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Supplier Investigation Is One More Reason To Sell Tesco PLC, J Sainsbury plc & WM Morrison Supermarkets PLC

The reputation of Britain’s embattled mid-tier supermarkets received a further blow this week with news that the recently appointed Grocery Codes Adjudicator (GCA), Christine Tacon, plans to investigate Tesco (LSE: TSCO) over allegations that it had contravened the supply code of practice.

The action relates to a number of claims from bullying suppliers, invoicing discrepancies, and deductions for unagreed or unknown goods.

Speaking to the BBC’s Today programme, Tacon advised that “I have studied an internal report from Tesco and documents from suppliers and trade organisations, which led me to the reasonable conclusion that I should be investigating a breach of the code.

But the Cheshunt-headquarted company isn’t the only firm in the adjudicator’s crosshairs, with Tacon adding she would act “if it becomes obvious that another retailer is doing this and if I have evidence of it happening,” urging more suppliers to come forward if they had evidence of rules breaches by UK retailers.

Will suppliers seize the initiative?

The code applies to any retailer bringing in revenues of £1bn and above, and those found guilty of a breach could potentially be fined 1% of their total UK revenues. To put this into context, Tesco could have expected a penalty in the region of £440m for the year concluding February 2014.

Even if Tesco is found guilty of misconduct, however, the GCA cannot impose any fines as any wrongdoing would have occurred prior to the new legislation being introduced.

Still, any guilty verdict would do nothing to assuage Tesco’s battered reputation — the business is of course also facing investigations by the Serious Fraud Office and Financial Conduct Authority over last summer’s £263m profit overstatement for the first half of the current fiscal year.

And Tesco is already facing a backlash from its customers over the way it deals with its suppliers, so any unfavourable verdict is likely to push more of its customers into the arms of its competitors. And of course should allegations emerge over the conduct of Sainsbury’s (LSE: SBRY) and Morrisons (LSE: MRW) then a similar outcome can be expected.

In such a scenario, Tesco and its peers would be forced to change the way they deal with their product providers, particularly as suppliers may feel emboldened enough to play hardball with the retailers. This is a worrying scenario, as heavy discounting programmes to tackle the likes of Aldi and Lidl are already wreaking havoc on Tesco and its rivals’ profit margins.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.