Tesco’s Ethical Issues with Its South African Wine Suppliers

In 2012, Tesco’s market share fell below 30% to 29.9% for the first time in seven years. Company’s competitors Sainsbury’s and Iceland, as well as low-cost chains Aldi and Lidl, on the other hand, gained market share (BBC, 2012a). Same year Tesco has incurred its first decline in profits since 1994 (BBC, 2012b). The 2007 crisis brought difficult economic conditions, and the shoppers became more price-aware and sensitive, as they had less money available they turned to cheaper food retailers. Due to the rise of the cheaper supermarkets there has been a “price war” with the major supermarkets, Tesco included, cutting prices in 2011 (Hughes, 2011).

While many shoppers may benefit from such “price wars”, the suppliers may suffer in such conditions. According to Oxfam’s report “Trading Away Our Rights” big retail companies, including Tesco, have used their buying power to enforce price reduction and adoption of “just-in-time” delivery policies which increase costs and risk for their suppliers in third world countries, including South Africa. Oxfam says that big corporations’ powerful buying teams’ actions lead to worsening of employment conditions (Proyect, 2004).

Due to hard economic conditions and strong market completion, Tesco’s price cutting strategy has severely affected its South African wine suppliers. Friends of the Earth organization (FOE, 2004) has exposed some of the problems faced by Tesco’s wine suppliers in South Africa: receiving payments below the production cost, compulsory fee (£100,000 quoted by one supplier) to enable selling wine in a higher price range to reflect the price of production, requirements to make last minute changes to packaging at their own expense, cost savings of using cheaper labour which are not passed on to the supplier. According to one of the wine-grape growers in South Africa, Tesco has never been concerned about the labour wages or their living conditions (FOE, 2004). When suppliers are pressured to reduce prices they may either go bankrupt, or reduce production costs which may worsen the working conditions and lower the workers’ wages. Such conditions may force suppliers to use child labour in order to cut wage costs, developing countries, including South Africa, are especially vulnerable due to low or non-existent government regulations. Research by Oxfam and its partners in South Africa revealed “that Tesco loads many of the costs and risks of its business onto farmers, who are passing them on to workers – especially women – in the form of temporary and sporadic employment without basic rights” (FOE, 2004, p.3)

The primary ethical issue in the Tesco practises described above is buyer power abuse, which is a common practice by the big UK supermarkets (Thompson, 2009). Suppliers from developing countries, such as South Africa, have little confidence in regulators and are afraid to lose the contract with the big supermarkets (which is their main source of income); thus they often agree with extremely unfavourable arrangements set by the buyers. Tesco abused its monopsony power by pressuring the South African wine suppliers to reduce prices, pay additional fees, and make last minute changes at their own expense. In order to compile with these conditions suppliers seek to reduce costs, mostly by saving on the working environment (worsening the working conditions) and reducing wages, in some cases even resorting to child labour. All the above leads to new ethical issues, such as human rights problems, with low wages and poor working conditions; and child labour issue, which denies the children opportunities to fulfil their other rights.

J. Werner, a new Tesco executive, has been asked to review the way the company deals with its South African wine suppliers. If Werner recommends adopting a utilitarian stakeholder approach, which strives to maximise benefits and minimise harm to all stakeholders including suppliers, the arrangements with suppliers would have to be reviewed and drastic changes would need to be made. Unlike s stockholder approach, which has a sole objective to maximise shareholder’s value, stakeholder approach “rejects the very idea of maximising a single objective function as a useful way of thinking about management strategy” (Freeman and McVea, 2001, p.12). Such stakeholder management involves continuous balancing and integration of various relationships and several objectives. This approach follows a consequential ethic theory which assesses the action based on the consequences it will cause. If this approach is adopted by Tesco, its management would have to renegotiate the contracts and arrangements with its South African wine suppliers, to ensure fair prices (for the suppliers view point) which would lead to fair wages to supplier’s workers, and fair working environment and conditions for those workers. In such conditions cheap labour would not be required to the same extent as before, causing a reduction in child labour. Every decision would have to be based on maximization of net benefit of all Tesco’s stake holders.

Even though Tesco might lose market share and profit margin to its competitors, who follow non-consequential ethical approaches, by adopting the stakeholder approach; however it would be the most ethically sound strategy. Trough this approach Tesco can resolve important ethical issues, such as human rights violation and child labour problem. According to Stanford Research Institute, following stakeholder strategy is essential for long term success (Freeman and McVea, 2001). It may also bring positive media coverage, which may give Tesco a competitive advantage and increase market share, by attracting ethically-conscious consumers. By not following utilitarian approach and ignoring social issues an organization can lose social legitimacy which “can lead to social activism, restrictive legislation, or other constraints in the firm’s freedom to pursue economic and other interests” (Werther and Chandler, 2006, p. 17).