Kroger’s recently announced 90-day payment terms for its suppliers is a traveshamockery.
That’s the ultra-condensed version of industry sentiment about the letter Kroger sent to suppliers, in which it said the new payment term would go into effect Aug. 1.
Kroger said it was making the change to:
- Smooth the company’s cash conversion cycle;
- More efficiently manage the chain’s working capital in order to reinvest in business; and
- Harmonize terms with Kroger’s industry peers.
The reasons why 90-day payment terms are unacceptable begin with the Perishable Agricultural Commodities Act Trust.
As Matt McInerney of Western Growers has stated in earlier coverage in The Packer, the payment terms directly conflict with growers’ protection rights under the PACA Trust. Agreeing to any extension beyond 30 days permanently waives PACA trust protection.
Under PACA, to be eligible for trust benefits — which gives priority on claims from growers and sellers if a buyer goes bankrupt or simply refuses to pay — produce suppliers must use prompt payment, which means payment terms of “PACA Prompt” or “Net 10 days”.
Sellers can only extend those terms to a maximum of 30 days.
There are other reasons why 90-day terms are unacceptable for suppliers of fresh produce. Fresh produce moves from farm to retail in mere days and often is bought by consumers within a week. As preposterous as it sounds, Kroger would be using the cash generated by produce growers as its piggy bank for its corporate schemes.
There is no reason for Kroger to finance its e-commerce expansion, for example, on the back of a hard-working Midwest fresh blueberry grower.
Kroger commanded 7% of the U.S. retail grocery market in 2016, according to GlobalData Retail, second only to Walmart’s 14%.
Kroger has not responded to The Packer’s inquiries about the policy so far.
The chain’s push to lengthen payment terms is apparently part of a larger trend.
The New York Times reported in 2015 that an increasing 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.
According to the coverage, the tactic has risen 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,” the story reported.
Kroger fits the bill as a “robust” company, reporting 3.4% revenue growth, 1.4% same-store sales growth, and 26% adjusted earnings-per-share growth in its first quarter this year.
Whether Kroger will soften its 90-day payment terms for produce suppliers remains to be seen, but one industry veteran said other chains may be sitting on the sidelines and watching to see what unfolds. Won’t they be compelled to copy Kroger if the policy sticks?
In response to the new terms, will suppliers refuse to supply Kroger? Will grower/shippers downgrade the quality of produce they send to Kroger to reflect the higher cost of doing business?
They just might.
With its bad math, Kroger will generate the wrong answers for growers, its employees and consumers.
Tom Karst is The Packer’s national editor. E-mail him at email@example.com.