Suppliers wise up after burning their fingers in Nakumatt fiasco
By Macharia Kamau
| Jan 25th 2022 | 5 min read
Suppliers delivering goods to supermarkets have devised mechanisms to reduce their exposure to potential losses.
Suppliers lost nearly Sh20 billion for goods they had supplied to the collapsed Nakumatt alone.
The amount is higher when money owed by other supermarkets that are either struggling or have since shut down is factored in.
It is against this backdrop that suppliers have since adopted mechanisms such as information sharing, with companies reporting whenever a retailer defaults on payments or pushes forward the payment date.
The companies manage the information-sharing platform under the aegis of the Association of Suppliers of Kenya (AKS).
“If your payment has been pushed from 30 days to 60 days, it is an alarm in itself. You may also not be alone; there could be other suppliers whose payments have been pushed forward. Unless there is a valid reason why it has been moved, this is alarming… it is a danger,” said AKS Chief Executive Ishmail Bett.
Mr Bett said the lobby offers members a platform to share such information and take action whenever there are several such complaints and where the retailer does not offer satisfactory reasons.
“We are asking our members to do due diligence and control credit limits on their end so that it shields them from extreme exposure,” he said.
In the case of Nakumatt and Uchumi, their collapse caught many suppliers unawares, with the thinking at the time being that the retailers were too big to fail.
Their dealings with the suppliers were also “secret,” with one company not aware whether the other was being paid for its supplies or not.
“We learned some hard lessons… Uchumi was our first lesson. At the time, Uchumi and Nakumatt were the SI unit on how to run a supermarket. Unfortunately, we did not see it coming. It has also happened again with Tuskys and Choppies,” said Bett.
Following the difficulties suppliers experienced with Uchumi, the Industrialisation Ministry conducted a study that recommended the development of a code of practice and coming up with regulations governing relations between suppliers and retailers.
The challenge, however, was that signing up to the code of practice was not legally binding, while developing a legal framework for the regulations would take time.
But Bett said the Competition Authority of Kenya (CAK), which is charged with policing big firms from abusing buyer power, offered some kind of refuge for suppliers dealing with retailers.
“We had expected to anchor the regulations on the National Trade Bill. This was, however, expected to take time before it went through Parliament. We wanted an urgent solution. Along came CAK, and we have found some refuge in its mandate to ensure there is no abuse of buyer power,” he said.
“In case there are many suppliers who are not being paid by a particular retailer, the association can report to CAK, which then investigates. CAK can also, through its own initiative, launch investigations if it has reasons to believe a retailer may be abusing buyer power,” added Bett.
He said the initiative is still a work in progress, but they have made remarkable progress.
“We are not yet at the point where we can say we are not exposed, but we have shrunk the exposure by getting the information at early stages and trying to resolve it.”
The Retail Trade Code of Practice (2021 Retail Code) was also gazetted in August last year, making it a statutory document.
Bett said this is still in the early stages of being implemented but noted that it captures the issue of late payments by supermarkets in a manner no other law does.
He, however, noted gaps, with the code not factoring that suppliers, particularly large manufacturers of popular products could abuse their power over retailers by withdrawing their products.
“For buyer power to be investigated, there has to be buyer power abuse. If a big retailer fails to pay a relatively small supplier, CAK will move to investigate, but if it’s the other way round – a big supplier withdrawing products from a retailer – it might not look into it. It does not shield us 100 per cent,” he said.
The code includes a model contract between a supplier and a retailer.
It also establishes the Trade Committee that will monitor implementation of the code and the Disputes Committee that will look into issues arising between suppliers and retailers.
“The 2021 Retail Code provides key guidance on late payments, disputed invoices… the overarching theme is that these price and payment terms should be agreed among the parties and specifically provided for in the buyer-supplier contract,” said law firm Bowman’s in an analysis of the code when it was gazetted last year.
“While it is still in its early days of implementation, the publication of the 2021 Retail Code is a clear sign that the Authority (CAK) is keen on enforcing the abuse of buyer power provisions of the (Competition) Act. We recommend that buyers and suppliers carry out audits of their contracts to ensure that they are in compliance.”
Bett explained why suppliers always get the shorter end of the stick.
“If a case goes to court and creditors are demanding liquidation of a supermarket, suppliers are not protected and are least likely to recover their money should it be liquidated. Suppliers are unsecured creditors… these creditors are the least to be considered and are only paid when all others have been paid,” he said.
But under the new dispensation, suppliers have to contend with logistical challenges.
For instance, they now have to deliver their products at the branch level unlike in the past where they delivered at the retailer-owned warehouses from where they would then be redistributed to the branches.
This has been blamed for locking out many suppliers who do not have the capacity to deliver to branches, especially those from far-flung areas.
“Being required to deliver to the branch is a concern, and we are trying to reason with them for practicability. Small suppliers will be automatically locked out unless they adjust their product prices, which will then affect the buyers’ ability,” said Bett, who noted that traditionally, only particular items were required to be delivered to the branches.
“We are talking with them, especially on behalf of small suppliers… it might not make economic sense to transport products to the stores. Most of the small suppliers do not have the financial muscle.”
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