America’s biggest grocery chain has agreed to backtrack on plans to extend payment terms for all its suppliers to 90 days, aggravating farmers who are currently paid within 30 days for their fresh produce.
Kroger, which is also the world’s third-largest retailer with 2,778 supermarkets across 34 US states, wrote to its suppliers late last month to advise that from August 1 it would end its policy of paying them within 30 days and in future pay them in 90 days.
The company justified the change by stating that it aimed to smooth its cash conversion cycle, allow it to more effectively manage its working capital to re-invest in the business and to “harmonise our terms with industry peers.”
The proposed change also required produce suppliers to forfeit the protection receive under the Perishable Agricultural Commodities Act (PACA) – first passed by Congress in 1930 – unless they agreed to give Kroger a discount in return for being paid in less than 90 days. PACA prohibits unfair trade practices in the sale of fruits and vegetables and ensures that sellers are paid promptly.
According to one of its producers the retailer had already begun implementing the new plan, giving the names of suppliers to a third-party to set up the discount required for early payment.
“We do recognise (the change) involves a modest extension of the average time Kroger will pay invoices,” the company admitted in its letter. “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.”
Various industry bodies reacted angrily to the proposal. The National Association of Perishable Agricultural Receivers (NAPAR) warned members that complying with Kroger’s new 90-day standardized payment policy would automatically forces produce suppliers to waive their PACA Trust rights, which have protected them since being signed into law in 1984.
PACA recognises 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. “It is inappropriate, if not illegal to force suppliers to forfeit their rights under the PACA,” stated George Radanovich president, of the California Fresh Fruit Association in a press release.
Response to feedback
Kroger has now confirmed that it exempt its produce suppliers protected under PACA from participating in its 90-day payment policy.
In a letter responding to an inquiry from the director of the United States Department of Agriculture’s (USDA) PACA Division, Kroger’ssenior manager, sourcing and financing, Matt Hodges, wrote: “Kroger has always had great relationships with our suppliers. We view them as essential partners for shared success.
“Our produce suppliers received a letter outlining our recently-modernised payment terms and supply chain finance (SCF) opportunity. We’ve shared with individual produce suppliers that we will respect existing contractual and legal mandates including PACA. We never intended for PACA-eligible produce suppliers to waive their PACA Trust rights.
“At the same time, we’ve welcomed and listened to feedback from our produce suppliers and other important stakeholders – including yours.
“I’d like to take this opportunity to clearly state that produce suppliers protected under PACA are not required to participate in Net 90 payment terms. For those PACA-eligible produce suppliers who are interested, we will continue to negotiate for payment terms that are permitted within their PACA Trust rights.”