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On Trade Special: Late Payments

Published:  23 July, 2008

Before I landed a job reporting on the world of wine for Harpers, one of my tasks in life was to sell wine at a restaurant near the Royal Courts of Justice in London. Soon after opening, it was apparent that the legions of lawyers who populate Chancery Lane were not turning up in the expected numbers.
The restaurant soon ran out of money - although it was almost half a year later that it began to run out of most of its wines. It all became rather problematic: May I strongly recommend this wine, sir? It has been drinking very nicely.

Oh, you want that one. Well, I'm afraid we don't have that one, nor that one, or that one'

The sad truth is that many wine companies are used to restaurants delaying on their payments, and then delaying some more. Withholding the cash for more than two months rarely stops the cases rolling in. The problem of late payments is, of course, hardly a new one, but it remains an important issue, especially for small on-trade suppliers for whom cash flow is paramount.

Despite an apparent rise in the level of professionalism in both the restaurant business and the trade that supplies it, it's an aspect of the on-trade that refuses to to go away. It's something that makes Douglas Wregg, sales and marketing director at the medium-sized importer Les Caves des Pyrene, very angry: Many years ago, we didn't even have anyone to chase payments. Now you need at least one credit controller just to phone people up and ask where the money is, and the restaurateurs can be very rude to them. Our standard payment term is 30 days, but in the real world that doesn't happen very often. We usually have to start phoning them up at around 45 days, and then it usually takes a little longer.'

Failing to get hold of the capital that is rightfully yours can have a destabilising effect on your business. As Patrick Sandeman of Lea & Sandeman says: It doesn't just affect our cash flow, it also affects the way in which we are able to do business. If we are asked to perform certain duties for our customers or meet certain deadlines, we are much more likely to do that for someone who is willing to pay us on time.'

Wregg concurs: I understand that they need to maximise their cash flow, but it comes to a point where our cash flow is affected. We need to pay small growers around Europe maybe once or twice a year, and they depend on us to pay on time. You feel that some of these restaurateurs are very selfish and they don't understand that their actions affect people right down the supply chain.'

If a restaurant has a crafty accountant, it becomes a lot more difficult than simply demanding payment. Hew Dalrymple, formerly both financial and marketing director at Waverley, one of the UK's biggest on-trade suppliers, says: There are some operators - and expensive restaurants can be just as

bad as tenanted pubs - who like to play games. They'll query a bottle of water on a five-figure invoice and refuse to pay until the "problem" has been sorted out. Which can take a while.'

All those asked agreed that no sector of the on-trade was particularly worse than any other, while on the restaurant side most said that the big chains were generally worse than independent operators. Wregg even had to become rather creative when Planet Hollywood became reluctant to part with its cash. They delisted us since they were launching a new list and menu, which is fair enough, but they were three months late in paying their bills. I had to phone up and threaten that we would turn up on the big relaunch night and take all

the chairs, even if the journalists and celebrities were sitting on them, to the value of the bill. Magically, they paid the next day, all 30,000, so they clearly had the money.'

Taking advantage of favourable terms

It's not totally the fault of greedy restaurants, however, since there are many wine companies who are perfectly willing to offer extended periods of credit (or are too scared of losing business to clamp down hard on late payers), meaning the customer will naturally want the same terms from all of its suppliers.

As Andrew Bewes, commercial director at Liberty Wines, says: There are some companies, particularly in the Italian sector, who use extended credit as part of their sales armoury. I suppose they take the view that money is cheap and, if they know they will eventually get paid, it's a cost worth bearing. It does make it a little difficult for others, but you just have

to take the decision whether to talk to customers who demand those terms. We take the view that we won't.'

Wregg adds: Some companies offer terms of 90 days or 120 days, and some are saying just pay for what you sell, on

a depletion basis. I can't see how you could do that for more than a couple of customers, though. Otherwise you'd just spend your time counting bottles.'

In truth, most wine companies appear to feel that late payments are just par for the course when it comes to the wine business, and the important factor is how you manage them. Michael Saunders, joint managing director of Bibendum Wine, even claims it is not a serious problem. It's very much to do with the attitude of the supplier,' he says. If you are firm and fair, the customer will generally give you the service back that you give to them. You have to set up the terms in advance and stick to them. If you are weak as a supplier and consistently let them pay late, then they will take advantage of that.'

Dalrymple says that a strong credit-control department is central to preventing late payments becoming a problem for your company. Everything depends on your credit-control department. It has to be strong and well run, and it is very important that you make sure that anyone you start to do business with is properly vetted first. There are lots of people you can go to for information, and other suppliers are pretty good at sharing this type of information with each other. You also need to get good references. If it's a start-up, then you need to make sure they have good management in place.'

Balancing sales and finance

According to Bewes, it is also important to make sure the credit controllers are not too distant from the sales team' and that the sales guys are not selling to unsuitable customers or offering terms that are not company policy just to get on to an elusive wine list. The sales guys have to understand that a sale doesn't finish when the customers agree to take it. It finishes when the goods have been paid for.'

Dalrymple makes similar points. You always get pressure from the sales team, who will say, "I've got this great account where we are going to get tons and tons of business", but you need a strong credit-control department that will say "No" or demand a cash relationship.'

So, with the on-trade widely expected to be heading for a downturn (if it hasn't already hit) due to a struggling economy and the effect of the London bombs on tourist spend in the capital, is the problem going to get worse? According to Dalrymple, maybe: It gets worse when business is tight, but recently the business environment has been relatively benign, whatever people are saying. Usually, the difficult period is straight after Christmas, when the restaurant gets its biggest bill of the year. If they haven't traded as well as they thought they might and capital is tight, then you can have problems. I would say, however, that I don't think the bombs will have much effect. It will take a proper downturn to really affect

a restaurant's ability to pay.'

Sandeman has noticed a worsening of the late-payment problems in recent months, but he puts it down to increased bullying and bad management rather than anything recessionary. We put them on stop since they haven't paid

on time, and then you get the old battle between the sommelier who wants his stock and the accountant

who wants to delay paying.'

Another major gripe is that restaurants are increasingly asking for extra inducements to stock wines - staff trips, free stock and promotional payments - without improving their payment terms. Wregg says that this combines to make it harder and harder for those who aren't among the big guys. If they paid on time, it would be easier to offer these things. I want to offer a full service, but they have to be realistic about what you can do. If you've got big brands like Waverley, a Champagne house or even someone like Bibendum, then these costs can come out of marketing budgets or be paid for by the producer. Our producers haven't got budgets, so it comes directly from our margin. We are having to look outside wine, at distribution, office costs and other aspects of our business, so we can stay competitive.'

Saunders is more relaxed about this type of activity. Free wines and other activities are pretty much par for the course. Some suppliers do it well, others don't. It's all about growing the wine category in general and encouraging your customers to push wine to their customers, which is good for everyone, really.'

It's important to remember, however, that, as Bewes says, running a restaurant can be a marginal business'. Paying late

is sometimes the only option available to the restaurateur. As one restaurant manager, whose premises got into trouble soon after the Millennium, told Harpers: The company probably expanded too quickly and we weren't getting enough cash flow from the new branches. We wanted to pay the wine suppliers but we didn't have enough money. And, to be honest, food was more of a priority.'