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Kroger announces new PACA Trust busting policy

In an undated letter to its “Valued Suppliers,” which was received this week by many produce shippers, The Kroger Co. announced a new 90-day payment policy that would effectively cause produce suppliers to waive their PACA Trust rights.

The brief letter, signed by four Kroger executives, began by informing suppliers that changes would be enacted unilaterally within 60 days. It stated, “I’m writing to inform you that as of August 1st, 2018, The Kroger Co. will standardize its payment terms to Net 90 (bold face in the letter) across all aspects of our business effective immediately.”krolog

The giant retailer explained, “We are making this change to (a) smooth our cash conversion cycle, (b) more efficiently manage our working capital in order to re-invest in our business, and (c) harmonize our terms with industry peers.”

Disbelief, then anger
Initial produce industry response was disbelief followed by anger. Matthew McInerney, senior executive vice president of Western Growers Association, said his phone and email accounts were ablaze with activity as many shippers received the letter on Monday, June 18. He said acceptance of those terms by any produce supplier would result in a waiving of the PACA Trust rights, as that law has specific rules with regard to terms of payment.

Basically if a supplier agrees to terms beyond 30 days, Trust rights are no longer applicable.

“We are advising our members that waiving their PACA Trust rights is not a good business practice,” McInerney said.

He explained that the Trust provision of the Perishable Agricultural Commodities Act was passed by Congress and enacted into law in 1984 as a way to ensure that produce suppliers would be first in line to receive the receipts from their sold produce in the event of a bankruptcy.

Congress reasoned that produce is different than other consumer goods, as its perishability means it is sold into commerce soon after production. It does not linger on a shelf for months, or even weeks, awaiting final sale.

As a buyer and then reseller of that produce, any company along the supply chain is required to pay the invoice in a prompt manner. When the act was first passed more than a half century ago, prompt pay meant within 10 days. Those were also the terms when the Trust provision was added, though subsequent regulations allowed for expanding those terms to as long as 30 days.

Any supplier that extends terms beyond that point is no longer protected by the provisions of the Trust. The reasoning is that a supplier extending terms beyond customary practice could be considered complicit if a bankruptcy subsequently occurs.

While no one suggested that financial trouble is the reason Kroger is instituting this new policy, McInerney said “no one ever needs PACA Trust protection … until they do.”

Ripple effect
There is also the ripple effect that could be created by the policy. Major suppliers of product to Kroger anywhere along the supply chain could have their own cash flow problems if they have 90 days of invoices waiting to be paid.

McInerney said fresh produce is unique in that it turns over quickly and provides funds to retailers and other sellers in very short order. “Fresh produce does not languish on a shelf causing cash flow problems,” he said. “It is not the problem. It’s just the opposite.”

While Kroger pointed to the desire to “harmonize our terms with industry peers,” McInerney said his conversations with multiple shippers revealed no industry peers with a similar policy for fresh produce.

One industry source had heard of a similar policy for consumer product goods by at least one or two of the giant retailers, but it did not apply to fresh produce.

Kroger’s letter did note that it was offering a quick pay solution to its suppliers through Citibank. Its letter said this service was available “at a very small discount. It relayed that a sample discount on a $1 million invoice paid on the 10th day would be less than 0.72 percent or $7,200. Presumably, discounts would be at a higher percentage rate with a smaller invoice amount.

Kroger made it clear that the new policy was not negotiable, as it stated that while the early payment plan was optional, it was 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.”

McInerney said the existence of the letter does not violate PACA Trust provisions nor does it allow the unilateral changing of contracted terms. He said that legally, suppliers will be operating under the terms of their current contract until such time that the contract expires or they sign a contract that supersedes it.