As Diageo become the latest major company to extend the credit taken from their suppliers to between 90 and 120 days, the law of unintended consequences begins to kick in...
Passing extended credit burdens back up the pipeline can be regarded as a way a supplier can attempt to neutralise the cost of the credit they have to give their customers. However, as you know, a high added value company can never hope to fully pass on to their suppliers the cost of credit they give their customers.
This is because, in the case of a supplier where bought-in ingredients represent say 10% of their £75 trade price, when their customer on a trade margin of 25% delays payment of that trade price, the supplier would have to delay payment of their suppliers by ten times to cover the cost of the customer’s credit.
The key issue here is not just the pain they inflict upon a trade partner who cannot afford to pass on the cost to their supplier, if any.
What really matters is that, as 120 days becomes 'a common industry norm', so too the major retailers will be tempted to extend their credit periods to 120 days, 150 days or even 180 days, with payment every six months becoming a possible settling point...until the major suppliers attempt to catch up.
When even a savvy consumer accepts that credit over 30 days (itself an abuse of power when value can be exchanged in five days) is unacceptable, and eventually results in higher prices on shelf, they will attempt to exercise their ‘walkaway’ option, probably en masse…
In the way consumers are becoming increasingly critical of global companies finding locally legal ways of side-stepping their tax obligations, so too they will eventually make a connection between supply chain abuse and what they have to pay on shelf, and begin to boycott both brands and retailers...
Meanwhile, the only answer for a supplier faced with excessive credit demands in this generic world is to offer a package so unique and of such value that one earns the ability to deal a ‘walk-away’ card onto the table, and mean it….
Passing extended credit burdens back up the pipeline can be regarded as a way a supplier can attempt to neutralise the cost of the credit they have to give their customers. However, as you know, a high added value company can never hope to fully pass on to their suppliers the cost of credit they give their customers.
This is because, in the case of a supplier where bought-in ingredients represent say 10% of their £75 trade price, when their customer on a trade margin of 25% delays payment of that trade price, the supplier would have to delay payment of their suppliers by ten times to cover the cost of the customer’s credit.
The key issue here is not just the pain they inflict upon a trade partner who cannot afford to pass on the cost to their supplier, if any.
What really matters is that, as 120 days becomes 'a common industry norm', so too the major retailers will be tempted to extend their credit periods to 120 days, 150 days or even 180 days, with payment every six months becoming a possible settling point...until the major suppliers attempt to catch up.
When even a savvy consumer accepts that credit over 30 days (itself an abuse of power when value can be exchanged in five days) is unacceptable, and eventually results in higher prices on shelf, they will attempt to exercise their ‘walkaway’ option, probably en masse…
In the way consumers are becoming increasingly critical of global companies finding locally legal ways of side-stepping their tax obligations, so too they will eventually make a connection between supply chain abuse and what they have to pay on shelf, and begin to boycott both brands and retailers...
Meanwhile, the only answer for a supplier faced with excessive credit demands in this generic world is to offer a package so unique and of such value that one earns the ability to deal a ‘walk-away’ card onto the table, and mean it….
