Two stories from the marketing world over the last few months have really caught our eye, and that of many national newspapers as well, which highlight the tactics some brand owners are employing to improve their financial position without really understanding the longer term implications. The two stories in question have been Premier Foods decision to charge suppliers to remain on their business partners list, and the revelation of AB Inbev’s 120 days invoice payment terms.
The media furore surrounding Premier Foods forced them to backtrack however AB Inbev have defended their position highlighting that the payment terms are ‘mutually agreeable’ with their suppliers.
There has been a great deal of discussion as to whether this is ethical. As a small business we don’t like their approach however, as long as we live in a capitalist system we don’t subscribe to the view that this is unethical. Suppliers have the decision of whether to accept these conditions, this is not exploitation it is a simple economic decision. Fundamentally it is the responsibility of every publically listed company to maximise their profits for the benefit of their shareholders, and if this is the way they have identified to increase profitability then so be it.
However, if the CFO’s are seeing this as a simple solution to save money or increase cash flow then they are missing the potentially negative impact of this policy. The negative business implications will result from two sources.
First is the policy’s impact on supplier quality. We are going to use an example of marketing agencies however you could substitute this for suppliers of packaging, raw materials, IT etc. By placing these severe financial constraints will automatically minimise the number of businesses that they can work with. As a rule, only the larger marketing groups, for example, would be able to absorb the 120 day payment terms. Generally speaking, smaller independent agencies are more agile, attract the more creative talent and therefore produce more disruptive and, ultimately, more effective work. The output from the larger marketing agency groups is, generally, average. Average is never going to deliver double digit growth!
In addition, even the larger marketing groups who accept these financial conditions will be under pressure to deliver against the payment terms. As a result, they will put ‘cheaper’ staff on the account, again resulting in compromised quality output.
A lot is written about the low perception of marketing within the boardroom, so maybe CFO’s will easily ignore the arguments about shades of marketing agency quality when balanced against their own cash flow. Whilst, of course, we would fundamentally disagree with this perception, within some organisations this may be a factor in dictating financial policy, however this brings us onto our second argument against this financial approach.
Much trend analysis is currently pointing towards the fact that consumers are becoming far more interested and engaged in the way that their brands conduct their business practises. Whilst we have no expectation that the treatment of a marketing agency will change a consumer’s brand perception, their boarder approach towards business may well become an issue. The current falling price of milk is a good example, the big four supermarkets are pushing the price of milk down as a loss leader, squeezing British dairy farmers to an unsustainable level. Once a brand’s push for increased profits starts exploiting (higher profile) smaller British businesses, it may just begin to change consumer behaviour. Once this happens potential brand decay, and ultimately a drop in sales, will be difficult to reverse which will certainly make the CFO’s sit up and take notice. Once the Premier Foods position was exposed in the media they were quick to retract the policy which highlights their miscalculation and the potentially negative impact it could have had on their business.
So whilst I absolutely support the right of these businesses to stipulate their own trading conditions, I would advise caution. Imposing restrictive financial conditions on their suppliers could easily lead to longer term negative outcomes for their brands and overall business. Profitability is key but these brand owners need to be careful about squeezing the easy targets for short term benefit as it may ultimately come back to bite them.