In the grocery sector, payment terms are pretty simple for consumers: They have to pay for the products before they can leave the store with them. But those terms are far more complicated at the next stage in the supply chain, namely, with regard to when the retailer pays for the products that manufacturers deliver to its stores. Conventional terms offer net 30-day terms, such that payment is due within 30 days of delivery. But Kroger has announced its plans to shift to a net 90-day option, a choice that has the manufacturers up in arms.

According to Kroger, 90-day terms are beneficial for the entire supply chain, because the increased flexibility creates smoother payment cycles and allows the grocer to allocate its resources to improving its operations. However, this argument implies that it is demanding manufacturers wait to be paid so that they can subsidize the retailer’s operations—a deal that benefits Kroger more than it does the makers of consumer products.

To counteract the resistance and frustration from vendors, Kroger also proposed an early payment option, in which it would earn deep discounts for paying the suppliers before the 90 days were up. It cited a new partnership with Citibank that would enable it to issue payments nearly immediately after they were approved, such that some suppliers might get paid in as little as 10 days.

Still, the suppliers are not happy, and some have called for a united response that rejects the new terms and demands payments within the industry-standard 30 or maybe 45 days. They may not have much of a choice though. Kroger represents a massive customer and channel for many consumer products, so manufacturers cannot easily afford to reject its terms. They also cannot raise their prices much to cover the costs associated with waiting for payment, because powerful retailers simply refuse to accept price increases.

A potential outcome, which could have negative repercussions for everyone involved, is that manufacturers will seek to reduce their costs by diminishing their product quality. Furthermore, the relationships Kroger maintains with its suppliers could be at risk, if those suppliers continue to feel angry at its demands. But perhaps the benefits are worth the risk for the grocery chain.

Discussion Questions: 

1. What is the advantage for Kroger, and disadvantage to its suppliers, of this new policy?
2. How does this new policy affect strategic profit model ratios?

Source: Warren Thayer, Retail Wire, July 25, 2018