Late payments from supermarkets are crippling supply chain and cutting market competition - March 2016

Late payments and sustained pressures from large consumer retailers is pushing small suppliers out of business and reducing competition in the marketplace, crippling the chain of suppliers supporting supermarket trade. This is according to supply chain consultancy Crimson & Co.

The recent revelations that Tesco intentionally delayed payments to its suppliers, following an investigation by the Groceries Code Adjudicator, raised wider concerns about large retailers’ impact on the businesses that make up the supply chain. According to Laura Magee, senior consultant at Crimson & Co, late payments from large retailers are cauterising the suppliers’ abilities to grow and stay in business, ultimately pushing them out in favour of big name brands:

‘Especially when it comes to small businesses, a consistent cash flow is vital to grow and develop, while still ‘keeping the lights on’. Given that an SME’s cost of capital is higher than global enterprises (with banks typically providing better rates for larger than smaller companies), the strain on a SME is considerably more than the benefit a larger retailer gets from delaying payment. Supermarkets need to look at the bigger picture, rather than solely short-term shareholder needs.

‘This will also filter down the supply chain, affecting both suppliers and middle-businesses in the chain. Let’s consider a small company whose main volume comes from supermarket trade. They will have supply deals with their suppliers and, most likely, volume commitments as well (a certain amount sold over a certain period etc.) This can mean that a small company faces pressure from both sides of their business – from supermarkets delaying payments and suppliers demanding their payment and volume commitments to be met. None of the companies involved in this chain truly benefit from this arrangement, with all losing the benefits that a reliable cash flow can bring.’

Laura also doesn’t see much aid from legislation to protect suppliers from late payments:

‘There is little protection for a company when it comes to long term payments. The Grocery Code has gone some way to offer cash flow security, but it only protects suppliers who provide goods for resale rather than all suppliers of goods and services. Since supplier relationships often involve unequal balances of power, it is up to the supermarket or large supplier to decide whether they want to exploit their position or to take a positive partnership approach. The latter is definitely a ‘win-win’ for the supply chain!’

Laura concluded: ‘Consumers need to take a greater interest in where their produce comes from to ensure that smaller suppliers are not pushed out of the marketplace through poor practices from supermarkets. We could end up in a situation where big brands dominate this sector, limiting consumer choice and cutting competition dramatically – both of which can lead to poor value purchases for shoppers. Supermarket behaviour is governed by consumer behaviour, so it is down to supermarket shoppers to demand more choices from a range of smaller producers to keep the supply chain vibrant long into the future.’

 

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