Asda's cost reduction plan developed with Bain

05 October 2017 Consultancy.uk

UK supermarket giant ASDA has come under fire from the Groceries Code Adjudicator (GCA) following tactics which were not respectful of “fair dealing” policy. The supermarket, which had developed a cost-reduction plan with consulting firm Bain in 2015, has subsequently had to repay hundreds of thousands of pounds to its suppliers, after demanding up-front payments worth up to a quarter of the value of annual sales of particular products in order to retain their presence at the grocer.

As discount supermarkets Aldi and Lidl continue to expand their presence in the UK, the two firms have grown to account for 12% of the total market share. In the meantime, the Big Four of British supermarkets – Tesco, Sainsbury’s, ASDA and Morrisons – have been consistently losing market share. Tesco is still in the lead with 27.8% of the market share, despite their minor fall of 0.5% in 2017.

As the major supermarkets – keen to maintain profit margins – scramble to compensate in their falling sales resulting from Aldi and Lidl eating into their market share, they have employed numerous cost-cutting initiatives. Earlier in 2017, Tesco announced the decimation of around 1,400 jobs while Sainsbury’s embarked on a new programme of saving-measures, masterminded by consulting firm McKinsey & Company, in order to save £500 million over the following three years.

ASDA supermarket

Now, ASDA, who implemented a project renewal plan – devised with support from consulting firm Bain & Company in 2015 – have come in for stringent criticism for their own attempts to avoid falls in profit. In a report published a year after the initial ruling, British supermarket watchdog, the Groceries Code Adjudicator (GCA), condemned the company, finding that ASDA had demanded up-front payments in order for suppliers to retain their place on the shelf, which in some cases were worth a quarter of suppliers’ annual sales value.

Reportedly, some of those who refused to make such payments were given as little as four weeks’ notice that their products would therefore be removed from the supermarket. Other changes which drew the regulator’s ire included cost price reductions, which were demanded from suppliers with as little as 24 hours’ notice under the group’s project renewal plan. Following ASDA’s compliance with the proceedings, the GCA declined to launch a further investigation, or to fine the company, which repaid a six-figure sum to its suppliers following the breach of "fair dealing" principles.

Accountability

ASDA’s current chief executive, Sean Clarke, said, “Our mission is to save customers money through low prices by always securing the lowest possible costs built on a foundation of strong, trusted partnerships with our suppliers and absolutely in line with the Groceries Supply Code of Practice (GSCOP)… The matter raised in the GCA’s case study occurred over a year ago and since then we have significantly strengthened our GSCOP compliance programme. We have engaged openly and transparently with the GCA to support her enquiries in keeping with her collaborative approach.”

While the accountability for the execution of the strategy lies with ASDA, as Bain provides advice rather than directly controlling the supermarket’s policy, the GCA also attacked the consultancy in one of its reports published on 4th September 2017. The ombudsman alleged that the firm – whose name does not explicitly appear but was confirmed as the architect of the plan by the British newspaper The Guardian on February 17, 2016 – was directly responsible for the policy of cost reduction applied by ASDA.

Referring consistently to a "third party consulting firm", the authority stated it believed Bain had been exerting influence on the negotiations with the various suppliers. On top of this, according to the document, the GCA also alleged Bain received bonuses calculated in proportion to the savings realised by their client.

Refusing to be drawn on the regulator’s accusations, Bain said in a statement, “As per our company policy, we do not speak publicly about who may or may not be our client.”

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