Big Companies Don't Pay Their Bills on Time
One of the more interesting business phenomena of the past decade has been the flow of cash in and out of Amazon.com. A metric called the cash conversion cycle measures the lag between when companies have to pay their suppliers and when they get paid by their customers. At department store chain Macy’s, it’s 71 days. At the legendarily efficient Wal-Mart, 12 days. At Costco, with its limited inventory and super-fast turnover, it’s just four days.
At Amazon, the cash conversion cycle was negative 24 days in 2014. That is, on average the company took in cash from customers 24 days before it paid it out to suppliers. By Amazon’s historical standards, that wasn’t even all that impressive:
Amazon is a low-margin retailer that needs cash to keep fueling its voracious investment needs. Getting paid three-plus weeks before it pays people is crucial to generating this cash. You could call it a strategic imperative.
How does Amazon make this happen? Here’s the explanation that the company gives every quarter in its earnings reports:
Because of our model we are able to turn our inventory quickly and have a cash-generating operating cycle. On average, our high inventory velocity means we generally collect from consumers before our payments to suppliers come due.
But Amazon’s inventory velocity isn’t anomalously high. Its 45 days of inventory outstanding is about the same as Wal-Mart’s, and is higher than Costco’s 30 days. That’s still impressive, given how many more items Amazon stocks than those retailers do. But it doesn’t explain why its cash cycle is negative while theirs is positive. No, what explains that is how long it takes Amazon to pay people.
Now, part of this may have to do with Amazon’s roots in books, where publishers have long bent over backward to keep big retailers happy, and part is a natural result of being a big retailer with lots and lots of small suppliers (the supplier ranks are more limited at Wal-Mart and Costco). But the company is also clearly making a choice to boost its own cash flow by making life harder for its suppliers.
As you can see from the above chart, Wal-Mart’s days payable outstanding have been rising, too -- and it has recently proposed making payments even less frequently. Delaying payments to suppliers is fashionable. As Stephanie Strom reported in the New York Times in April:
In the past, extended payment terms often were a signal that a company was experiencing worrisome cash flow problems, but these days big, robust companies are imposing new schedules on suppliers as a business strategy, analysts say.
Strom attributed the popularity of the tactic to the successes of Brazilian private equity firm 3G, which put it to use after InBev, which it controls, bought Anheuser-Busch in 2008. These days, Anheuser-Busch InBev makes Amazon look like quite the prompt payer.
Different industries have different customs, and comparing these metrics across them can be problematic. Anheuser-Busch already had a slightly negative cash conversion cycle even before InBev took over, so it was already in a different boat from most businesses. Still, the change since 2007 is dramatic. That year, Anheuser-Busch got paid eight days before it paid its suppliers, on average. In 2014, the gap for AB InBev was 176 days.
For a private equity firm such as 3G, cash is king, so getting it sooner and paying it out later is something to strive for. In fact, I would attribute the trend toward late payment not just to 3G but to the broader rise of this cash-flow mindset, brought on by the rise of private equity, the success of cash-focused investors such as Warren Buffett and the generally increasing sophistication of corporate financial executives.
Still, taking it to the lengths that AB InBev has is pretty obnoxious. The suppliers who have to deal with these extended payment terms tend to be smaller and have fewer resources than the companies delaying payment. Even with the extended terms, 47 percent of the suppliers surveyed earlier this year by Taulia, a company that facilitates supplier payments, reported that their customers paid later than promised. Maybe this is one explanation for why big companies have been on the rise and business dynamism on the decline.
This trend hasn't gone unnoticed in government circles. In the U.S., President Barack Obama last year announced a SupplierPay initiative in which a couple dozen big companies “committed to pay small suppliers faster or help them get access to lower cost capital.” Amazon and AB InBev weren’t on the list, but Apple -- which also takes quite a while to pay people -- was. The U.K. launched its own Supply Chain Finance scheme in 2012.
In general, says Bob Glotfelty, the director of marketing operations at Taulia, the European solution to the slow-payment problem has been to arrange financing for suppliers. In the U.S., discounts for prompt payments are the favored approach. In March, the Marketing Agencies Association in the U.K. tried another tactic, calling on its members to “strike” in protest against the stingy practices of AB InBev. But none of them were willing to climb out on that particular limb. I’d like to offer another approach -- public shaming. Here are three more big companies that have been getting progressively worse about paying their suppliers:
It’s no coincidence that these three companies are in mature industries, and aren’t seeing much revenue growth. Such conditions turn chief executives’ thoughts to financial engineering, which is what slowing payment to suppliers amounts to. Amazon can at least justify its aggressive cash management as a way to finance growth; at Procter & Gamble, Mondelez and Kimberly-Clark, the money is more likely to go to stock buybacks. I’m all for slow-growth companies giving cash to shareholders, but do they really need to be doing that before they pay their suppliers?
On the Bloomberg terminal, where I got this data, the term is “accounts payable turnover days,” but I went with “days payable outstanding” because it’s more widely used. Also, Wal-Mart’s fiscal years end in January, so I put the company’s FY 2015 data into 2014, and so on.
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