Supermarkets
? Industry View
Supermarkets
Supermarkets – are they blue chip or just have you singing the blues? Following recent comments by the British Retail Consortium that a Grocery Adjudicator would “increase costs for consumers, but achieve nothing new” it has again highlighted what some see as oppressive conduct by the supermarkets. So with blue chip status, do supermarkets represent good business for a company’s lender, and what are the issues to look out for? The Supermarket Code of Practice was introduced in March 2002 and has since been criticised for being ineffectual. In 2008 the Competition Commission found that large grocery retailers were passing on excessive risks and unexpected costs to suppliers. As such, a Revised Code of Practice was implemented in February 2010, but this also appears to lack the bite to redress the relationship between supermarkets and suppliers; with calls from the industry for an ombudsman to be introduced a year later.
A complex relationship... Payment terms are only one element of an overly complex relationship between supermarkets and their suppliers that appears to benefit the supermarkets and cause cashflow difficulties for companies. Rebates and over-riders, contributions to marketing, unilateral changes to contracts, listing fees, exclusive dealing arrangements, waste payments and damages continue to be a feature of supermarket contracts and invariably impact on cashflow even further. What starts out as an attractive proposition can become an unwanted necessity; with limited opportunity to extricate themselves from the position or an enforced move both of which will have the supplier reaching for the guide to insolvency practitioners. This is not simply limited to farmers – cases of which are well documented – but to
any form of supplier from plastic bags to stationery. The reality is that a large number of suppliers have no alternative but to supply to supermarkets and consequently find themselves having to agree to their demands in the knowledge that they usually have an alternative supplier waiting in the wings.
Identifying the risks involved Invariably suppliers need to increase their facilities to accommodate a supermarket, so more now than ever it is key that the asset-based lender (ABL) identifies the risks involved and ultimately how to mitigate them. The main risks are: Incorrect calculation of margins – have hidden costs been taken account of? What is the contingency plan if they lose the supply contract? Impact on relationships/supply chain to established customers. Cashflow/working capital management. Exposure from any associated chattel asset finance provided. In identifying these risks, ABLs should be considering how they can be mitigated by the following: The use of a co-operative to provide greater bargaining power and if not possible, consider whether it is commercially or contractually possible to reduce reliance. Regular account reconciliation – monthly.
A regular audit by ABLs. A full legal review of contractual terms. Regular communication between supplier, supermarket and lender.
Protecting the position So, what if the relationship between the customer and the supermarket begins to sour? From a lenders’ perspective, taking legal action against a debtor that in all likelihood makes up a significant proportion of the ledger is not an attractive proposition. The likely outcome is further delays on payments and in the worst case scenario the supply contract being cancelled. Essentially, careful management of the facility and the customer is required, as a workout is usually more beneficial than an immediate withdrawal of services. If legal action is required then late payment legislation may prove a useful bargaining tool in the settlement of outstanding debts, especially with the changes proposed by the new EU directive, announced earlier this year, which will include the ability to recover legal fees. In summary, although supermarkets remain blue chip, as experience tells us they will make regular payments, lenders will need to fully understand the risks and potential exit strategies available to them which in turn requires a full understanding of the business with on going monitoring and not just simply a review of the numbers.
Matt Bond, partner, MCR. Contact him via:
[email protected] T +44 (0) 20 7487 7276 M +44 (0) 7747 480043 Business Money
Kevin Buckett MCR. Contact him via:
[email protected] T +44 (0) 20 7487 7295 M +44 (0) 7967 635022
June 2011 55
Supermarkets
Supermarkets – are they blue chip or just have you singing the blues? Following recent comments by the British Retail Consortium that a Grocery Adjudicator would “increase costs for consumers, but achieve nothing new” it has again highlighted what some see as oppressive conduct by the supermarkets. So with blue chip status, do supermarkets represent good business for a company’s lender, and what are the issues to look out for? The Supermarket Code of Practice was introduced in March 2002 and has since been criticised for being ineffectual. In 2008 the Competition Commission found that large grocery retailers were passing on excessive risks and unexpected costs to suppliers. As such, a Revised Code of Practice was implemented in February 2010, but this also appears to lack the bite to redress the relationship between supermarkets and suppliers; with calls from the industry for an ombudsman to be introduced a year later.
A complex relationship... Payment terms are only one element of an overly complex relationship between supermarkets and their suppliers that appears to benefit the supermarkets and cause cashflow difficulties for companies. Rebates and over-riders, contributions to marketing, unilateral changes to contracts, listing fees, exclusive dealing arrangements, waste payments and damages continue to be a feature of supermarket contracts and invariably impact on cashflow even further. What starts out as an attractive proposition can become an unwanted necessity; with limited opportunity to extricate themselves from the position or an enforced move both of which will have the supplier reaching for the guide to insolvency practitioners. This is not simply limited to farmers – cases of which are well documented – but to
any form of supplier from plastic bags to stationery. The reality is that a large number of suppliers have no alternative but to supply to supermarkets and consequently find themselves having to agree to their demands in the knowledge that they usually have an alternative supplier waiting in the wings.
Identifying the risks involved Invariably suppliers need to increase their facilities to accommodate a supermarket, so more now than ever it is key that the asset-based lender (ABL) identifies the risks involved and ultimately how to mitigate them. The main risks are: Incorrect calculation of margins – have hidden costs been taken account of? What is the contingency plan if they lose the supply contract? Impact on relationships/supply chain to established customers. Cashflow/working capital management. Exposure from any associated chattel asset finance provided. In identifying these risks, ABLs should be considering how they can be mitigated by the following: The use of a co-operative to provide greater bargaining power and if not possible, consider whether it is commercially or contractually possible to reduce reliance. Regular account reconciliation – monthly.
A regular audit by ABLs. A full legal review of contractual terms. Regular communication between supplier, supermarket and lender.
Protecting the position So, what if the relationship between the customer and the supermarket begins to sour? From a lenders’ perspective, taking legal action against a debtor that in all likelihood makes up a significant proportion of the ledger is not an attractive proposition. The likely outcome is further delays on payments and in the worst case scenario the supply contract being cancelled. Essentially, careful management of the facility and the customer is required, as a workout is usually more beneficial than an immediate withdrawal of services. If legal action is required then late payment legislation may prove a useful bargaining tool in the settlement of outstanding debts, especially with the changes proposed by the new EU directive, announced earlier this year, which will include the ability to recover legal fees. In summary, although supermarkets remain blue chip, as experience tells us they will make regular payments, lenders will need to fully understand the risks and potential exit strategies available to them which in turn requires a full understanding of the business with on going monitoring and not just simply a review of the numbers.
Matt Bond, partner, MCR. Contact him via:
[email protected] T +44 (0) 20 7487 7276 M +44 (0) 7747 480043 Business Money
Kevin Buckett MCR. Contact him via:
[email protected] T +44 (0) 20 7487 7295 M +44 (0) 7967 635022
June 2011 55
