Woolworths is planning to stretch out payments to most of its food and grocery suppliers to 60 days – two or three times the payment terms at Coles – in an attempt to free up cash and improve working capital.
Industry sources said Woolworths had a project team in its supermarkets division reviewing suppliers' terms of trade and identifying "legacy" suppliers on 30-day terms who can be pushed out to 60 days – double the 30-day terms Woolworths expects from its own debtors.
When to buy back into Woolworths
Facebook shares to fall bets expert
Netflix misses subscriber growth expectations
Tesla safety on Australia's roads
UK, euro zone data defies Brexit doom
Will there be a rate cut?
Zara owner accused of plagiarism
Verizon buys Yahoo for $US4.8 billion
When to buy back into Woolworths
The giant grocer has missed an opportunity to revamp its culture, but investors should keep a watchful eye.
While the project could alleviate pressure on Woolworths' cash flow, it threatens to antagonise suppliers who have criticised Woolworths for paying bills well outside trading terms.
"Their payment system is broken and deliberately so. Payments come slowly and in dribs and drabs," said one supplier, who supplies products to all Woolworths divisions, including home improvement and BIG W.
"One of my terms is 28 days and I have invoices that are 90 and 120 days old," the supplier said. "They're way outside payment terms."
Another supplier said: "Invoices aren't being paid on time. You get a contract with settlement terms and they never meet the settlement terms. In any one week we'd be chasing 30 invoices at Masters and Woolworths. Sometimes they haven't paid at least 20 per cent of the invoices."
Focus on price cuts
The project has also surprised analysts, who believe Woolworths' cash flow and cash conversion rates are still in good shape, despite weaker supermarket sales and margins, and say the retailer should be focusing on reducing prices to compete better with Coles and Aldi, rather than "haggling" over trading terms.
"They sell product on average 22 days after they take possession, so if they can pay back after 60 days they get to use the cash for 38 days," one analyst said.
"Woolworths is reducing capex and outgoings so they don't need it as much. What they do need more of is pricing, so they can be competitive with Coles and close the price gap with Aldi."
A Woolworths spokesman said most of its grocery suppliers had been on standard 60-day trading terms for many years.
"However, we have a number of suppliers who mainly for legacy reasons have different terms. We are always looking to simplify our arrangements, so have been negotiating with some suppliers to move to our standard terms," the spokesman said.
The move comes as Coles and Woolworths negotiate new grocery supply agreements, after the introduction of the grocery code of conduct in 2015.
Longer payment terms
Woolworths' payment terms are much longer than those at Coles, where trading terms for food and grocery suppliers range between 10 and 30 days, Wesfarmers finance director Terry Bowen said.
"We don't have a program in place to lift that to 60 days," Mr Bowen said. "Sixty days for supermarkets is very high – many suppliers are fresh and they need very short terms, close to a week."
Woolworths' days creditors – the average time the retailer takes to settle its debts with trade suppliers – was about 51 days in fiscal 2015, compared with 41.5 at Wesfarmers. Excluding non-food and liquor operations, Coles' days creditors are estimated to be about 20 days and Woolworths' food and liquor days creditors almost 50.
Industry sources believe Woolworths might consider alleviating the cash-flow pressure on suppliers on 60-day terms by introducing a supply chain finance scheme in conjunction with one or more of the large banks.
"Normally companies that standardise terms come along with a financing option. That's what a lot of the major supermarkets [overseas] try to do," one finance industry source said.
Woolworths said as part of its negotiations it was open to ways to assist suppliers moving to standard terms, but did not have formal vendor financing arrangements in place now.
Not used widely
Supply chain finance schemes are available at Coles but, because of the retailer's shorter trading terms, are not used widely.
Meanwhile, Woolworths head of transformation Matt Stanton, a former Bauer executive who joined the retailer less than two years ago, has resigned to pursue other opportunities.
Mr Stanton was overseeing the Mercury II supply chain overhaul, which is aimed at slashing the cost of transporting food, liquor and general merchandise to supermarkets, liquor stores and BIG W.
Woolworths said the transformation projects had been embedded into each business division and as a result, Mr Stanton would not be replaced.