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Diageo Tightens The Screw On Suppliers To Improve Cash Flow — Dramming
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Diageo Tightens The Screw On Suppliers To Improve Cash Flow

by Oliver Klimek on January 27, 2015

Here is a bit of fresh news that I can not leave uncommented. The Drinks Business reports that Diageo has announced to delay payment for newly contracted suppliers from 60 to 90 days. Diageo is quoted to take this step to “improve its cash flow and drive out costs”.

I have to say this move does not surprise me at all. But it is an indicator that behind  the shiny window fronts of the Diageo headquartes the wind has become rougher too. Distillery expansions abruptly put on hold, very modest sales figures in the past quarters, and now putting the pressure on the suppliers.

I don’t even want to comment on the fact that Diageo is actually able to dictate contractual terms which normally are negotiated, if the partners are on eye level.

But you don’t stomp around on your buisness partners just for the fun of it. I am sure that Diageo is aware that many small suppliers might face serious problems when they have to wait for their money for three months. In this light this move reeks of serious financial problems, as if it were a desperate attempt to turn around a heavy tanker before crashing into a reef.

{ 10 comments… read them below or add one }

two-bit cowboy January 27, 2015 at 6:40 pm

We can’t spend the money now. We have a quarterly report to shareholders coming due soon!

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Peter January 27, 2015 at 6:48 pm

Exactly. Oh, and look…Johnnie Walker!

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Jeff January 27, 2015 at 10:20 pm

I wonder if Nick Morgan will say “it’s not about running out of money, it’s really about running out of cheques”?

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Frank Murphy January 28, 2015 at 4:07 am

The pausing of the headlong dash to build extra capacity was the first obvious sign that the land of milk and honey that was predicted from ever-rising whisky sales was a potential bubble. I would suggest that the Tellytubby distillery at Macallan will be quietly shelved also. But as has already been said, you don’t dump all over your suppliers. You might find that by hook or by crook, you might not be getting supplied much longer. If they fold, you’re gubbed. If they decide it’s not worth it any more to supply you, you’re gubbed. On the other side, the adage about riding a tiger is also applicable here…

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Ol' Jas January 28, 2015 at 4:23 am

Jeff, that was gold.

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Jeff January 29, 2015 at 11:26 pm

My thanks.

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kallaskander January 28, 2015 at 9:40 am

Hi there,

the titan of the drinks industry dries up its suppliers to improve its own cash flow?

Has steamship Baltic reported large icebergs again?

Greetings
kallaskander

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Alex January 30, 2015 at 6:04 am

I’m not sure Diageo’s partners are that small, and might not be equals either. I assume they buy millions of glass bottles, thousand of barrels, etc., especially when much of their business is not even whisky related. They probably need larger partners and some alternates, just so they don’t rely on any single one and so that they can be guaranteed the supplies they need when they need them. On the other hand, their suppliers may be dependent on Diageo for a larger percentage of their business.

They are probably the Wal-Mart of their space and can dictate terms. I am speculating that if someone is too small to be able to wait for their money, they’re probably too small to supply Diageo anyway.

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Oliver Klimek January 30, 2015 at 6:17 am

Of course Diageo needs big suppliers for the production of their big brands. But I could imagine that many minor ingredients they need for their drinks like colourings of flavourings are not made by big companies, for example. And if you look at distillery expansions much of the construction and outfitting work may well be done by smaller companies. Of course we also have to ask how small is “small”? But I know from personal experience that also companies with 500+ employees can run into cash flow problems that will break their neck.

There are a lot of small things to be done in a big company that nobody is employed for. Offices need to be cleaned, the grounds of the sites have to be cared for, it all adds up.

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Alex January 30, 2015 at 6:57 am

Sure, I defer to your expertise. However, at least in the U.S., I believe there are 2 to 3 companies that make almost all the colors and flavors. They’re not easy to make, so it’s up to large specialty chemical companies. But certainly Diageo uses local, smaller companies. I just suspect they have the power to strong-arm those suppliers into accepting any terms.

I would have expected that a company like Diageo would have made this change a while ago, unrelated to any cash flow problems. Companies like General Electric were masters at waiting as long as possible to pay, while also being able to dictate terms.

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