Many small and medium sized companies think they have hit the big time when they get their first order from one of the major retailers. Unfortunately it can end up being their downfall. Read on to find out why.
Most SMEs, regardless of what they have specified in their own terms and conditions of sale, will be forced to accept the terms and conditions of purchase to deal with the major players which can be fraught with potential pitfalls
Here are just a few to be wary of and the potential pitfalls for a small business or SME:
Sale or returnStock cleanseMarketing contributionsDiscounted product salesRetrospective rebates / volume discountsPenalties for missing delivery time slotsUnilateral changes to payment termsOne-sided relationships
The happy small business thinks they have made the sale, delivered the goods and even seen the cash in the bank.
However, the goods may get returned with a debit note raised as they haven’t been sold. This can be weeks or even months after the transaction has taken place and so prove disastrous for the SME.
This is a similar condition to sale or return but normally occurs periodically to tie in with catalogue production or a new season starting.
Large orders may have been placed and paid for to ensure the retailer had sufficient stock to cope with predicted demand. Unfortunately the demand for the product has not materialised and so the retailer decides to drop it from next season’s catalogue and return the entire unsold product, debiting back the cost.
The retailer agrees to sell the product but then insists on the supplier contributing to the cost of marketing it in their stores.
This is another backhanded way of getting the product at a discount!
There have even been cases where the product has been sold to the retailer in the normal course of business but the retailer decides unilaterally that in order shift it quickly, they will put the product on some sort of sales promotion (e.g. 2 for 1, BOGOF). They then raise a debit note back to the hapless supplier for the discount offered hence meaning the supplier actually sold it for much less!
These are where discounts are taken if a certain volume of purchases are made by the retailer e.g. if they buy a higher amount of the product in a period, they demand a bigger discount. These discounts can be a shock when they are suddenly knocked off the value of outstanding invoicing or debited back at a quarter end. Any such agreements need to transparent and the supplier needs to know when and how they are to be taken. They can then at least be planned for and taken into account when assessing cashflow.
Despite the regular delays on our crowded roads, “stuck in traffic” just doesn’t cut it with some retailers. If the unlucky supplier is late for a delivery time, not only may they refuse to accept the goods but they may then levy penalties on the supplier for good measure!
In recent years, in order for the retailers to bolster their own cashflow, many have just decided to change their payment terms from 30 to 60 or even 90 days overnight. This can happen with no prior discussion and offered as a take it or leave it scenario, which can cause major cashflow issues for the poor supplier.
One of the biggest issues is the relationship is completely one-sided, with the SME forced to deal with “Purchasing Managers”.
These are professional buyers whose main job it is to negotiate the best deal for the retailer.
In many cases this can be to gain a 10% reduction on price year-on-year despite rising wages and increasing material prices for the poor supplier. It’s usually sold on the understanding that if they promise volume, the SME will be able to become “more efficient” and thus be able to supply cheaper.
In reality there is no negotiation, as the powerful retailer will just say, unless you can commit to a certain costing structure including reductions year on year, they will seek supplies elsewhere.
There has been many a horror story in the annals of the insolvency world where a major retailer has insisted on taking all production from a supplier at the expense of other long-standing customers, only to then drop the supplier when they have bled them dry. By then the suppliers long-standing customers have found new suppliers and the business fails through lack of sales.
Unfortunately when dealing with the big boys, it’s not a case of “buyer beware” more “seller beware”.
If you'd like to discuss how you can make the most of your relationships with major retailers, why not give us a call on 0845 602 9354.