Allegations that Premier Foods has asked suppliers to pay them cash has been met with widespread criticism, not to mention some considerable surprise that a prominent food industry brand has openly resorted to such tactics.
It is certainly surprising the extent to which Premier Foods has been willing to openly demand money from its suppliers without apparently offering them anything specific in return. But in principle, the use of rebates or sometimes “prebates” is not uncommon among buyers wishing to extract value from their supply base. Such strategies normally involve demands for lower prices in exchange for protecting a long-term supply partnership. In the case of Premier Foods, the only difference seems to be how explicit the company has been about its intentions.
Premier Foods' demand for payments to be made to its "invest for growth" programme seems particularly ill-advised. The company has given no explanation of what (if anything) suppliers get in return for their payments, other than an ongoing association with a leading brand and an opportunity, in theory at least, to secure a "bigger slice of their business". It is also not helpful that the remit of the programme that benefits from these payments is so vague. Indeed, by demanding payments from its suppliers, the company appears to be attempting to force through a programme of consolidation on the basis of "he who pays the most wins".
Such tactics are unfair and heavy-handed in an industry where suppliers are already feeling significant price pressure, and Premier Foods could have taken a different approach. By negotiating and working closely together on reducing waste and risk, lower price points could be achieved for the products and services they purchase from suppliers and the company could have streamlined its supply base over time, instead of requiring them to "pay up or go". It is a little perplexing that the firm has been so open about its intentions but failed to communicate the benefits a supplier would see. A clear case of "investing in our joint future", delivered with a supplier-specific business case would have been easier to understand and unlikely to have met with such a response.
The Labour Party has called for such practices to be outlawed, but in reality they are more prevalent than many might think and enforcing any such policy would therefore be quite difficult. Major buyers are currently free to use a number of different strategies to recoup revenue without placing suppliers under undue pressure and, as long as they are offering something in return, this is entirely legitimate. In this case, it seems like Premier Foods has been using the stick without the carrot.
The fact two days after news broke about its activities, the company has backtracked by calling a halt to the upfront payments suggests they now realise they were wrong. The decision to use such strong arm tactics was not only poorly considered, it has damaged their corporate reputation.
☛ Roy Williams is managing director at Vendigital