Pepco looks to SCF to fuel expansion
European discount store operator Pepco is looking to use supply chain finance to support its expansion plans, says Alan Chitty, director of group treasury, tax and risk at the company at the Working Capital Forum Europe on 1st December.
The company is opening at least 550 new stores next year, adding to the existing 3000 shops across Europe, according to an announcement in October.
“We are rolling out a lot of new stores and have a significant capex spend – this is helping to finance that. But not only Capex…we are also utilising a lot of working capital. If we can be neutral on that, it means we are not burning up cash in order to grow,” he said.
Pepco first launched its SCF programme a year ago to help keep their business model as a discount store despite the challenges of pressurised supply chains caused by the Covid pandemic.
It needed to extend payment terms to maximise its cash position, while keeping suppliers in its key markets in India, China and Bangladesh happy and discouraging them from increasing their prices.
During the height of the Covid pandemic, the company had to increase payments from 30 days to 60 days – without the offer of supply chain finance.
The company then extended to 120 days - with the offer of joining the new SCF programme. “Effectively that made our cash conversion cycle neutral. As a discount retailer, we do not have accounts receivables…we need to balance our inventory with our accounts payable. And that is what we have achieved,” he explained.
Chitty said that there wasn’t too much resistance to the extension in payment terms from suppliers.
“[There was] not so much push back. When we are growing…the suppliers are growing. We give them a lot of volume,” Chitty said, explaining how Pepco supports its suppliers during more favourable economic conditions.
He also noted that many suppliers already factor their invoices to local companies – often paying high local bank costs.
“We were coming in at a fraction of that price,” he said.
Initially the company targeted strategic suppliers and has on-boarded more than 60 suppliers to its platform so far. Within 12 months of launch, the programme size was over $300 million, producing a working capital benefit of $150 million.
Up-take in India was very strong, he said, noting suppliers in China were initially more reluctant to join the programme given they had far more sources of local financing at preferable rates.
However, China’s real estate crisis over the past year has led to a drying up of local funding sources, leading to Chinese suppliers unexpectedly flocking to use the programme, Chitty said. “The discount rate became very favourable overnight,” he said.
Uptake among Chinese suppliers now has the potential to reach 100 percent, exceeding initial expectations of 50 percent, he said.
Using the SCF platform to support environmental, social and governance (ESG) goals is also a goal for Pepco, Chitty added.
“We want to make our supply chain more environmentally friendly,” he said, noting how the company would even look at ways of encouraging the suppliers’ suppliers to attain certain ESG standards.
All suppliers are audited every year in terms of their ethical sourcing and Pepco is looking to roll out environmental auditing as well.
He is also looking at ESG-linked SCF as well as pre-invoice financing – whether that is involving purchase order financing or guarantees.
“We also have dynamic discounting on the table – we’ve parked it for a while – but we have that vision,” he said.
To read more about Pepco’s SCF programme, click here
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