The Produce Industry Responds to Kroger's New Net 90 Payment Policy for Suppliers
SACRAMENTO, CA - Kroger is now asking its produce suppliers to waive their PACA rights and agree to 90-day payment terms. Under a PACA amendment established in 1984, produce suppliers were given a super priority to be paid first in an event of bankruptcy for the buyer, but only if those transactions had payment terms of 30 days from acceptance. A letter to suppliers signed by four Kroger executives shared the retailer’s intentions to “standardize its payment terms to Net 90 across all aspects of [its] business effective immediately,” which effectively could make any transaction with Kroger ineligible for PACA protection.
Why does this matter? I spoke with several members of the produce industry across professions to find out exactly why this is not only an alarming practice for the American farmer, but also for the consumer.
“Any other industry would die to have a safety net like PACA, and the PACA trust is the Holy Grail of our industry. No, we aren't worried about Kroger going bankrupt, but it's not about who is making the ask—it’s about if this is a best practice for our industry,” Matt McInerney, Sr. Executive Vice President of the Western Growers Association tells me, noting that he can’t remember an issue that has caused this much concern from the association’s members in the past several decades.
“The problem with Kroger’s letter is that it’s a one-size-fits-all request. Sure, supply for center store products may stick around for months, making cash flow unimportant—but this does not work in the perishable fresh produce industry,” Matt continues. “Congress has recognized the inherent risk that farmers make every time they put a seed into the ground and that the need for timely payment is imperative to the produce industry’s economic welfare. This is an issue of fairness and equality for farmers, and the Western Growers Association is looking to get Kroger’s policy re-examined.”
Joseph Sbrocchi, General Manager at the Ontario Greenhouse Vegetable Growers (OGVG), also spoke to me on behalf of the organization’s grower members, explaining that Kroger’s policy creates an unfair disadvantage for farmers.
“It's gravely concerning,” Joseph said of Kroger’s demand. “When I was in retail, the tendency to request for things like this came from our finance department or other departments that didn't understand the urgency of the produce industry. This would just be another way of squeezing growers’ margins. The concern I have is, if one retailer does something like this, the rest will follow. It is very regrettable, and at the end of the day, it's going to add cost to the consumer. I deeply care for all the growers I represent, and this is not in the interest of their well-being.”
George Radanovich, President of the California Fresh Fruit Association, spoke on behalf of his group's members, as well.
“We’ve gotten a lot of calls—A LOT of calls—from our growers and rage would be a good descriptor of how they are feeling. We plan on conveying this to Kroger in a statement that we will release on Monday,” he tells me.
Tom Stenzel, President and CEO of the United Fresh Produce Association, says he’s spoken with the Kroger produce team, who indicated that the 90-day payment terms may not be as strict in the case of produce suppliers. However, Kroger has not publically made a statement regarding that flexibility.
“We understand verbally from Kroger’s produce team that there is flexibility for produce suppliers regarding the recent supplier letter announcing 90-day payment terms,” Tom shares. “They’ve encouraged produce suppliers to talk with their Kroger contacts about payment options, and offered to meet with suppliers at their business suite in the United Fresh show this week in Chicago. We appreciate that direct dialogue. There’s still significant concern in the industry to see a more formal clarification of payment policies for produce, and we encourage Kroger to consider that option.”
Veteran retailer and now-Consultant Dick Spezzano echoed many of the same sentiments as the association leaders I spoke with, expressing that he hopes Kroger rescinds the new supplier demand for the sake of America’s farmers, shippers, and vendors.
“I don't think that, currently, anyone is worried about Kroger going bankrupt. However, this could lead to a trend of some or even all of retail and foodservice to copy it, and if they don't, they will be financially disadvantaged. Most suppliers, at least at the beginning of their seasons, are waiting for their checks, as they have put out all of the investment in land, equipment, planting, inputs during the growing, picking, and packing, and now they have to wait an additional 60-80 days to get paid by Kroger,” Dick explains.
Many growers, shippers, and produce vendors are borrowing from banks to get to their current 10-30 payments, he says, and, now, they would have to borrow even more.
“The banks will not like this at all and would probably increase their interest rates in response,” Dick continues. “With Kroger’s current pay practices, it buys, receives, ships to its stores, and sells the produce 4-5 times before it pays for the first shipment. With this new pay practice that would probably extend out to 12-15 times before they pay for the first shipment.”
Given how major of a player Kroger is in the grocery landscape, many industry members I spoke to asked for their comments on the new policy to be made anonymous. Several had passionate responses that spoke to what they deem to be a lack of understanding of the produce industry by the Kroger executives who are pushing this.
“I think this a really good example of a big, greedy Wall Street organization who thinks it can squeeze one more drop of blood out of this turnip. Nobody is going to fall on their sword for this issue because Kroger is such a big powerful customer—this is what happens when a customer has become this big and powerful. That said, if they set a precedent here with bypassing PACA, it will be a whole different world for fresh produce suppliers in a few years,” a source shared with me. “Kroger is beholden to Wall Street; the produce industry needs to be beholden to the grower—the American farmer—who takes extraordinary risks for little and sometimes no margins.”
They continued by stressing the extreme importance for the produce industry and its associations to unite together to take a strong stance against Kroger’s policy.
“We need to hold steady arm in arm and say we won’t do business with Kroger because we aren’t going to break PACA," the source continued. "This is the associations' opportunity to step up to the plate and say we will fight this thing tooth and nail for our members and the American farmer. And we need to fight collectively so that no one company is at risk. American farmers, growers, and shippers, pay our dues for associations to protect us. Kroger has taken a stance against us and we have to say we are not going to play ball. The grower and consumer will be the ones who foot the bill for this.”
Kroger’s letter did say it would have a quickpay option available “at a very small discount.” The sample given in that letter was, if a $1 million invoice was paid on the 10th day, the discount would be less than 0.72 percent or $7,200. The early payment plan is reportedly being offered “to help our long-term business partners with the migration to our new standard payment terms, which are not considered optional to Kroger.”
With a topic as controversial as this one, the conversation is certainly not over. AndNowUKnow will continue to report on the situation as it develops.