Executives from The Kroger Co.’s produce department have reportedly indicated that there is some flexibility in the new company-wide 90-day payment policy that was announced earlier this week.

The new policy, which, if accepted by produce suppliers, would invalidate the Trust provisions of the Perishable Agricultural Commodities Act, was relayed to its suppliers via letter earlier this week, stating that the policy would go into effect Aug. 1, 2018. Though the letter clearly stated that the new payment terms “are not considered optional to Kroger”, there apparently has been some easing of that position.

The letter to its “valued suppliers” was met quickly by protest from suppliers and their trade association representatives. United Fresh Produce Association President Tom Stenzel had a conversation with an executive at Kroger and reported to other association executives that there was some movement on the issue and that Kroger wanted to get that message out.

Stenzel confirmed that conversation with the following statement to The Produce News on Friday, June 22: “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. 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 next week in Chicago. We appreciate that direct dialogue,” he wrote. “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.”

Expressing that concern was Western Growers Senior Executive Vice President Matt McInerney, who had been briefed on Stenzel’s conversation. “We appreciate that Kroger has been responsive to the incredible outcry from the supplier community.” He said. “But if this is a preference and not a demand, we would like to see specific clarification in writing that the policy does not apply to produce.”

McInerney went on to say that while he understands the opportunity some larger shippers might have to sit down with Kroger and discuss payment options, “as far as we are concerned there are no options. This new payment policy requires shippers to abandon their PACA Trust rights. Our members don’t think that is an option.”

He added that clarification in writing would allow dissemination of the policy exemption to all grower-shippers, even small operators without direct access to Kroger.

Under the terms of the PACA Trust, a produce supplier is given priority status in the event of a bankruptcy, largely because of the perishable nature of fresh produce. However, to preserve those rights, the supplier basically cannot extend payment terms beyond 30 days.

One chief financial officer of a western vegetable shipping operation told The Produce News that if Kroger’s policy was adopted throughout the industry, it “effectively shatters PACA and forces a pretty material reengineering of everyone’s balance sheets.”

He said this is a major issue for any Kroger supplier and if other retailers followed suit “it would flip the entire industry on its head.” He explained that a supplier with $1 million per week in sales to Kroger, which he said is not an abnormally high figure, would see its Kroger balance sheet grow from $4 million to $12 million, as typical industry pay is a bit less than 30 days. “That supplier would have to go out and find another $8 million in working capital. They would either have to raise capital or get a new bank line.”

He added that while a bank might extend a line, they would probably do it a higher rate considering the 90-day payment term is an added risk. If every supplier had a similar policy, this CFO indicated that there would be many, many companies that simply couldn’t raise the additional capital as the industry’s margin lines are already very thin.

He also dismissed the Kroger option of offering quick payment at a discounted rate as extremely expensive. The retailer offered that through Citibank a $1 million invoice could be paid in 10 days at a discount of 0.72 percent. A supplier of that size would effectively be borrowing $1 million every 10 days at that interest rate. On an annual basis that represents a rate of about 25 percent…an interest rate that no CFO would consider.

He added that the new payment policy is, at its core, Kroger’s attempt to raise capital on the balance sheet of its suppliers.