Some food retailers and manufacturers operating in the UK have reduced their payment terms to help suppliers deal with the fall-out from Covid-19. Digging into data, David Burrows looks at the records of how the UK’s largest grocers – and certain manufacturers – have been paying their suppliers and wonders if the recent changes are sustainable in the longer term.
Major supermarkets are run as ‘negative working capital’ businesses: in other words they pay suppliers after generating income from their product. Just how long after has been the subject of continued scrutiny in recent years – not least in the UK by the country’s Groceries Code Adjudicator, which made late payments a top priority after a high profile investigation into Tesco’s practices in 2015.
But data compiled by just-food suggest the UK’s major food retailers are now paying the vast majority (97%) of their invoices within agreed terms and are, on average, settling up far more quickly than major manufacturers. Indeed, 27% of the invoices paid by 14 of the largest food processors are paid outside the agreed terms, with manufacturers taking on average 23 days longer than supermarkets to settle their bills.
But does this mean that supermarkets are off the hook, and it’s time to investigate the payment practices of large manufacturers? Not quite. “Supermarkets have improved but they’re by no means exemplary,” says Duncan Swift, partner and head of the food advisory group at accountancy firm Moore. “It’s very difficult to wean businesses off [paying late].”
Since 2017, all large businesses in the UK must publish information about their payment practices and policies. The data, which is stored and aggregated on the UK government’s website, covers all invoices, and is designed to “shine a light” on payment practices, increase transparency and “make payment behaviour a reputational boardroom issue”, according to the Government.
However, very few suppliers or consumers know it’s there. So just-food has used the database – which includes everything from the average time taken to settle an invoice to the percentage paid on time and whether companies are signed up to the voluntary Prompt Payment Code – to assess the performance of nine major supermarkets and 14 of the country’s largest food manufacturers.
Across the manufacturers assessed (Arla Foods, Bakkavor, Greencore’s grocery unit, HJ Heinz, Kellogg, Mars, McCain Foods, Mondelez International’s confectionery business, Muller UK, Nestlé UK, PepsiCo, Premier Foods, Unilever and United Biscuits), 27% of invoices (food, non-food and services) were not paid within the agreed terms.
Kellogg, Premier and Unilever all paid 95% or more of their invoices on time. At the other end of the scale were Arla (43% on time), Bakkavor (32%) and PepsiCo (28%).
Only one in five (20%) invoices were paid within 30 days – the term the Government wants to become “the norm”. In fact, the average time taken to pay was 65 days – this ranged from Muller (33) to Greencore and Kellogg (both 86). For five companies – Kellogg, Greencore, Bakkavor, Mondelez and Premier – the average time taken to pay had actually increased in the two years of reporting.
Meanwhile, the supermarkets (Aldi, Asda, Iceland, Lidl, Marks and Spencer, Morrisons, Sainsbury’s, Tesco and Waitrose) paid invoices on average in 42 days – 23 days sooner than manufacturers. Swift reckons this can, in part, be explained by the inclusion of fuel, which “flatters” the figures: fuel suppliers generally want payment “within three to five working days”. So-called ‘pay me early’ schemes could also be driving the figure down, he adds, making comparisons between retailers and manufacturers a bit “apples and pears”.
Nevertheless, supermarkets are still struggling to move towards the 30-day norm, with just 26% of invoices paid within that time-frame. Performance was varied: Marks and Spencer managed to pay 60% within a month, whilst Sainsbury’s struggled with 5%. At 42 days, the average time taken to pay has also crept up – two years ago it was 39 days.
Still, only 3% of invoices were paid outside the agreed terms by the supermarkets. In the first set of reports the figure was 8%. This was mainly down to Lidl, which was paying 39% of its invoices outside the agreed terms; the discounter has improved dramatically in the latest reporting period, paying 94% of invoices within the agreed terms. Morrisons was the top performer, paying every single invoice on time in the period from August 2019 to February 2020; Marks and Spencer, the next best, managed 99%.
Christine Tacon, the UK’s Groceries Code Adjudicator, is impressed with the progress – not least because her own supplier surveys are also showing delays to payments have tumbled down the list of concerns. In 2014, 35% had an issue with late payments, she explains, but last year this was down to 13%. “I don’t have evidence it’s a real problem [anymore].”
“Morrisons are better off if they hold the cash. [The terms] will be moved back again once this is over”
Tacon even goes so far as to say the improvements – arguably sparked by her Tesco investigation – has “very definitely” helped improve the resilience and ability of the sector to deal with the current coronavirus crisis. “The interests of suppliers and grocers during the pandemic has been aligned,” she explains. “They are actually talking to each other.” Others are not so sure.
The pandemic has served to enhance the supermarkets’ reputation as responsible businesses – and none more so than Morrisons. “The group has seriously considered its responsibilities to its stakeholders – customers, employees and suppliers – and shown great agility, capability and innovation to deliver a strong Q1 FY2021 trading performance,” analysts at Shore Capital this week. Morrisons is a ‘house stock’ for the brokers at Shore Capital.
Morrisons quickly moved to an immediate payment for small suppliers, the definition of which has also been extended to cover those doing up to GBP1m of business with the supermarket (previously it was GBP100,000). “We want to be there for the smaller foodmakers, farmers and businesses that supply [us],” says chief executive David Potts. According to Shore Capital, this represents a working capital investment of around GBP50m.
Other retailers have made similar moves to support suppliers. Sainsbury’s, for example, has committed to pay small suppliers immediately, benefiting nearly 1,500 small businesses that have less than GBP100,000 annual turnover with the chain. Tesco, which has a policy to pay suppliers who deliver up to GBP0.25m of products a year within 14 days, reduced the terms to five days. “We recognise [this period] is particularly challenging for our smaller suppliers, [so] we shortened our payment terms for our smaller suppliers […] with payment processed immediately and funds cleared within five days,” says a Tesco spokesperson.
This is positive PR for these retailers and will massively improve the cash flow for this group of suppliers. However, some say the moves do little to improve resilience overall. According to Swift, it’s often the own-label goods suppliers that get buffeted by late payments and mostly in the GBP20-100m turnover bracket. “The gesture isn’t quite as significant as the headlines suggest,” he says. The commitments will also likely last no longer than the coronavirus, notes David Sables, a business and negotiation consultant and CEO at Sentinel Management Consultants. “Morrisons are better off if they hold the cash. [The terms] will be moved back again once this is over.”
Manufacturers have also adapted their methods during pandemic, if not their payment terms. Unilever is offering EUR500m (US$542.7m) of cashflow relief to the “most valuable” smaller and medium-sized suppliers. Nestlé, meanwhile, has a more ambiguous promise of “prompt and pragmatic” backing for its suppliers.
just-food approached the manufacturers and supermarkets about their performance regarding late payments and long terms. Many explained the myriad reasons payments could get delayed, for example mismatching purchase orders and errors on invoices, whilst others blamed the banks or “intra-company payments”.
“We are subject to constant pressure from large suppliers on payment terms: it is not one-way traffic” – Iceland
Iceland, one of the worst-performing supermarkets with 40% of invoices paid after 60 days, explained it “over-indexes in purchases of frozen food, for which payment terms naturally tend to be longer since product is bought in bulk and may take as long as three to four months before it reaches our stores”. In an email, an Iceland spokesperson adds: “As the UK’s smallest national supermarket, it should be noted that we are subject to constant pressure from large suppliers on payment terms: it is not one-way traffic.”
Negotiating terms is part and parcel of business life – and it’s particularly ruthless in grocery. “Dealing with FMCG is intense,” notes Sables, not least because paying later makes perfect sense for any business: stock can be rotated more quickly, cashflow improves and the return on inventory is better. A spokesperson for United Biscuits sums it up by writing: “United Biscuits (UBUK) operates standard payment terms of 75 days. However, we work with our suppliers to find a suitable set of commercial terms that may be shorter or longer, that are acceptable to both businesses.”
One explanation for the manufacturers pushing out their own payment terms is because they have negotiated poorly with their customers – the supermarkets. Swift thinks for the Unilevers of this world that’s unlikely to be the case. He says it’s the own-label manufacturers he most often ends up helping. When the supermarkets push their payment terms out it triggers a cascade, with manufacturers having to find credit for every extra day they’re not paid. Of course, every extra day gained by supermarkets – the part of the chain that receive payment for goods almost immediately from shoppers – results in more “cash to play with”, Swift explains; this can be invested in new stores, upgrades and so on.
Swift, who has likened late payments to “crack cocaine” for large companies, estimates that at any one time, the top four UK supermarkets (Tesco, Sainsbury’s, Asda and Morrisons) owe suppliers GBP12bn. As The Financial Times put it 15 years ago: suppliers have acted as surrogate bankers to some supermarkets. That is unlikely to change anytime soon.