Following his investigation into the finances of supermarkets John Plender answered readers’ questions in December.
To read John Plender’s investigation into how big supermarkets fund expansion by using suppliers as bankers, click here
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Given the profitability of these particular retailers why can’t they pay their suppliers immediately? Could they not buy or develop a financial mechanism which will allow them to do so?
Baroness Glenys Thornton, Chair of the All Party Retail Industry Group
John Plender: It would, in theory, be possible to legislate to require supermarkets to pay suppliers immediately. But it would be difficult in practice.
First, finding a definition for who should be required to pay on the nail would be tricky, because there would have to be a cut-off point. Judgement about that would have to be made on the basis of financial accounts, which are works of art rather than science. And since there are differences in accounting treatments between supermarkets, there would be contentious issues to do with inter-company comparability.
Then there is the problem of unintended consequences. The contract between retailers and suppliers is not just about payment terms but other factors such as pricing and discounts, which could be adjusted to compensate the supermarkets for the change in payment terms. So for an immediate payment law to work, there would have to be other provisions to govern other parts of the contract. It strikes me as very unlikely that the government would wish to tackle the problem through such heavy intrusion into private contractual relationships.
Perhaps the trend in payment terms over the last few years is something which should be disclosed to the competition authorities and benchmarked against the deadline for statutory interest. Maybe it’s time that a statutory protection is inserted into contracts for smaller and medium scale suppliers to protect them against the power of the supermarket monopoly buyers.
Andrew Wright, Archaeologica Ltd, Milton Keynes, UK
John Plender: We are all in favour of disclosure. Your suggestion about statutory protection is interesting, but beware the law of unintended consequences.
When the UK recently introduced legislation to permit companies to charge high interest on overdue debts owed by companies and public sector bodies, many large companies simply negotiated longer payment periods with smaller suppliers, instead of paying bills more promptly. The initiative seems to have made little difference on the ground.
In the last 10 years Tesco has moved toward a just-in-time replenishment system which results in much faster inventory turns. Such a system required increased investment in information and distribution systems but freed up working capital. I’ve never seen a Tesco, but know this from reading a recent book called “Lean Solutions”.
If the suppliers to Tesco and Asda are still getting paid under customary terms, whether 15 days or 30 days, what is the problem with the retailers becoming more efficient in their operations? The consumer gets fresher products and there can be no question that Tesco and Asda have used their increased efficiency to pass on lower prices for consumers.
Are you suggesting that consumers should subsidise suppliers who are struggling to compete by paying higher prices for their goods?
Don Pugh, Roswell, Georgia, US
John Plender: We are not criticising Tesco or Asda for their exceptionally efficient management of working capital, which we lauded. The public policy question is whether and at what point this phenomenal success, with its growing call on supplier finance, turns into an abuse of a dominant market position.
Without access to a great deal more data than is available in the accounts of the two companies, it is not possible for us to make a judgement - that is for the competition authorities. We are certainly not advocating that consumers should subsidise struggling suppliers, but believe that suppliers are entitled the benefits of robust competition policy.
You mention Unilever in your article. They have been in the media recently talking about this issue, recognising it only hurts them in the end and working to develop a joint solution to the problem with their suppliers. Is it possible, that in the end, these large buyers create a supply chain of large suppliers who both have the financial strength to resist their financial demands and lack the production competency and quality demanded by the buyer’s customers?
Robert Barnes, President, PrimeRevenue Inc.
John Plender: Interesting point. But even the big suppliers are finding it tough dealing with the big buyers’ financial demands, especially in markets where they are not the number one supplier. That applies even to the likes of Unilever and Nestle.
The fact that retailers have so much muscle that they can use their suppliers as their bankers should raise concerns both in the city and even in the Treasury. Should any group of 4 companies have such control over so many strands of the economy?
Michael Hutchings, solicitor
John Plender: It’s important not to forget that while the food retailing marketplace has been highly concentrated, it has also been highly competitive in the past and has served customers very well.
The question is, when does concentration reach the point where there is abuse of a dominant market position? You are right that this is a public policy issue about which there ought to be concern in the City and on the part of the competition authorities.
What are the implications of Tesco and Asda’s use of extended credit agreements for a) small suppliers and b) small retailers?
Shane Brennan, Public Affairs Executive, Association of Convenience Stores
John Plender: The implications for small suppliers are made clear enough from our piece. Those at the end of the supply chain suffer most from the supermarkets’ buying power and credit terms.
The implications for small retailers are simply that they lack an important competitive advantage that Tesco and Asda enjoy. That has always been part and parcel of how markets work, although the dominance of these two retailers across the UK is a relatively recent phenomenon.
Is it all such bad news for the suppliers? Surely if a company is able to say double its number of stores through this financing then the supplier (all being well) will double his business with the company. I bet if you asked most suppliers if the price of doubling their sales over say five years was that they had to wait an extra 30 days for payment then the vast majority would be in agreement
Tim Hollidge, London
John Plender: Of course the growth of the supermarkets has been good for many suppliers. But in exchange for increasing volume the supermarkets extract tougher terms on pricing. And doubling your business alongside that of the supermarkets, especially if payment terms are extended, may be at the cost of a weakening balance sheet as the working capital requirement increases. In such circumstances cash flow usually suffers.
On top of that would come the risk of increasing dependence on the supermarket. The greater the potential damage from the loss of the contract, the weaker the suppliers’ bargaining position vis-à-vis supermarket buying power.
It is an interesting phenomenon that this government has constrained and regulated anything that moves, speaks or thinks. Therefore, why has it turned a blind eye to the behaviour of supermarkets?
John Plender: The question is obviously rhetorical. Maybe it’s because ministers shop at Tesco...