Monday 8th December, 2014

With such cosy household names as Mr Kipling, Branson, Bisto and Ambrosia under its label, it’s easy to think of Premier Foods as a manufacturer at the top of their game. And of course, with 99% of all UK households buying a Premier product this year, in many ways they are. But struggling under a mountain of debt, the Board probably thought that it had come up with an excellent, profit-boosting scheme with the so called “Pay to Stay” supplier programme. And over the last 18 months, it’s one which has netted the firm millions of pounds.

However, since the outing of the CEO, Gavin Darby’s letter to suppliers on last week’s Newsnight, in which he asked suppliers for an “investment payment to support [Premier’s] growth”, the manufacturer has been accused of bullying tactics and the government has said that it’s “deeply concerned”. Of course, no-one can blame Premier for trying to find ways to work with a clear set of preferred suppliers to create a mutually beneficial partnership. After all, without one, the other will struggle to exist. However, as with most things, the benefits have to work both ways. If suppliers are being asked to “invest” just to sit on a list without a guarantee of any future contract, then it’s difficult to see what the Premier Board were thinking of.

No doubt the Procurement department have long established relationships with most, if not all of their preferred suppliers – relationships which are likely to have been put under strain with this latest move. Any relationship is built on a foundation of trust, where there’s a certain expectation that any dealings will be open and fair. The issue with the “pay to stay” scheme lies fundamentally in its blatant one-way benefit.

With many smaller suppliers struggling with late and extended payment terms, such tactics are just the latest in a series of squeezes on their working capital – pushing some out of business, and others into punitive financing arrangements. But it’s a situation which Premier now seems to have recognised, with the company bowing to pressure and announcing that from now on it will continue to negotiate with suppliers using more traditional negotiation tactics, such as discounts and bundled/bulk deals etc - which as long as it’s transparent, is something that the Financial Reporting Council (FRC) is likely to approve of.

The accounting watchdog said today that in the wake of the scandal at Premier and the ongoing saga at Tesco’s, it will be monitoring the methods used by accountants and auditors to estimate profits. In particular the FRC has said that businesses need to be more open in relation to supplier arrangements. Richard Fleck of the FRC said that “complex supplier arrangements such as fees and discounts may have a significant impact on the reported margins and other results of a company and on investor’s views of its performance.”

As Tesco’s has found to its peril, a company’s supply chain and how you deal with it, is more closely linked to marketing and brand than internal structure in many organisations would have you believe. With the hashtag #paytostay still trending, Premier’s swift move to retract its supplier programme is probably a very wise move.