Food producers margins squeezed as supermarket price war escalates

UK food producers are now facing payment delays of 45 days on average, up one day from the previous year according to research by Funding Options. By lowering their prices, supermarkets are put in a situation where they continue to delay payment to suppliers, without paying interest upon what is essentially an over-extended loan.

With bank borrowing rates for SME of 6% above base compound, or around 20% per annum, many independents have no other options but to work paycheck to paycheck. Delayed payments have serious consequences on these businesses’ financial stability, particularly those in from small to medium business that depend on a tight turnover and already work with thin margins. Across all sectors, BIS reports that £30billion is overdue to SMEs because of late payments.

Initiatives and legislation to combat this have been put in place. Many of the largest supermarkets in the UK including Tesco, Asda, and Sainsbury’s have signed the Prompt-Payment Code, which sets up a target of 30 days for signers to pay their suppliers. The European Commission (EC) draft for Unfair Trading Practices (UTP) highlights the need for restrictions and prohibitions on certain trading practices within the food supply chain to support SMEs. But still food producers find their payments being continually delayed and research from the Intrum states that a majority of these late payments are deliberate.

According to Paul Gregory, consultant at Food Solutions, the only UK representative in the food sector at the European Association of Craft, Small and Medium-sized Enterprises (UEAPME), these initiatives need to broaden their scope. Gregory says, “The new draft EC Directive on Unfair Trading Practices throws a cannonball into supermarket supplier payment, enforcing maximum 30 day net payment for fresh food suppliers. The UEAPME (representing 13 million SMEs in Europe, and is the only body authorised by the EC to represent small business) response asks for the whole of the food chain to be covered.” The EC draft for UTP focuses exclusively on the role of supermarkets, but the UEAPME insists it cover everyone from distributors to late-paying retailers. Research by HMG found that despite public authorities paying main contractors, 73% of of subcontractors receive their bills late, and many distributors ask for 60-80 days credit, often unsustainable for a small business, while many are also, themselves, MSMEs.

According to a report by Food Solutions, 90% of food businesses are MSMEs, making this a widespread, relevant topic. The push of long term credit onto these businesses has negative effects all around. Intrum’s 2018 European Payment Report found that over 40% of businesses said they suffered liquidity problems because of late payments. “When a business is liquidated by reason of late payment,” states Intrum in a past report, “the directors lose their capital, and they and other employees become dependent on the state for support, and contribute nothing to the economy.” The longer credit terms can come to affect the consumer in way of higher prices on products, since suppliers may have to increase costs to make ends meet. Of course, the businesses suffer, either unable to meet the demands of distributors and thus denied market access, or unable to dispute unfair terms being smaller organisations than their counterparts.

Ensuring 30-day payments are enforced can have a major impact. Professionals in the industry have underlined the effect that a 30-day bill payment would have, one cheesemaker stating it would enable them to double both their turnover and their employment. While it is a problem that needs be solved, in the meantime, there are other options for SMEs. Conrad Ford, CEO at Funding Options, states, “Food producers are suffering from longer waits for payment as the supermarkets wage a price war amongst each other. Even with Government initiatives such as the Prompt Payment Code, we are increasingly seeing food producers suffering from cashflow issues as a result of late payments. It is vital that food producers understand the options available to minimise the impact of late payment by freeing up the funds they require. There is a wide range of choices out there for businesses seeking funding, such as invoice finance, asset finance, crowdfunding and peer-to-peer lending.”