There has been a lot of attention in the press recently about so-called ‘pay-to-stay’ arrangements whereby suppliers are asked to make cash payments in order to keep their contracts with the companies they supply to.
Premier Foods found itself at the centre of this issue, though reportedly it later moved from asking for upfront payments to asking for discounts instead.
This prompted the Federation of Small Businesses (FSB) to release the results of a survey of 2,500 of its members which, it said, found “alarming evidence of supply chain bullying” and widespread levels of “unfair dealing”.
Certainly, such issues are symptomatic of a tough food and drink market where all players, from supermarkets to manufacturers to suppliers, are feeling the pressure to eke out what margin they can.
But the fact that it’s tough for everyone is likely to be of little comfort if you are a small or medium-sized business asked by one of your major contracts to agree to a pay-to-stay or other arrangement such as guaranteed discounts.
Is it legal?
If you are asked to sign up to such an agreement, what should you do? Is it legal?
The answer, I’m afraid, is…it depends.
There is some provision within the Groceries Supply Code of Practice (set up by the Department for Business, Innovation and Skills -BIS) for arrangements akin to pay-to-stay but the circumstances in which they are justifiable or enforceable are actually quite limited. Some pay-to-stay arrangements could be unlawful under competition law.
So if you are in doubt, it is worth consulting your legal advisers for a considered view based on the individual and specific circumstances of the case.
BIS has asked the Competition and Mergers Authority (CMA) to investigate such practices to better establish their legality – but the CMA is likely to need more evidence of the practice in order to carry out a full investigation.
For the CMA to uncover more evidence, more companies would need to come forward on the issue. But of course it is a delicate balance because small suppliers are rightly worried about losing important and valued business.
It’s unlikely to be resolved overnight, in much the same way that long payment terms are an ongoing issue despite the creation of the Prompt Payment Code which BIS has said it is giving more “teeth” to. BIS is also currently running a consultation on a duty for large and listed companies to report payment practices and policies including average payment times.
Weighing it up
Regardless of the technical debate on the legalities, the fact remains that if you are asked to sign up to such an arrangement, you have a decision to make: agree to it or not?
In the end, it is likely to come down to simple maths. How much is the contract worth to you? How much are you being asked to pay? If you make the payments (or give the discounts), how much profit will you still be able to make?
You might decide that some contracts are worth keeping due to the long-term potential for the contract to grow, or because supplying to a well-known brand enhances your standing in the market and may help you gain other business as a result. Or you might decide that the maths just don’t add up, and the money would be better spent elsewhere – on other routes to market such as marketing spend, or making new investments.
There’s no doubt that it’s a difficult issue to deal with. There may be no easy answers – but make sure that you ask yourself the right questions so as to make the best decision for your business.
Gavin Poole is a partner in the food and drink team at Stephens Scown. To contact Gavin, please call 01872 265100, email firstname.lastname@example.org