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Sunday, 17 November 2013

DE Master Blenders: “We rather beggar our suppliers and force them to default, than that we pay our invoices in time”

There are a lot of large companies these days, which are looking for ways to improve their balance sheets and reduce their debt. Unfortunately, one of the easiest and cheapest ways to do so, is by paying the bills of their suppliers later….

Much much later….

‘Just because they are worth it…’.

These suppliers – often much smaller and less powerful than their behemoth customers – agree toothgrindingly; what kind of choice does a company have, when 30% or more of its sales could be transfered to another supplier overnight. So they accept it with a smirk and try to cover these extra expenses by cutting their own costs to the bone.

Everybody with half a brain understands that in the end, this is a losing strategy for these companies that could bring them to their knees.

The only thing that these companies hope, is that the crisis makes a turnaround before their company defaults. When demand would increase again, their prices could go up and they would get a more powerful position towards their currently almighty customers. However, the outlook for these companies is still darkened.

One of the behemoth companies that drives this miserable strategy of ‘beggar thy neighbour’ to its limits, is DE Master Blenders, a company that we know too well already, for its opaque ways of doing business.

Het Financieel Dagblad has written on this one:

Large companies in The Netherlands are still unilaterally stretching the payment periods for their suppliers’ bills, in spite of a legal arrangement and private initiatives to come to shorter payment periods.

A recent example is coffee and tea company DE Master Blenders, which recently informed its suppliers that the payment periods will be extended to 180-200 days from the previous 60-90 days .

This change of policy at DE is disclosed by e-mail traffic between a purchaser of DE and one of DE’s suppliers, which came in the hands of the FD financial newspaper. In the e-mail exchange, the supplier is informed without further notice that the payment period is extended to 200 days. Protests of the supplier are silenced. ‘There will be no negotiations’, is the sobering message of the DE purchaser.

The unilateral stretching of payment periods by large companies has already been a topic for discussion for a much longer time in The Netherlands. This way of doing business has become common policy among large companies, as it strongly reduces their working capital and thus their financing costs. Victims are their suppliers, often Small and Medium Enterprise (SME) companies, which have to finance these unofficial credit lines at very high expenses.

‘It is killing for suppliers, which are often already with their backs against the wall’, according to Rob Toorman of NL Credit Services, a factoring company which specializes in SME customers.

Earlier this year, the Second Chamber of Parliament passed a Bill of Law, which administers that deliveries have to be paid within 30 days. Companies may bilaterally agree upon a longer payment term. However, longer than 60 days is only permitted under extraordinary circumstances.

According to factoring companies however, which are called in for help by these SME companies under distress, this unoffical policy of ever later payments is still how it goes here in The Netherlands. ‘Especially among retail companies’, according to branch director Laurens van der Starre of Svea Finans. As examples, he mentions Mediamarkt, V&D, Hema and Danone, which all maintain a 90 day payment period. The emergence of private equity, [like in the case of DE Master Blenders – EL], is often the precursor of payment period extension, according to Van der Starre.

A 180-200 day payment period is litterally unheard of and a total disgrace for an intrinsically healthy company like DE Master Blenders. I have no other words for that. It is the most disgusting form of ‘beggar thy neighbour’.

A small calculation here: a supplier delivers for €360,000 euro’s per year in supplies to a large company and this company pays its bills after 180 days (aka half a year).
After a while the average outstanding amount will summarize to €180,000.

When this supplier pays 7% in yearly interest to its bank (no extraordinary amount), the interest payments for this ‘credit line’ to the large company are a staggering €14,500 per year, approximately. That is roughly 4% of the sales value of the delivered goods: more than enough to eat away almost all the margin for this supplier, leaving him behind with none.

The last statement of Laurens van der Starre (red and bold text) is interesting and it makes sense too. At the shortest possible notice, Private Equity companies want to increase the profits of the companies that they took over. The ‘best’ and easiest way to do so is to make beggars of the suppliers of their companies.

They don’t care one bit that this ruins the future of their (often small) suppliers, which – like Rob Toorman stated in the aforementioned fragments – are already with their backs against the wall.

Unilaterally extending payment periods is the ultimate form of corporate egoism and there is very little that small companies can do about it. This was one of the lessons that I learned in one of my first jobs in 1989:

I worked as an intern at the administrative department of a Dutch importer of high end hifi equipment and on a certain day I was handling the invoices.

When I called a very large and powerful customer of my employer, to ask him about the status of his (long) overdue payments, the head of the administrative department told me: “Don’t do that anymore!

Yes, we know that company ‘XYZ’ pays much too late and we also know that this company even deducts their ‘discount for cash payment’ after such a long period, while they shouldn’t. But they are one of our best customers and we simply cannot afford to lose their business. So we simply let them do this, in spite of the fact that we are disgusted by it”.

And that’s that!

The only thing that the central government can do about this extremely bad practice, is giving this new ‘bill of law against late payment’ teeth, in order to make it bite when large companies break it.

However, the central government not only rejects to do so yet, but – to make things even worse –local governments are among the worst payers, when it comes to timely payments.

Here are a few snips from an article about this topic by the goverment website (i.e. ‘municipality now’):

The period for payments has been set legally; nevertheless, governments are still often too late with their payments. Municipalities come as worst out of this investigation.

This is disclosed by an inquiry  among credit managers of the Union of Credit Management Companies. Less than one third of the inquirees calls the government a decent payer, in spite of the fact that the maximum payment period has been set legally at the beginning of this year.

“The lower governments are among the worst offenders, when it comes to timely payments of bills”, according to Mannes Westhuis of the Union against BNR News Radio. “In the investigation, we noticed that the higher, central governments start to maintain their maximum payment periods better. Things are definitely going better there”.

How good as an example is a government – irrespective whether it is central or local one – that does not maintain its maximum payment periods itself.

This widespread policy of companies to wait endlessly with making payments should be discarded agressively. Companies that don’t want to pay their dues in time, like DE Master Blenders, HEMA and Mediamarkt should be punished by their customers for this undesired behaviour.

The best way to do so for ‘the average Joe in the street‘ is to avoid these companies, by not drinking DE coffee, or buying products from HEMA and Mediamarkt.

As it is in the interest of everybody that people and companies pay their dues in time, in order to help other people and companies survive this nasty economic crisis...

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