Marks & Spencer (M&S) last week announced that it is to force almost 500 of its general merchandise suppliers, many of them small independent suppliers, to wait almost 11 weeks for payment as the company’s chief executive attempts to accelerate a turnaround of its clothing business.
M&S have written to suppliers notifying them it was unilaterally changing supplier terms to extend payment from 60 days to 75 days from the receipt of an invoice. M&S said the move would bring the company “in line with industry standards”. In fact there appears to be no ‘industry standard’, with times for payment ranging from 30 days (Next plc) up to 120 days (Debenhams). Terms for rival fashion brands to M&S including GAP and Levi’s remain at around 45 days. In the general high street picture M&S are well within the pack and realms of what is normal.
What this news highlights however, apart from the fact M&S are seeking to provide a much needed financial stimulus to their ailing fashion line, is the fact that many large businesses in the retail sector are free to trigger provisions in one sided supply chain contracts and vary terms of trading and effectively strong arm suppliers into accepting unilateral variations to a contract they spent time carefully negotiating without any further discussion. Whilst this assists those towards the top of the retail food chain it does little to assist the small independent suppliers who often represent the engine room of the retail sector and are likely to feel the pinch more than most.
The retail sector is no stranger to the late payment culture. Indeed this was a significant factor in the late 1990’s when the Government of the time introduced the Late Payment of Commercial Debts (Interest) Act 1998 (as amended) which provides creditors upon ‘commercial debts’ to claim statutory interest at 8% p.a. above base rate once payment is beyond terms. The same Act also permits a creditor to charge an ‘administration fee’ for late payment ranging from £40-100 per invoice on overdue debts. This interest and associated charges are a statutory right and a debtor would have little prospect of resisting a legal claim for payment of the same. Much of the reason for this was to combat the culture of late payment that exists in the retail sector. Strangely the legislation is little used in reality with suppliers not wishing to upset the contractual relationship with the retailer. The real difficulty however arises when the debt is late, but within ‘extended terms’.
This has led to an increase in smaller businesses coming to rely upon factoring agreements with banks and finance companies to preserve their cash flow. Factoring agreements see invoices paid almost immediately which can make a significant difference to businesses relaying upon the regular flow of funds.
The supplier will in fact receive nearly all of the value of the invoice and not just a percentage. How it works is that the user will receive a percentage of the invoice (typically 80-85%) immediately, and then the remainder when the client settles their bill, minus a very small charge for the funder. As a form of funding its cost is extremely competitive, particularly when compared to traditional forms of finance.
Whatever strategy is adopted by retailers and their suppliers, the picture in the sector remains tough, notwithstanding some recent goods news stories on trading figures. Many companies remain in financial difficulties and with a large debtor list. As in many sectors, effective cash collection and turnaround time on payment is crucial.
It remains to be seen whether other retailers follow the lead of M&S, but any retailer looking to vary its payment terms will usually find it has to start with its standard supply chain agreement that it has with its suppliers. It is usual for the standard agreement to have clear provisions governing any changes to terms and what, if any, circumstances must be fulfilled. Providing the retailer complies with its contractual obligations (which are often drafted in its favour) then it will have the option to extend terms in the same manner as M&S. How it is greeted by its suppliers is another matter. Whilst it can provide a real boost to cash flow and assist in turning around fortunes, it does run the risk of alienating suppliers who may, when contracts expire, choose not to renew or bid for further contracts. The short term boost that such a move generates should be weighed strategically against long terms effects and reputation in the market place as larger retailers may be reluctant to gain a reputation as a bully on terms with its business partners.
The reality is however that many suppliers become reliant upon their contracts with the larger retailers and will suffer any changes in silence. When its comes to deciding which retail partners they wish to work with long term however, the damage for the retailer may be that over time their better suppliers drift to competitors who may have more equitable payment terms; or worse still, their squeeze puts their suppliers out of business which in turn creates a fresh procurement headache for the retailer. As with most situations, it is a careful balancing act.