Supply chain · 23 November 2015

Small suppliers suffering due to supermarket price wars and lack of negotiating power

Profit margins at small to medium-sized manufacturers fell by more than a third in the last year, from 3.5 per cent to 2.1 per cent
Profit margins at small to medium-sized manufacturers fell by more than a third in the last year, from 3.5 per cent to 2.1 per cent

The UK’s small food manufacturers are feeling the pinch from the supermarket price wars, as the gap between the profit margins of these suppliers and their bigger competitors widens.

Law firm EMW found that profit margins at small to medium-sized manufacturers, with less than £25m in turnover, fell by more than a third in the last year, from 3.5 per cent to 2.1 per cent.

For the same period, the food industry’s largest manufacturers – with over £1bn in turnover – saw profit margins increase from 5.2 per cent to 5.4 per cent.

EMW said smaller suppliers lacked the negotiating power that the bigger names could wield, instead preferring to accept terms offered to them for fear of losing what could be a hugely important contract.

On average, the profit margin for food manufacturers was 3.9 per cent in 2014, up 2.9 per cent from the previous year.

Sebastian Calnan, consultant at EMW, said: “Larger suppliers often feel more confident about pushing back against the supermarkets because they have a stronger market position and greater demand for their products.”

Often small suppliers don’t feel capable of resisting the supermarkets’ demands for rebates for stocking their products, Calnan pointed out.

The supermarket sector has been under scrutiny, with Tesco’s accounting scandal last year cropping up over how it booked commercial income from suppliers, as it has been paying them latter while taking money earlier – leading the retailer to overstate profits in the first half of last year by £326m.

An investigation was launched into Tesco’s treatment of suppliers and in June 2015 was rated as the worst of the major supermarkets at complying with the government-backed industry code. Christine Tacon, the Groceries Code Adjudicator, did say the company had made a “big improvement” under CEO Dave Lewis, with supplier complaints dropping from the year before.

In a bid to rebuild relationships and establish trust, Tesco has also announced a simpler business model for suppliers, standardising their payment terms, with smaller suppliers set to be paid within 14 days.

This is around 34 days quicker than before, while medium-sized suppliers (delivering up to £10m in product value per year) will have their accounts settled five days quicker than larger suppliers in their category.

Dave Lewis said: “We want to work with our suppliers to get back to innovating on behalf of our customers and these changes will make it easier for us to do that.”

It’s not just food firms which have come under criticism for their treatment of suppliers however. Department store Debenhams has angered its suppliers in the run-up to Christmas for the second time in three years by demanding a discount in return for bringing payment terms closer in line with the industry standard.

Over the past few weeks, it has contacted suppliers and requested a reduction between one and two per cent on bills in exchange for paying them 30 or 60 days earlier than their current terms.

It’s a similar move to one the department store made in 2013, when it caused outrage after forcing some suppliers to cut their prices by at least two per cent just eight days before Christmas, which became known as the “Santa tax”.

The Sunday Telegraph reported that the letter from Debenhams outlined that the window for shorter payment terms would last for a set period between 24 Novemebr 2015 and 26 May 2016.

“The working capital benefits associated with early payment are subject to suppliers agreeing an additional discount on the value of the associated invoices,” it said.

Mike Cherry, policy director at the FSB, said he was “concerned and disappointed” by this example of poor payment practices from Debenhams. “Sadly, it is not the first time we have seen the retail giant behave in this way and would have hoped that, by now, it would have improved its behaviour.”

The power dynamic is a difficult one for smaller suppliers – as Cherry noted, they “rely on the integrity of their bigger customers when it comes to honouring agreed contracts and paying up in full and on time”.

A Debenhams spokesperson said: “In response to requests from some of our suppliers, we have this year offered earlier settlement of invoices in return for a small discount. The scheme is entirely optional as was made clear in our communication to our suppliers, and is intended to help their cash flow at peak periods.”

Image: Shutterstock

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Rebecca is a reporter for Business Advice. Prior to this, she worked with a range of tech, advertising, media and digital clients at Propeller PR and did freelance work for The Telegraph.

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