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Kroger’s 90-day terms have CPG suppliers seeing red
Through a special arrangement, presented here for discussion is a summary of a current article from Frozen & Refrigerated Buyer magazine.
Kroger’s announcement of a shift to 90-day payment terms, effective August 1, has many manufacturers up in arms. What particularly frosted them was one of the reasons given: to “harmonize our terms with industry peers.”
Net 30? Maybe. Net 40 or 50? Trending that way. But 90 days? That’s pretty far from the norm, manufacturers say.
Since announcing the new policy, Kroger has said the terms won’t apply to produce suppliers, which are protected by the USDA’s Perishable Agricultural Commodities Act. But will the policy apply to other vendors? Confusion is rampant, and Kroger isn’t talking. Some vendors and brokers think Kroger, seeing the negative reaction from the produce industry, has decided to quietly forget about the whole thing. Others aren’t so sure. So yes, it’s a real hornet’s nest.
In fairness, Kroger in its initial e-mail to suppliers softened the blow somewhat, with an “early payment option.” Via a partnership with Citibank, manufacturers can get full payment of invoices before the 90 days are up. Payment would come within one day of Kroger invoice approval, which it says averages 10 days. A “very competitive” discount will be taken off these early payments.
The chain gave two other reasons for its new net 90 policy: to “smooth out our cash conversion cycle, and more efficiently manage our working capital in order to re-invest in our business.”
“So, they want us to finance their business for them,” snorted one manufacturer. “I hope there’s a lot of resistance from vendors,” said another.
Well, that’s unlikely. The Golden Rule of business is “he who has the gold makes the rules.” If you were a seller, would you want to tell a huge customer like Kroger you’re not selling to them anymore?
It used to be that you could just bake some extra “cost” into your product to make up for retailer shenanigans. But now you’ve got Kroger and Walmart refusing price increases. Is there still room to play footsie with deal money and marketing allowances?
My guess is that “valued suppliers” are going to cut corners on quality to remain viable. That’s a shame, considering that we’re finally getting more high-quality products on the shelf. And Kroger is also likely to feel manufacturer wrath down the line.
Manufacturers, for their part, aren’t angels about rapid payments either. Just ask suppliers of packaging and ingredients.
Cost-shifting is accelerating everywhere. Kroger has led our industry in technology, digital, consumer insights, SKU curation, meal solutions — the list is long. But my fear is that this time, it may be leading others down an unfortunate path.
Discussion Questions
DISCUSSION QUESTIONS: Is there much vendors can do about restrictive payment policies from large chains? Do you see the benefits from such lengthy terms outweighing the risks for Kroger?
Poll
BrainTrust
Dr. Stephen Needel
Managing Partner, Advanced Simulations
Tony Orlando
Owner, Tony O's Supermarket and Catering
Unfortunately, unless all the vendors agree to not sell to Kroger and they stick to it, there is little they can do. If this is Kroger’s intent, no doubt Kroger knows it. There is no reason for the 90-day terms other than Kroger wanting to have access to extra cash for a longer time to use how they see fit. It is an interest-free loan. Offering the quick payment with a percentage off the invoice is smart, and that’s done all the time however the article didn’t say what the expected discount would be. I have seen them for as little as 2 percent and as much as 10 percent. I can’t help but feel that overall this is nothing but greed along with exploiting the power Kroger has over its vendors. The only advice I offer here is to remember the adage, “the ball is round!” So as more CPG companies venture out on their own with direct-to-consumer opportunities and the more other competitors get into the grocery game, don’t be surprised if a few years from now, Kroger is the one asking for help. If that happens, let’s see how the vendors respond.
This is the same poker match that has been going on for decades, but the stakes are much higher. Time is money. In this case it involves millions. When is a retailer too big not to sell? There is not much that vendors can do except cut corners and realign or restructure marketing funds. Much like international tariffs, there are few/no winners in this saga. Kroger will ultimately pay a price in some form.
This is another poke in the eye from big grocers to CPGs. Unless and until CPGs take off the gloves and fight back against aggressive retailer tactics (private label, aggressive discounting, etc.), retailers will continue to have their way with CPGs.
This is indeed a slippery slope. Retailers beat up manufacturers, manufacturers beat up suppliers of ingredients as well as solution providers like us. It is not unusual at all now for manufacturers to demand 90-day terms but actually pay at 120 days or beyond! This, so they can have better cash flow to re-invest in their business. How does this help the industry overall? What choice do we or the suppliers have to meet the customer demands?
Those of us of a certain age will remember, in the ’80s, when King Sooper in Denver was the home for gang-cut coupon redemption. P&G finally said, “That’s enough,” gave them a few weeks to stop, then stopped all shipments. In short order, no Tide, no Crest, no Pampers, etc. With half the store empty and customers flocking to Safeway, King Sooper capitulated. Want to bet other retailers would love to give manufacturers a great deal for every week they don’t ship to Kroger?
King Soopers (a Kroger subsidiary) might have capitulated, but Kroger commands almost 2800 stores and about 7ish% of the entire grocery market and in certain markets like Cincinnati — almost 50% of the local market. Even a single CPG the size of P&G wouldn’t stop customers from buying alternative toothpaste, and the CPG would certainly lose considerable sales in Kroger’s stronger markets. CPGs would also relinquish brand value to its competitors beyond just product revenue. It would be a lose-lose all around.
The smart money would be pushing for better terms than their competitors instead. The frequency of grocery buying makes it that much harder to boycott a grocery retailer of that size. In the ’80s P&G was stronger, Kroger had just purchased Dillon Companies that owned King Soopers, and there was an actual cost incurred that P&G had to deal with when it came to manufacturer coupons. In the end, it’s just a $ amount — interest on the float will be bundled into the product price, eventually raising the overall cost to the end customer.
This is a perfect example of the tail wagging the dog. The pipeline to the customer controls the entire game.
CPG has done a poor job recently of differentiating their brands in meaningful ways. This means few consumers will change supermarkets if a desired product is not on the shelf.
CPG: Invest in your brands. That is my advice. And investment goes way beyond features and benefits. It is always the emotional connection that ignites preference.
Shameful. There is no spirit of partnership or collaboration in this decision. It’s like a bully in the playground, nobody wants to play with him but he brought the ball. Yes, CPG manufacturers can make the decision not to sell to Kroger. How long can they last doing that? I don’t know. Colgate-Palmolive, Lays and Coca-Cola may know. Considering that grocery/supermarket is a fast turnover business, there is no excuse for this.
Kroger’s suppliers have a very limited set of options. Each can individually say no and likely lose Kroger’s business, especially if other suppliers agree to the new terms. Given Kroger’s size it is extremely unlikely that any CPG supplier can find new customers to replace the volume.
A supplier can elect to take the early payment option and accept a yet-to-be-published discount, in essence a price reduction. The third option would be to require longer terms from its suppliers. The final option for each CPG company would be to take cost out of their systems. In my opinion it is unlikely that there is enough cost reduction to cover the cost of the longer terms.
Another possible outcome is that if enough suppliers say no, Kroger will modify its changes to its payment terms. How likely it is that any of these possibilities occur is anyone’s guess.
Kroger is a monster-sized company and wants to be treated like Walmart, and many CPG companies are playing Russian Roulette wondering if they want to adhere to these terms or walk away.
This is why small businesses get upset, as they are lucky to get 7 to 14 days on their invoices, not to mention the special pricing these big companies are getting on top of these terms. Who will blink first? My biggest concern is, if they cave in, we as smaller stores will pay more to subsidize Kroger and that is how it is done today. The rich and powerful control and dominate the manufacturers of many products besides food and, in the end, the communities suffer as main streets and strip plazas continue to empty out.
As always, manufacturers are at the mercy of large retailers. Given the average American’s view of the large corporation versus the “little guy,” this move could definitely generate negative news in the media for Kroger. Kroger customers expect quality products. It seems like Kroger is building its new apparel lines and other new initiatives on the backs of suppliers.
I’m with those who know that 90 days is the new normal. It was typical on an invoice to indicate 30 days with a fee associated for each day over 30 days. LOL.
Manufacturers’ default has been 90 days for years. Recently I was asked if I could withstand 120 days. For a small company this is impossible, especially if there are costs that have to be paid to other vendors. You can expect an erosion of loyalty and quality.
This is where banks come in as they have done for years in the garment industry. They will guarantee to pay immediately after the invoice has been approved. That’s what Kroger is offering. Each fee gets transferred to the next company in the chain. Or companies can just borrow in bulk to cover their cash flow.
I don’t see any benefits but just a beating that businesses have to accept as part of the cost of doing business. And that cost is just going up.
There is not much vendors can do as clearly Kroger is feeling their oats. This is a power move from a retailer that is seeing other brick-and-mortar players on the decline so it is using its leverage. I’m not saying it is a wise move or that they won’t regret it in the future, either.
This is a reflection of Kroger deciding what is good for business without considering the consequences. This creates in-store inflation. The time value of money, and impact on cash flow from the supplier that this decision forebodes will simply drive prices up. As any manufacturer knows, simply discontinuing a model and replacing it with another one (at a higher price) in slightly different packaging will solve the “unable to raise prices” question for the manufacturer. Kroger will then be faced with higher priced products that are less competitive than similar SKUs from other retailers (especially the Club stores). What will Kroger think of next?
Target began making the same “request” one year ago. Here is the issue: once the supplier caves-in to Target, or Kroger, then it’s only a matter of time until the manufacturer will be under pressure to do the same for most other accounts, and eventually, your business model will need to adjust to 90 days for almost every retailer nationwide. That’s not a good situation.
I am advising my clients to hang tough. I am requesting a face to face meeting with the powers-to-be, so that I can explain why this does not work for the client’s business-model, and the impact it will have on the brand’s ability to advertise, and to support the retailer’s promotions. In any case, without a personal face to face meeting with the true decision-makers, we will hang tough.
Whatever happened to “the good old days” when a handshake was all you needed and payments were never a question? It used to be net 30 was the norm and was honored. Sometimes there was a discount for payment in 10 days. Those times are gone. It seems everyone is using everyone else’s money to finance whatever it is they are behind on. What a vicious cycle we are living in. There will always be vendors out there who are so hungry for business that they will do anything and acquiesce to any demands, no matter how absurd, to get it. Sad, isn’t it?
Ultimately, no. They can of course refuse to do business, and for vendors with particularly strong brands, and who have widespread distribution, the loss of a single customer may be something they find tolerable (whether/not it’s a good idea is another matter … the customer, after all is not refusing to pay, they’re paying late). But what happens when, domino-like, every other customer follows suit?