Premier Foods, the company behind Mr Kipling cakes, has hit the headlines for asking suppliers to hand over money – or risk losing contracts.

It has written to its suppliers asking for an ‘investment payment’ and those that fail to pay run the risk of being dropped by the food giant.

The news of the initiative was featured on BBC’s Newsnight, appears in the Daily Telegraph and was the lead item on this morning Radio Four’s flagship Today show.

Premier Foods has said it is not breaking any competition laws by adopting the controversial scheme.

Growth ideas

In a letter to suppliers last month, chief executive Gavin Darby, said: “We are aiming to work with a smaller number of strategic suppliers in the future that can better support and invest in our growth ideas."

He added: "We will now require you to make an investment payment to support our growth. I understand that this approach may lead to some questions. However, it is important that we take the right steps now to support our future growth."

The scheme, called ‘Investment for growth’, was launched by Premier Foods in July last year and follows a torrid period for one of the country’s largest food producers.

Julie Palmer, partner and retail expert at recovery expert Begbies Traynor, said: “While Premier Foods is not breaking any competition laws by demanding an ‘investment payment’ from suppliers wishing to remain on their books, this is more a question of business ethics.‎

“Smaller suppliers to the food manufacturing industry typically operate under microscopic margins, meaning that they are extremely dependent on high volume contracts with the likes of Premier Foods, to stay afloat.

Struggling

”Clearly Premier Foods has been struggling itself, announcing a profits warning in October, however this practice of bringing in millions of pounds of new ‘investment’ from suppliers to mask shortfalls in their own operations will sit uneasy with many.

"With suppliers under constant pressure to slash prices further, while accepting unreasonably elongated payment terms, the UK’s largest food manufacturers and retailers need to find a better way of balancing prices with profits, without pushing their suppliers off a cliff.”

In an interim management statement in September the company, which also makes Sharwood cooking sauces, said its sales were down by around 4% and that profits in the year ahead would be lower than anticipated.

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