WHEN BUSINESS DOESN'T PAY ITS BILLS, The Daily Telegraph, 3 November 2016
Yesterday, I rang my supermarket. It was just a courtesy call, letting them know that from now on I would be paying for my groceries 60 days after scanning them at the checkout. I assured them it was nothing personal – simply a matter of improving my cash flow.
Alright, I’m pulling your leg. But you can only imagine a company’s reaction to getting such a call from a regular consumer. Yet this is exactly what many large Australian companies are doing to their suppliers right now.
Earlier this year Rio Tinto told many of its suppliers that, with no compensation, it would now pay its bills after 90 days instead of 45 days (in 2014 it was 30 days). This followed BHP’s decision last year to pay its suppliers after 60 days instead of 30 days. Woolworths is also reportedly increasing its payment terms from 30 days to 60 days. Mars, Kellogg, Procter & Gamble and Heinz are also pushing for more generous payment terms. In April, Murray Goulburn retrospectively cut the price it paid to farmers, then asked them to pay back the difference.
The reason these companies are squeezing suppliers is simple: it improves their cash flow and makes them money. Even in the current low interest rate environment, there’s money to be made from taking your time to pay up.
For example, Rio Tinto’s bills reportedly amount to $24 billion per year. Invest that in Commonwealth Treasury bills for an additional 45 days, and you’d make nearly $70 million. So Rio’s 45-day delay in paying its bills means at least $70 million more revenue for the large miner. It also means $70 million less revenue for the smaller firms who supply Rio Tinto.
The reason firms can get away with longer payment terms is straightforward: they’re big companies. Data from Dun and Bradstreet show that, on average, large companies in Australia are almost 20 per cent slower in paying their bills than small companies. When Rio Tinto was asked why they were extending their payment terms they said it would ‘free up their cash’. If you asked Rio’s suppliers, I expect they would have pointed out that its effect was to ‘tighten their cash’ – making it harder for them to meet payroll and pay the rent, let alone think about growing their small business.
If there’s a ray of sunlight in this gloomy story, it’s the fact that payment times have improved slightly: from 53 days a decade ago to 45 days today. But some sectors are still worse than a drinker who won’t buy a round when it’s his turn. According to data from Dun and Bradstreet, the Australian industries which are the laziest in paying their bills are telecommunications, mining, utilities and the industry for finance, insurance and real estate. Australian companies are also tardier than those in New Zealand, where bills are paid 22 per cent faster.
Last month the Australian Competition and Consumer Commission raised particular concerns for Australia’s horticultural sector. Growers told them that late payment or non-payment by wholesalers was a significant issue. ‘The regularity with which this issue was raised’ the regulator said ‘suggests it is a wider problem’. According to the competition watchdog, growers were hesitant to raise complaints for fear of damaging their relationship with the wholesaler or to be seen as a ‘troublemaker’ in the industry.
Part of the problem is that many Australian markets are dominated by a few big players. As a rule of thumb, concentrated markets are those where the biggest four firms control more than 30 percent of the market. Analysing 481 Australian industries, the Australian National University’s Adam Triggs and I find that 10 of the 20 largest industries are dominated by four big firms.
Unsurprisingly, these concentrated industries include almost all of the industries identified by Dun and Bradstreet as being slow in paying their suppliers. In short, the increased concentration of Australia’s industries mean there is increased scope for this sort of oppressive behaviour towards suppliers. So what should be done?
As is often the case, wine might be part of the solution. In 1991 South Australia passed a law setting out the minimum requirements for paying suppliers. For example, if grapes are delivered between 1 April and 1 May, the legislation requires that the first payment be received by 31 May. If underpayment becomes an egregious problem in other sectors, regulation may be preferable to letting hundreds of small businesses go to the wall.
Another way is to address market power directly. At the last election, Labor proposed increasing penalties for anti-competitive conduct, boosting the litigation budget of the Australian Competition and Consumer Commission, giving them a market studies power so it can explore particular markets in more detail and have the government initiate a thorough inquiry into the consequences of market concentration more broadly.
Cash flow matters more for small businesses than for large ones. Small firms pay higher interest rates and are more vulnerable to shocks. In a small business, financial stress means sleepless nights worrying about the mortgage and the kids. From an economy-wide perspective, it makes no sense for big businesses to be improving their cash flow at the expense of small companies. In a low interest rate environment, such an approach is doubly dumb. Why send small businesses to the wall so big ones can make a slightly larger profit? Paying your bills within a reasonable time isn’t just good ethics, it’s good economics too.
Andrew Leigh is the Shadow Assistant Treasurer and the Shadow Minister for Competition. An abridged version of this article appeared in the Daily Telegraph on 3 November 2016.