Brace yourselves suppliers as Tesco’s turnaround strategy might empty your wallets as well as your shelves.

As the shock waves surrounding the supermarket’s black hole continue to reverberate it’s not yet clear what path the rebuilding will take.

Just as we thought we’d seen the last big name to suffer some post credit crunch jitters along comes the sad story of the supermarket behemoth allegedly resorting to some creative accounting to keep it in the game. Overstated profits going back over three years has seen the share price dive and carnage in the boardroom.

Many people will be aware of the practice of “rescheduling” supplier payment dates (despite what the terms actually say) to make things look a little less strained. What some people may not be so aware of however is that these same poor suppliers often have to pay Tesco for the pleasure of supplying them. And if you can reschedule payment dates you can reschedule income ones as well.

Big boy’s rules

There can’t be many SME owners around that wouldn’t feel a slight twinge of excitement when a large supermarket shows an interest in their product. Not only is it a feather in the cap but their sheer presence on the FTSE 100 is usually seen as a cast iron guarantee that subsequent invoices will be paid.

This latest story surrounding supplier contributions, plus other recent headlines about shoddy payment practices, should serve as a warning to tread carefully when dealing with the supermarket industry.

It is now clear to all that there is a cost attached to where a product is displayed. You’ll be expected to pay a premium if you want it at eye level or at the end of an aisle. You will also be expected to stump up your share of any promotional initiative the supermarket deems necessary.

Small boy’s resources

Of course going into a relationship like this is fine if you have the marketing budget to support it and, perhaps more importantly, the finance to cover the inevitable lengthy payment terms. Prior to discovering the black hole in its profits Tesco was already hitting the business pages and once again for all the wrong reasons.

A small independent chocolate supplier had to threaten the store with a winding up petition after it took five months to settle a £6,000 debt. As with all things size is relevant, and whilst £6,000 might not sound like a financial disaster to some it represented the monthly wage bill for this business.

Club card or red card?

The immediate reaction to the Tesco black hole has seen the ritual cleanout of executives, the chairman has fallen on his sword and the men in suits from both the accounting and legal professions are pouring over the detail. The boss has also vowed to draw a line under it and move forward. How, and with what fallout, is not yet clear.

What is clear however is that the price war is sure to gather momentum. Historically, price matching and undercutting between the usual suspects has been seen as a bit of a national sport but now they all have the added problem of those pesky discounters to deal with.

So whilst the consumer might be rubbing their hands together at the prospect of a more cheerful check-out, suppliers can probably look forward to their margins being squeezed further and/or waiting even longer to get paid.

After all when it comes to getting a former giant off the canvas, every little helps.

by Steve Leeves