Thursday 5 March 2015

120 days credit - a supplier own goal?

Yesterday’s Kamblog post re Lidl’s alleged request for 120 days credit raises some important issues for NAMs.
I believe that this first (?) move by a retailer in the UK is an unintended consequence of supplier attempts to reduce the cost of trade credit given to retailers by passing demands for extra days credit back up the pipeline to their suppliers...

In other words, the genie has been released from the 120 day credit-bottle, and we are now headed towards an era of universal 120 day credit.

Government intervention?
If governments are really serious about protecting small and medium sized enterprises, they will abandon the meaningless ‘on time payment’ condition and legislate to ensure that payment periods truly reflect order cycles and delivery frequencies, so that trade credit fulfills its original function - a bridge between buying and reselling..

Size of the problem - the calculations:
Say UK annual sales of Big 4 multiples   (2013/14)     =   £117bn ex VAT
Assuming average retail Gross Margins of 25%
Then Supplier sales to Big 4                                      =   £88bn ex VAT
Assuming average payment periods of 40+ days
Then retailers pay suppliers approximately 365/40 = 9 times/annum
Meaning the 4 retailers are holding a total of £9.8bn free credit from suppliers at any time i.e. £88/9
Assume cost of credit = 10%
Then it is costing the supplier base £980m p.a. to give interest-free credit to the Big 4
Which represents 1.1% of supplier sales i.e. 980/88,000 x 100

If the payment period moves out to 120 days, the same calculation shows that supplier cost of credit will move out to approximately £3bn, i.e. 3.4% of supplier sales…!

Action for NAMs
  1. Why not calculate your current cost of credit for each of the four multiples?
  2. Then calculate the cost to you of 120 days credit in each case, and the value to your customer in incremental sales….
  3. Then ask yourself about the impact on your bottom line, and practice reverse-negotiating the difference...

It will still be tough, but at least you will be way ahead of the supplier-pack…

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