Debenhams in new ‘Santa tax’ row

Debenhams in new tax row

Debenhams has angered its suppliers in the run-up to Christmas for the second time in three years after controversially demanding a discount in return for bringing payment terms closer in line with the industry standard, reports The Telegraph.

In recent weeks, the department store chain has contacted suppliers asking for a reduction of between 1 per cent and 2 per cent on bills in exchange for paying them 30 or 60 days earlier than their current terms.

In 2013, Debenhams sparked an outrage after forcing some suppliers to cut their prices by at least 2 per cent just eight days before Christmas. The controversial move was dubbed the “Santa tax”.

In this recent letter seen by The Sunday Telegraph, Debenhams says that the window for shorter payment terms will last only for a set period between Nov 24, 2015 and May 26, 2016. The scheme will come into effect from this Monday.

“The working capital benefits associated with early payment are subject to suppliers agreeing an additional discount on the value of the associated invoices”, the letter says.

A person close to Debenhams said that it was a “completely optional scheme” that was offered in response to requests by suppliers.

But one supplier, speaking on the condition of anonymity, said they felt under pressure to enter the scheme to maintain a relationship with the department store chain. “We’re being asked to shave off the price again,” he said.

Nick Bubb, the independent retail analyst, said: “It smacks of a tough trading period at Debenhams, and that they are looking to protect their margins. It’s actually outrageous that they have to wait longer than 60 days at the moment.”

Sources close to Debenhams claim that the average time it takes to pay suppliers is around 60 days. However, in 2013, suppliers were asked to extend their payment terms from 90 days to 120 days. The industry average of the top 25 listed retailers is around 42 days, according to an analysis by The Sunday Telegraph.

Tesco’s chief executive Dave Lewis recently recently announced that Britain’s biggest supermarket will reduce terms for payment of its smallest suppliers from 45 days to 14 days to help usher in a new era of transparency at the grocer. The 14-day terms are below the food industry standard of 28 days.

Unlike its retail rival John Lewis Partnership, Debenhams has failed to sign up to the Government’s Prompt Payment Code, which has been strengthened to promote a 30-day term as standard, with a 60-day maximum limit.

The Government is also planning to force big businesses from April next year to publish their standard payment terms and the average time they to take to pay their bills as a matter of public record.

Mike Cherry, policy director at the Federation of Small Businesses, said: “We are concerned and disappointed by this latest example of poor payment practices from Debenhams. Sadly, it is not the first time we have seen the retail giant behave in this way and would have hoped that, by now, it would have improved its behaviour.

“The FSB has consistently condemned the practices of some large companies towards their supply chains. Small businesses rely on the integrity of their bigger customers when it comes to honouring agreed contracts and paying up in full and on time. They often lack the clout, funds or time to seek adequate redress in these circumstances.”

The previous Debenhams letter came during a disastrous period of trading two years ago when it issued a string of profit warnings that led to the departure of its finance director, Simon Herrick, who was blamed for the letter.

Debenhams chief executive Michael Sharp announced last month that he would step down after 25 years at the company. He has insisted that his exit from the company was part of a plan to leave after five years at the helm but it followed shareholder unrest at the level of promotions.

News of his departure came amid a slight increase in pre-tax profits to £113.5m for the year to August despite complaints from some high street retailers of a tough autumn due to the wet weather – and they are now braced for a period of heavy discounting, starting with Black Friday.