Supermarket giant Coles recently committed to 14-day payments for small suppliers that provide up to $1 million in merchandise, Woolworths responded that from July 1st this year it would do exactly the same, noting that it already had this arrangement with a number of its suppliers.

“At Woolworths, small business suppliers of fresh foods are already generally paid between seven and 14 days from delivery because they are either supplying fresh food, engaged under our local buying initiative or requested weekly payment terms at the start of their relationship with Woolworths,” the supermarket chain’s head of buying and merchandising Steve Donohue told SmartCompany.

On the whole, this is great news for small suppliers. Coles said 1,000 businesses will benefit and we can assume a similar number of Woolworths suppliers will benefit. But let’s be real about this – it’s probably a cashflow dent to either business of only $20m or a cost of finance of $1.2m, hardly a game changing commitment.

The standard payment term for the next level up from the $1m club – those with sales between $5 million and $100 million a year – is circa 60 days and it can take 75 to 80 days before funds are received. A recent study from Xero that shows big business are major offenders when it comes to late payments, reporting that one in five of their invoices that are overdue by 30 days or more come from ASX200 businesses which is right where our supermarkets sit.

Coles and Woolworths are extracting discounts of 3.75% per cent of sales from food and grocery suppliers in return for the privilege of paying them for goods in 30 days rather than 60 days, that is a significant cost of finance. It’s not just the supermarkets that are playing games with terms: FMCG giants Kellogg’s, Fonterra and Mars all confirmed they had payment terms of up to 120 days, and offered finance to their suppliers.

As Adam Smith once told us, market forces drive prices and the cost of finance is pretty easy to establish for a supplier – working out if the offer of a 3.75% discount is better than alternative finance solution. Although negotiating on price is a one-way win-lose event, it is the gift of these businesses to influence this transaction and therefore an area the industry bodies really do not need to play.

I believe there are three things the retailers can do that changes the model, levels the playing field and creates a win-win environment.

One. If supermarkets are going to profit from terms, then put it on a level playing field. Offer a cost of finance and let firms flex in and out of it as they require. This could really help businesses that build stock for seasonal activity. It also keeps it super simple and levels the complex playing field during a tender process.

Two. The digital and automated age is upon us, however a significant proportion of the industry does not have the money to invest. Supermarkets could offer improvement payment terms where the supplier will invest the additional cash into capital to improve the cost of manufacture or quality of the product. This suddenly creates a win-win.

Three. Payment terms are there because it takes time to sell the product to the customer, it takes time to use the raw materials in the factory and it takes time to use the stock feed or seed on the farm. Each one holds a little more than the next in the chain to ensure supply. The bullwhip effect kicks in and that stock hold is multiplied to cover the variability in demand down the supply chain. In easy-to-understand terms, our supply chains are fat. If retailers and the supply chain collaborated, shared information, considered sharing buffers and looked at the velocity to shelf, we could reduce the cash needed to operate the industry considerably. This in turn could be used to reduce terms or as above, investing in the future to create better and cheaper products for consumers.

 

The supermarkets are the ones that need to drive this agenda, rebuilding their relationships with suppliers through collaboration and innovative ways to create value. Turning a win-lose into a win-win on payment terms is just the beginning.