Bullying in the supply chain: Tesco

Following on from Sainsbury, the media is now focussing on Tesco and late payment.  The BBC had a very relevant interview with a small supplier from October 2014 to illustrate this week's story - Moo Chocolate.  Their point was that after contract Tesco decided to pay them late (or in their words to extend payment terms), and that the £6k involved was small change to Tesco but their monthly wage bill and late payment would have meant closure.

The interest on £6000 for an extra month is maybe £60 (based on 10%pa, which is probably too high as interest paid, and too low as interest charged).  I know that the cumulative sum of all these £60 is going to be a big number, but let's think about this in more detail. 

Firstly, if the buyer thought there was another £60 to be taken out of the price why didn't they go for it at the initial contract? If not, what do they think the consequences are going to be?

So, secondly, from working with ASDA Walmart years ago I believe that products are only going to be put on a supermarket shelf if they can make more money from the product than from whatever is on the shelf at the moment.  How much more?  Well I don't know.  But maybe 10% more is realistic.  Note that that is 10% more profit, not 10% more on the price.  In the case of small niche products like this chocolate bar the price is likely to be higher than Cadbury's anyway, but the profit margin will depend on a wide range of factors (raw materials, marketing, order costs, economies of scale in manufacturing, supplier power, contribution to supermarket promotions etc.).  So if the small supplier closes because of trying to get £60 extra out of the deal, you lose £60 in extra margin.  (yes, it will be replaced but if it could be replaced by something with a higher margin it already would have been).  That seems quite a risky way of doing things, unless you are absolutely certain that you can get the money out of the supplier - in which case see point 1.

And of course Tesco are now tarred with the same brush as Sainsbury, and in fact more publicly - which does not help their public relations and may have subtle longer term damage to the brand.

Was the £60 worth it?  Are the other £60s (from other suppliers) worth it?

I (oddly) hope that it is part of a considered strategy.  But I fear it was just opportunistic.

By the way, I was helping ASDA Walmart with bringing in these smaller suppliers.  The team there was well aware that small suppliers needed support before they were handed over to the "beasts" in category management who are as tough as they need to be.  And I don't underestimate how tough you need to be to do those jobs (I don't think I could) but you also have to be careful not to cross the line into being tough all the time when it is actually damaging to your long term interests