The recent Newsnight report claiming that Premier Foods had asked suppliers to pay them cash in order to retain them as a customer was met with widespread criticism, not to mention some shock, that a prominent food industry brand had openly resorted to such strong-arm tactics, reflects leading sector professional.
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It was certainly surprising the extent to which Premier Foods had been willing to openly demand money from its suppliers without apparently offering them anything specific in return.
However, 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 seemed to be how explicit the company was being about its intentions.
Premier Food’s demand for payments to be made to its ‘invest for growth’ programme seemed particularly ill-advised. The company had given no explanation of what (if anything) suppliers got in return for their payments, other than an on-going 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 was so vague. Indeed, by demanding payments from its suppliers, the company appeared 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 was being 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 recently 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 seemed like Premier Foods was using the stick without the carrot. The fact that two days after news broke about its activities, the company chose to backtrack by calling a halt to the upfront payments suggests that they realised they were wrong, however the decision to use such strong arm tactics was not only poorly considered, it has damaged their corporate reputation.