Premier Foods – Demanding “Money with Menaces” from Suppliers

We covered briefly on Friday the BBC Newsnight report into Premier Foods, which wrote recently to its suppliers demanding a fee in return for being a “preferred supplier.” Some suppliers called it “blackmail,” the Federation of Small Business thought it was grossly unfair, legal experts warned it might be illegal, and the Department of Business (BIS) said:

"We are concerned by recent reports, and are consulting to assess the evidence so we can establish what more we can do. We are also consulting on whether the biggest companies should be required to report publicly on whether businesses need to pay to be on their supplier lists. ”(Note to BIS - do you really think this would achieve anything)?

The Daily Mail reported this:

A spokeswoman for Premier said there were " no guarantees" of work for those that were willing to pay but "we are clearly unlikely to want to build longer-term, strategic partnerships with suppliers that are not interested in helping us grow." Reducing supplier numbers from 2,800 to around 1,230 by the end of the year "has been achieved through the natural expiry of existing contracts rather than 'de-listing' any supplier as such."

She added: "We are sensitive to the position of small suppliers. If any supplier has difficulty with our requests then we encourage them to come and talk to us. Many small suppliers also have the opportunity to be one of our strategic suppliers. In fact, three out of the five winners in our annual supplier awards in 2014 were small companies with less than 50 employees."

However, yesterday Gavin Darby, the CEO, said this.

Over the last few days it has become apparent that this mechanism has been widely misunderstood and misinterpreted. In this situation, we are fully prepared to simplify the details of our future programme to a more conventional type of discount negotiation, potentially based on price, value or volume based rebates, or lump sums.”

The first thing to point out is that Premier is a firm fighting for its own survival. It’s debt mountain, built up through a string of not very clever acquisitions, is almost overwhelming the business. So we should be understanding of that situation.

However, in terms of these demands, if there are “no guarantees” of work, then it seems at best immoral and at worst fraudulent. How different is it to those firms who send invoices to businesses for inclusion in some (probably non-existent) business directory? Premier saying, “give us some cash just for the possibility of being a supplier” seems very dodgy.

If these payments were linked to specific suppliers / contracts, then in a sense we could argue that they are just part of normal contractual negotiations and commercial give and take. Even better, as David Atkinson commented on Friday’s post, " if Premier had genuinely offered suppliers tangible incentives to be part of a partnering programme (long term agreement, co-branding/marketing opportunities, benefits sharing on improvement initiatives, etc.) rather than seemingly position the ‘deal’ as an entry ticket.”

But the ethical problem comes if, as we saw with certain retailers, the demands come when the suppliers believe they have already negotiated a firm contract. So if we’ve arrived at what both parties feel is a fair price, we agree a contract, then somewhere down the line you demand more cash from me, with nothing in return, then that can’t be ethically acceptable.

I have some sympathy with the procurement staff at the firm – I doubt whether Mark Hughes and the team like this approach either but I assume they are executing the wishes of the Board. It is also pretty poor from a reputation standpoint for obvious reasons. I don’t expect shoppers will be boycotting Mr Kipling cakes this morning, but would you be rushing to apply for a job with Premier right now?

But probably the main negative of this move is what it does too supplier relationships. Any supplier who does pay will have to build in the cost of these payments into their prices to Premier, so at best this brings forward some savings that will disappear again next year. And do you think Premier’s suppliers see them as a “preferred customer”? Do you think they give Premier their best ideas for new products? Or go out of their way to help when there is a problem?

Perhaps I’m wrong. Perhaps Premier will win the CIPS SM “Best Supplier Relationship” award next year and surprise us all. But this strikes us as the actions of a very desperate and not very smart organisation.

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Voices (2)

  1. Dan:

    Brilliant strategy. Firstly make yourself dependent on a smaller number of suppliers. Then p*ss them off. Are there any actual business people on the Board, or is it stuffed with accountants? (no offence to accountants, but this is the thinking of people who are just looking at numbers on a spreadsheet)

  2. Nick @ Market Dojo:

    This is such poor practice. All the good work that the procurement teams have done in forging close ties with the supply market, fostering relationships and preferred rates….all undermined by this decision.

    The next time a competitive tender is run, the suppliers will factor this into account in their proposal, as you mention, especially given the high risk position from the financial instability of Premier Foods. They’d be targetted as nothing more than a short-term cash-cow. Long-term pain for short-term gain, sad this world we live in sometimes!

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