It used to be said that the UK’s large supermarket chains wielded a figurative baseball bat over their suppliers, trying to preserve every last percentage point of margin in their high volume businesses. It’s always been an uneasy dynamic, with the retailer invariably holding the balance of power, even with global food and consumer goods manufacturers.
Even so, it seems there’s never a shortage of willing ‘victims’ among smaller suppliers and start-ups. They’re regularly spotted on Dragon’s Den, desperate to be stocked on national shelves. However, the home delivery era has now brought its own Goliath to the attention of the UK watchdog policing grocery suppliers.
The Groceries Code Adjudicator (GCA) has launched an investigation into Amazon, suspecting the US giant of breaching its Supply Code of Practice on timely supplier payments over a three-year period. The code aims to ensure that the UK’s largest grocery retailers, including Tesco, Sainsbury’s and Marks & Spencer, treat suppliers fairly.
The alleged delays in payment “could expose Amazon suppliers to excessive risk and unexpected costs, potentially affecting their ability to invest and innovate”, says the GCA, although in the current environment, it’s primarily about survival, particularly for the Small and Medium Enterprises (SMEs) in the supply chain.
Last autumn’s launch of the Fair Payment Code aimed to build on the Prompt Payment Code of 2008, which SMEs generally believe had achieved very little, not even after its post-Covid update which urged a commitment to paying 95% of SME invoices within 30 days. The new code promised ‘medals’: a gold rating to companies paying 95% of all suppliers within 30 days; silver for honouring those terms for SMEs but 60 days for other suppliers; and bronze for paying 95% of suppliers within 60 days.
The intention was to change long term behaviours and break the cycle once and for all; until significant progress has been made and the longer supply chain remains damaged, forget about investment, innovation and the improved borrowing appetites of SMEs. The long-tolerated practice of large trade customers making suppliers sweat leads to existential liquidity problems down the chain. Businesses need cash just to breathe, let alone grow.
The beginning of the end is when they enter into a cycle of robbing Peter to pay Paul, too often in a miserable combination of late settlement with their own suppliers and non-payment of corporation tax and/or VAT. It’s a scenario seen as much among relatively established small companies as it is in more recently formed businesses. It usually ends badly for both, sometimes with personal insolvency or disqualification for directors.
Suppliers to larger, more powerful companies must have the confidence to chase payment and enforce their terms, regardless of the perceived risk of upsetting a customer: if a business agreement is too fragile to able to discuss money indisputably owed, then it will invariably lead to a bad debt, at least in part.
All businesses facing severe cashflow pressures should seek professional advice on credit management, invoice discounting, overdraft planning, communicating with HMRC and contractual terms to minimise the impact of late payments.
This article is written by Jo Milner, Managing Director at Buchler Phillips, an independent boutique firm, with an impeccable Mayfair London heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.