Big Companies Pay Later, Squeezing Their Suppliers
Stephen Brock, the owner of Supplied Industrial Solutions in Illinois, largely quit selling equipment to Anheuser-Busch InBev after it imposed a 120-day period for paying vendors.
How would you like to have 120 days to pay your creditors?
Adopting a tactic widely used by 3G Capital, the Brazilian private investment group behind the recent merger of Heinz and Kraft Foods, a growing number of the world’s largest food and packaged goods companies are asking their suppliers to give them as much as four months to pay their bills — even though they typically require payment from their own customers in 30 days.
The tactic has gained in popularity ever since an affiliate of 3G Capital put it to use after it bought Anheuser-Busch in 2008.
In the past, extended payment terms often were a signal that a company was experiencing worrisome cash flow problems, but these days big, robust companies are imposing new schedules on suppliers as a business strategy, analysts say.
Bea Chiem, a credit analyst who follows food companies at Standard & Poor’s, offered several reasons that companies might use the tactic: “Their recent performance has been soft, many are in the middle of restructuring and all are trying to balance the need for cash for their business and shareholder returns.”
Diageo, the European spirits company, now asks for 90 days to pay its bills. Mondelez, Mars and Kellogg seek 120 days. The list of companies doing the same reads like a grocery store version of Who’s Who — Church & Dwight, Procter & Gamble and Heinz are among those wanting more generous payment terms, suppliers said.
Most are trying to maximize use of their capital, bankers who work with supply chain finance say. By pushing out payments to suppliers to three and four months, companies have more cash for any number of projects. Mondelez, for one, is buying back stock. Kellogg is in the middle of a restructuring. Procter & Gamble’s move to extend its payment terms to 75 days in 2013 has probably added $1 billion so far to its cash flow, according to one estimate.
“Extending our payment terms allows us to better align with industry practice and ensures we compete on a level playing field, while simultaneously improving transparency and predictability of payment processes,” Valerie Moens, a spokeswoman for Mondelez, maker of Cadbury chocolates, Honey Maid graham crackers and other brands, wrote in an email.
Kris Charles, a Kellogg spokeswoman, wrote that the company started a new supply chain financing program last year, extending payments to 120 days. “It gives Kellogg and our suppliers more flexibility to manage our businesses effectively through better cash flow management,” she said.
The companies would not make executives available to speak about the matter, sending brief statements instead. And most suppliers would comment only without attribution, an illustration of the power imbalance with their big customers.
“Eventually,” said V. G. Narayanan, chief of the accounting practice unit at Harvard Business School, “the additional financing costs that suppliers incur because they aren’t being paid promptly work their way back into higher prices for consumers.”
The practice is often crippling for suppliers, especially smaller businesses that have little cushion. In Britain, the Marketing Agencies Association called on its member advertising agencies to “strike” in April against Anheuser-Busch InBev, the beer behemoth created by an affiliate of 3G, after the company began seeking new terms. Those included acceptance of a payment period longer than 120 days and a request for pro bono work.
Martin Sorrell, the chief executive of WPP Group, the advertising titan, has warned that such practices could turn suppliers into lenders. “I don’t think our purpose is about banking — we’re not a bank — or extended payment terms or agreeing to supply payment terms in low-interest conditions,” he told Advertising Age in an interview shortly after Diageo moved to extend its payments to 90 days.
Stephen Brock is surprised that a revolt against Anheuser-Busch InBev did not happen sooner. Mr. Brock, the owner of Supplied Industrial Solutions in Granite City, Ill., had provided valves, processing instrumentation and mechanical systems to Anheuser-Busch, maker of Budweiser and other beers.
Anheuser-Busch was bought by an entity controlled by Jorge Paulo Lemann, Marcel Telles and Carlos Alberto Sicupira, also the principals behind 3G, and merged into InBev in 2008. A year later, Mr. Brock was told that he would no longer be paid for his goods in 30 days; rather, Anheuser-Busch InBev imposed a 120-day period.
The beer giant represented about 5 percent of Mr. Brock’s sales. He ultimately concluded he could better afford to lose the business than wait four months to be paid.
“This really had a dreadful effect on our bottom line,” he said. “And because it hit right in the middle of the recession, it took us about a year and a half to recoup those lost revenues.”
He still does a small amount of business with Anheuser-Busch InBev. The company pays him using a credit card.
“Banks have tightened up lending, especially to small businesses like mine, so it becomes even harder to manage,” Mr. Brock said. “You still have a payroll to make, your own suppliers to pay, electric and other utility bills — they can’t wait four months for payment.”
There are other signs that suppliers are fighting back. Last month, Diageo, which owns Johnnie Walker, Tanqueray and other spirits brands, had to backtrack in Britain after the Forum of Private Business, an organization representing small and midsize businesses, challenged the practice.
The spirits company is a signer of a voluntary agreement, the Prompt Payment Code, made by about 1,700 companies doing business in Britain after regulators threatened to take action against extended payment terms. The agreement holds those companies to 60-day payment terms, so when Diageo began asking suppliers for 90 days, the Forum of Private Business appealed to the group charged with its enforcement.
Diageo now says it will pay its British suppliers in no more than 60 days.
“The practice of implementing grossly unfair trading terms is a growing trend” among some of Britain’s best-known companies, one that “risks breaking the backbone of the economy — small business,” said Phil Orford, chief executive of the Forum of Private Business.
So far, most of the pressure seems to fall on so-called ancillary suppliers, those providing companies with packaging, advertising, equipment and so forth. Diageo, for example, has asked for more extended terms from European suppliers of components for its manufacturing plants, but not from suppliers of sugar, an ingredient it cannot easily do without or readily find alternative providers for.
That may be changing, though. Two major commodities houses, which supply raw materials like coffee, flour, sugar and cocoa to food companies, confirmed that many of their customers were demanding longer payment cycles.
Irit Tamir, a senior adviser in the Oxfam America program aimed at ensuring that big global companies do not take advantage of small farmers and suppliers in the developing world, said she was concerned that such businesses, like Cargill, Bunge, the Noble Group and Archer Daniels Midland, were coming under pressure.
“These things tend to make their way down the supply chain, and we know that the small farmers who produce palm oil, coffee, cocoa and the other commodities those companies need already have an inordinate amount of risk in their lives,” Ms. Tamir said.
But outside the financial industry, few observers approve of the trend. “I think the whole idea is very bad,” Professor Narayanan of Harvard said. “They essentially are going to their suppliers for credit, rather than their banks — and for big, creditworthy companies like these, that’s ridiculous.”
Professor Narayanan said that major retailers had begun extending payments to their vendors some time ago, which in turn encouraged those vendors to put the squeeze on their suppliers. More recently, he said, Wall Street has gotten into the act, pushing companies to extend terms because their competitors are.
Investment analysts “compare one manufacturer to another and say, ‘How come you’re not managing your working capital the way that other company is?’ ” he said. “It becomes a matter of benchmarking, so if one company does it, then other firms fall in line.”