The Kroger Co. has introduced a new requirement for all suppliers, including those to its produce business, making them commit to new 90-day payment terms. The produce industry, as a result, is condemning the change.
Kroger Co. is enacting the change to smooth its cash conversion cycle, more efficiently manage its working capital in order to reinvest into its business, and harmonize its terms with industry peers, according to a memo to suppliers.
“We do recognize it involves a modest extension of the average time Kroger will pay invoices,” read the memo, which was signed by Robert Clark, SVP, merchandising; Todd Foley, VP, finance and controller; Carin Fike, VP and treasurer; and Mark Purtilar, VP, enterprise sourcing. “As such, we are partnering with Citibank, a core relationship bank of Kroger, to provide suppliers the option of receiving full payment on invoices before they are due, at a very small discount based on our strong credit profile. In many cases, the early payment option will save suppliers money in lieu of financing Kroger receivables through other means of capital.”
According to Kroger, the early-payment option, whose use is optional, may reduce days sales outstanding and enable suppliers to take advantage of early visiblilty of payment date, amount, invoice details and deductions or credit memos; payment within one day of Kroger invoice approval (10 days, on average); and a “very competitive” discount rate.
Among the industry respondents to the memo’s news are:
National Association of Perishable Agricultural Receivers
Showing its concern over the new policy, the National Association of Perishable Agricultural Receivers (NAPAR) stated that compliance with Kroger’s new 90-day standardized payment policy automatically forces produce suppliers to waive their Perishable Agricultural Commodities Act (PACA) Trust rights, which have protected produce suppliers since they were signed into law in 1984. PACA recognizes the “unique position” of produce suppliers as providers of a highly perishable commodity, and ensures that they are first in line to receive payment for their produce in the event of the buyer’s bankruptcy.
PACA protection was meant to level the playing field in the produce supply chain, especially considering that many suppliers are small family-owned and -operated businesses that provide highly perishable produce to larger retailers and foodservice businesses. Agreement to payment terms beyond 30 days results in “automatic loss” of PACA protection.
“Proceed with extreme care,” Matthew D’Arrigo, chairman of NAPAR, advised members, noting that agreeing to any retailer’s 90-day payment policy will forfeit rights and protection provided through the PACA Trust. He also asked Kroger to exempt produce suppliers from the new policy, stating that while it might be a workable policy for Kroger’s many nonperishable suppliers, “the process from harvest to sale in the grocery store is short and produce suppliers need to be paid promptly to cover their expenses.”
United Fresh Produce Association
United Fresh Produce Association had direct dialogue with Kroger’s produce team, learning that there might be some flexibility with the 90-day payment terms for produce suppliers. Kroger is encouraging produce suppliers to talk with their Kroger contacts about payment options, and has offered to meet with suppliers in their business suite at the United Fresh trade show currently taking place in Chicago.
United Fresh President and CEO Tom Stenzel did add, however, that, “There’s still significant concern in the industry to see a more formal clarification of payment policies for produce, and we encourage Kroger to consider that option.”
California Fresh Fruit Association
The California Fresh Fruit Association (CFFA) expressed “extreme displeasure” with Kroger’s “Net 90” payment standardization announcement across all aspects of business. CFFA President George Radanovich called it “inappropriate, if not illegal, to force suppliers to forfeit their rights under the Perishable Agricultural Commodities Act, an act created specifically to protect the perishable fresh fruit industry.”
Additionally, Radanovich noted that while Kroger has expressed a “willingness to be flexible” with the new policy, “‘flexibility’ in this matter won’t help.”
“By this action, Kroger has opened the door for other retailers to violate supplier rights protected by law,” he stated. “Our industry should not and will not stand for attacks like this.”
Radanovich reminded Kroger that the fresh produce industry has been a good partner, and that he hopes the top grocer will “remember that partnership and fix the mess it created.”
Western Growers stressed to members that under PACA, to be eligible for trust benefits, prompt payment is required, which means terms of "PACA Prompt" or "Net 10 days." Sellers can extend those terms to no more than 30 days, and anything beyond automatically invalidates protection and rights to the trust provisions.
"The produce industry supply chain has benefitted from the trust provision since 1984," Western Growers said. "Any shipper’s best business practices mandate that you not waive trust rights, regardless of who may be requesting the waiver. Also, if you have outside growers, you will remain liable to them for any non-payment. Based on those aforementioned reasons, it is recommended that you contact Kroger about your concern with the new 90-day payment policy."