Woolworths Limited shoots itself in the foot

Credit: Scott Lewis

If reports are true, supermarket retailer Woolworths Limited (ASX: WOW) is about to seriously damage its relationship with suppliers, and likely extending the recovery timeframe.

The Australian Financial Review (AFR) reports that the retailer is looking at extending its payments to food and grocery suppliers to 60 days – two or three times longer than payment terms with rival Coles – owned by Wesfarmers Ltd (ASX: WES). Woolworths goal is to free up cash and improve its working capital.

The longer it can hang on to cash that is due to be paid out, the more benefits Woolworths can get out. The AFR reports that industry sources say Woolworths has a project team looking at legacy supplier terms who may currently be on 30-day terms – and identifying which ones can be pushed out to 60 days.

The AFR also reports that Woolworths is delaying payments to some suppliers by months – with one supplier saying that its terms are 28 days, but it has invoices that are 90 to 120 days old. Another supplier says that in some weeks they would be chasing 30 invoices at Woolworths and Masters.

Coles has much shorter trading terms ranging between 10 and 30 days, Wesfarmers finance director Terry Bowen has told the AFR. In some cases, where suppliers are fresh, they need very short terms – close to a week Mr Bowen says.

If the news is true, Woolworths is at high risk of damaging its relationships with its suppliers. If I was a supplier and one supermarket paid me with 30 days and another in 60 days or later, I know which one would get my priority.

And it’s not like Woolworths doesn’t already have longer terms than rival Coles. Woolworths’ average time to pay its suppliers was 51 days in 2015 – compared to 41.5 at Wesfarmers. The AFR reports that Coles’ day creditors are estimated to be just 20 days.

Foolish takeaway

Personally, I think the move is totally in the wrong direction. Woolworths needs to be working with its suppliers, not getting them offside. Pushing its weight around will likely backfire. As analysts have suggested, the supermarket retailer needs to focus on lowering prices so it’s more competitive against the likes of Coles, IGA and Aldi. If this is the best idea Woolworths’ management can come up with, I won’t be holding my shares for much longer.

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Motley Fool writer/analyst Mike King owns shares in Woolworths and Wesfarmers. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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