Tougher new payment rules to protect supermarket suppliers

Supermarket suppliers are headed for a big relief from payment delays and defaults following the formulation of rules that will make it difficult for retail chains to engage in unfair trading practices.

The new rules, proposed by the Ministry of Industry and Trade in collaboration with stakeholders, seek to cut the average payment period in the retail sector to 30 days from the current 180 to 240.

The move comes in the wake of mounting retail sector debts that topped Sh40 billion at the end of last year amid industry turbulence that has left some supermarkets on the verge of collapse.

If the proposed rules become law, supermarkets will pay suppliers of fresh produce within 15 days of their weekly statement, offering a big relief to farmers who have been waiting for months after deliveries.

“Unless otherwise provided in the supply agreement or joint business plan the payment terms… for fruits, vegetables and fresh produce delivered…shall not exceed 15 days from the date of the weekly statement,” the draft retail code of practice and regulations says, adding that payment terms for fast moving consumer goods (FMCG) shall not exceed 30 days from the date of monthly statement.

Retail Trade Dispute Settlement Committee

Penalties for non-compliance include accumulation of interest charges on any pending payments at the prevailing market rates until paid in full.

“Unless otherwise stated in the supply agreement or joint business plan, late payment shall attract interest at the market lending rate as determined by the Central Bank of Kenya,” the rules say.

“Interest will accrue on the amount not paid after the due date as determined by the date of statement of supply agreement and or joint business plan.”

Interest on overdue payment shall commence accruing from the first date of default until settlement of the disputed amount is made in full.

Besides, suppliers will refer cases involving retailers who fail to pay interest on amounts due within one month to the Retail Trade Dispute Settlement Committee for determination.

Trade principal secretary Chris Kiptoo said his office was fast tracking process of making the draft rules law. “I am happy we now have consensus on retail sector regulations and code of practice. We are now working on anchor trade law,” Dr Kiptoo said.

He said the majority of stakeholders, including the Association of Suppliers of Kenya, the Kenya Association of Manufacturers (KAM) and the Retail Trade Association of Kenya (Retrak) have accepted the proposals.

Retrak chief executive Wambui Mbarire said the regulations had been drafted by a task force made up of government representatives, retailers and manufacturers.

“Once the trade Bill has been finalised, the retail regulations shall be anchored there,” she said. Association of Kenya Suppliers chairman Kimani Rugendo described the proposed laws as a landmark, arguing it is what the industry needs to rein in rogue retailers.

Mr Rugendo said the industry needs prompt payments to enhance cash flow in the market and protect businesses.

Suppliers of fresh produce and processed products said in October 2016 that the supermarkets owed them an estimated Sh40 billion, straining their cash flows and even pushing some of them into bankruptcy.

Mr Rugendo attributed the industry's troubles to the “big boy” tactics that the retailers use to arm-twist suppliers into continuing to deliver goods on credit despite failing to pay outstanding debt.

Leading retailers Tuskys and Naivas welcomed the recommendations even as they warned that they will leave the retailers with heavy cash flow obligations.

“We are part of the task force that has been negotiating this and of course we support the same,” said Tuskys chief executive Dan Githua, who maintained that prompt payment of suppliers will deepen the retail market and allow smaller manufacturers to grow.

"The bitter pill , however, is that retailers will have to raise about Sh10 billion in new capital to comply with the proposed regulations.”

Naivas chief operating officer Willy Kimani claimed the company was already making prompt payments to suppliers. He, however, insisted that retailers should allowed to agree terms of engagement with suppliers. “We currently observe those terms and our position is that in a free market economy a supplier and retailer should be allowed to agree on trading terms. Signing of supply agreements should supersede regulation to keep trade alive,” said Mr Kimani.

Troubled supermarkets

Manufacturers, however, backed the proposals, saying the rules will enhance markets for local goods, as well as increase liquidity in businesses.

“The short-term payment period will encourage a cash flow economy, that will play a key role in providing more investment and job creation opportunities for manufactures,” KAM said in a statement. “SMEs will also greatly benefit, as prompt payments ensure sufficient flow of necessary resources they need to survive.”

The lobby added that penalising retailers who delay payments would cushion manufacturers against losses.

“With the current situation, where two of our local major retailers have gone to a near collapse, there is need to protect manufacturers using short-term payment periods to prevent losses,” it said.

“The recent collapse of some retailers has brought to light the concern that the top creditors for retail companies remain suppliers and manufacturers, who are classified as unsecured creditors in any insolvency situations.”

Linus Gitahi, the Tropikal Brands Afrika board chairman, welcomed the new rules, saying they have the potential to force supermarkets to buy only what they are able to sell.

“The fact is that as Nakumatt goes down, it goes down with cash for small manufacturers, who are not able to negotiate,” said Mr Gitahi.

The top five largest retail chains in Kenya owed suppliers at least Sh700 million, which was 83 per cent of the total debts outstanding by the end of 2016, according to a Trade ministry report.

Troubled supermarkets Nakumatt (now under administration) and Uchumi alone accounted for 73 per cent of the debt.

The report, which sampled 22 suppliers, found that Nakumatt owed the most money to suppliers at Sh278.9 million by December 2016, followed by Tuskys (Sh174.8 million) and Uchumi (Sh123 million).

Naivas was fourth at Sh86.4 million, with Chandarana, which owed the top suppliers Sh35 million, closing the top five. The rest of the supermarkets combined owed less than Sh100 million, meaning that suppliers of big retailers are the worst hit.