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Fighting back       

Suppliers see light at the end of the tunnel.

As Britain’s supermarket giants continue to use their size to hammer down the prices paid to their suppliers, Martin Williams, managing director of Graydon UK, a leading credit reference agency, explains how suppliers can fight back in what doesn’t necessarily need to be an abusive relationship with the big retail players.

With Tesco-bashing having become akin to a national sport in recent times, it seems somewhat gratuitous to flag the approach to Corporate Social Responsibility (CSR) as adopted by Sir Terry Leahy’s global retail behemoth as a classic example of the medieval treatment exacted on small and medium-sized suppliers by large supermarkets.

On this occasion, however, Tesco provides easy meat. The company’s website features lengthy explanations of its behavioural commitments towards customers, staff and the communities in which it operates but makes virtually no mention of suppliers. Given the widespread bullying of suppliers by supermarkets, this omission is hardly surprising and also poses wider questions regarding supermarkets’ sincerity towards CSR.

On the face of it, the issue is a simple one. Supermarkets are businesses in their own right and exist primarily for the purpose of making a profit and delivering shareholder returns. They’re also as fearful as anyone of the impacts of the global credit crunch and are already in the firing line from the mainstream media as consumers feel the heat created by rising food prices. As such, perhaps they should even be treated to a little sympathy.

Nevertheless, there’s little doubt that the likes of Tesco, Asda, Morrisons and Sainsbury’s are all guilty to a greater or lesser extent of what can only be described as some questionable business practices when it comes to their treatment of suppliers.

Judging by its recently published final report into UK groceries retailing, the Competition Commission is sympathetic to the suppliers’ plight. Changes to the industry’s existing code of practice, coupled with the recommendation of an
independent ombudsman to police the code, offer considerable hope to businesses which have suffered for too long at the supermarkets’ hands.

The abuses by supermarkets which have caught the Competition Commission’s attention are multi-faceted. They range from dictating prices and payments terms before amending them without consultation; to making unpredictable, last-minute demands accompanied by the making of threats to suppliers who are unable to respond quickly enough to their whims. It’s the kind of behaviour which can destroy marriages, never mind business relationships.

Joking apart, nowhere is this better illustrated than in relation to the perennial issue of late payment, itself a problem seemingly now ingrained in British business culture. Supermarkets aren’t the only culprits of course but the fact remains that the value, according to BACS, of payments outstanding to SMEs in all sectors in the UK currently amounts to a figure somewhere in the region of £18.6bn, with 50% of all trade debts remaining overdue at any one time.
 
The shortcomings of existing government legislation are partly to blame for this unpalatable situation. The tenth anniversary of the 1998 Late Payment of Commercial Debts (Interest) Act is almost upon us and although it was warmly welcomed at the time; it is abundantly clear that the legislation simply hasn’t served its purpose of protecting smaller, more vulnerable supplier companies. The fact that the Competition Commission has now seen fit to create an Ombudsman service and revise the Groceries Supply Code of Practice serves to underscore this point.

In an environment where supermarkets can flex their muscle through switching suppliers in an instant where they so choose, the act’s placement of the onus on suppliers to penalise tardy customers, by giving suppliers the right to add additional interest to overdue payments, is ill-conceived and unfair and has seen absolutely no difference whatsoever made to the proportion of outstanding trade debts between 1999 and now.

Many small supermarket suppliers simply don’t have the administrative capacity to chase debts and what’s more they don’t actually want to for fear of inflicting irreparable damage upon relationships with large corporates.

Against this background, it’s hardly surprising that large corporations can take such actions as extending their payment terms to suppliers without any form of consultation. Alliance Boots have already been heavily criticised for this and whilst that particular business doesn’t qualify as a supermarket, it’s a fair bet that regardless of what they might say publicly, the major supermarket chains would follow suit given the opportunity.

It seems logical therefore that pressure should be applied for the Competition Commission’s key findings to be enforced across the entire breadth of the retail sector, not just the supermarkets.

Legislative reform and enforcement won’t be achieved overnight of course and SME representative bodies are already calling for new regulation to tackle the problem by the Department for Business Enterprise and Regulatory Reform (BERR). This would most likely involve the monitoring of compliance amongst large corporates via BERR spot checks and the imposition of financial penalties on persistent late payment offenders.

The more workable and undoubtedly preferable alternative, however, would be the introduction of a voluntary code of practice signed by all large corporates, including the supermarkets, to ensure the faster payment of trade debts. This would create a situation whereby offenders could be publicly named and shamed without suppliers necessarily having to be involved in taking direct legal action.

In these rocky economic times, this might help alleviate the persistent pressure placed by supplier groups on the Bank of England Monetary Policy Committee to enact further base rate cuts. If more money was actually sat where it should be, in suppliers’ accounts, the need for additional bank borrowing would be significantly lessened, albeit not swept away entirely.

Returning for a moment to the medieval theme, suppliers can cling to the hope that the Competition Commission will, following the publication of its most recent report, emerge as a white knight and in farming industry parlance break the armlock of the large supermarkets.

How realistic this really is remains to be seen. The recommended changes to the existing supply code of practice including the prohibition of retrospective retailer adjustments to the terms of supply, as well as the creation of the new ombudsman to oversee and enforce the extended and strengthened Groceries Supply Code of Practice, should be genuinely welcomed. However, enforcement really is going to be the key thing here and it could be a while before the true impact of these recommendations is felt.

From a suppliers’ perspective, there has undoubtedly long been a genuine need for the proposed ombudsman service to be created. Armed with the power to investigate supermarkets’ accounts on demand and without warning following anonymous complaints from suppliers; the presence of the ombudsman will, undoubtedly, enable suppliers to feel more confident in their collective efforts to expose bad payment practices on the part of retailers.

This all leads to the question of what other practical actions suppliers can take to protect their financial well-being in the face of dealing with the supermarkets. Even following the Competition Commission report, this requires an acceptance that whilst supermarket purchasing power is a fact of life, there are means available of mitigating its impact on a business.

The most sensible practical step is for small firms to do something which, where consumers are concerned, is typically the stuff of nightmares for supermarket marketers and purposefully avoid putting all their eggs in one basket.

The building of a mixed client portfolio which does not lead to disproportionate reliance on a single customer should therefore lie at the heart of every supplier’s business plan, with juicy supermarket contracts being regarded as a welcome bonus rather than a staple food source in revenue terms.

Another sound practical step for suppliers is to consider the possibility of invoice discounting. As a business finance solution, this can be costly but as an alternative means of drawing money against invoices issued, it remains a cost-effective way in which a profitable supermarket supplier can improve its cashflow situation regardless of the behaviour of its larger clients.

To further improve their position, suppliers should ensure that rather than simply accepting supermarket bullying as a natural part of the contract negotiation process, that they stick to their guns, maintain a focus on attention to detail and cut off at the pass commonly used excuses for supermarket late payment.

Foremost amongst these is the frequent claim by supermarkets that agreed prices have not been loaded correctly into their systems before invoices are issued. This practice, which can lead to further delays and heightened frustration on the part of the supplier, is known in the industry as pay and deduct and involves invoices being only partially settled, with the remainder being held back whilst queries are investigated.

The practice rears its ugly head frequently but most often in instances where special promotion such as buy one, get one free offers have been agreed; or where pledges have been made to ensure that the positioning of goods within the supermarket environment is likely to temporarily enhance sales; for example the guaranteed placing of goods at customer eye level.

The challenge of settling such disputes has been exacerbated in recent times by the offshoring by supermarkets of the back office functions dedicated to resolving supplier-related issues. Whilst there is nothing wrong with this in principle, it has reduced further the level of face-to-face contact between suppliers and supermarkets whilst dealing with disputes. The insufficient training of offshore staff in handling detailed, complex supplier matters has also served to further exacerbate the problem.

The Competition Commission’s recommendations that retailers be required to maintain written records of all agreements with suppliers on terms of supply, offer genuine hope that this practice may soon pass into the annals of history but this is unlikely to happen overnight.

For the time being, however, supplier persistence in terms of seeking formal assurances that such matters have been attended to is the best form of counteraction here and resources should be directed towards checking and indeed double-checking that the correct agreed prices are being applied by the supermarket in question from the outset.

Ultimately, however, the remedy for suppliers is to adopt what is a distinctly un-British approach to supermarket relations and have the courage to be vocal with their grievances and not be afraid to whistleblow on late payers, including supermarkets. It’s worth remembering also that countless small independent retailers are also feeling the heat despite the shadow cast by the big players and as such they also have a vested interest in containing their power and influence.

This is a daunting prospect at the best of times but by following the basic steps above, the process of wriggling out from under the collective thumb of the supermarkets can at least begin.

Martin Williams,
managing director,
Graydon UK,
tel: (0) 20 8515 1400