Pressure from government and business groups has forced Diageo to withdraw a threat to lengthen the time that it takes to pay its suppliers to three months.
The owner of Guinness, Smirnoff vodka and Baileys has promised instead to settle its bills within 60 days for all UK-based small and medium-sized companies.
Diageo had been accused of “threatening the backbone of the economy” in January when it wrote to suppliers to warn that it would extend its payment terms from 60 days to 90 on all new contracts.
Business groups, including the Forum of Private Business, called for the drinks group to be stripped of its place on the government’s prompt payment code, which promotes fair treatment of suppliers. Critics said that Diageo had broken the rules of the voluntary scheme by changing terms without consultation.
After talks with the Chartered Institute of Credit Management, which runs the code on behalf of the government, Diageo acknowledged that its letter had caused confusion.
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David Cutter, president of supply and procurement for Diageo, said: “We fully recognise the importance of SMEs to the UK economy and to the sustainability of our own business and, therefore, we will commit to a maximum 60-day term. We want to clarify that our standard supplier payment terms have not changed and no supplier would be required to move to longer payment terms in order to secure future business.”
Phil Orford, chief executive of the forum, described Diageo’s decision as a victory for common sense.
The company’s change of heart represents a significant victory for the code, which has been criticised for a perceived lack of influence over large companies’ treatment of suppliers.
The government has promised to get tougher on the code’s 1,800 signatories, with those that break its terms by pressuring their supply chain facing the embarrassment of being removed from the scheme.
Matthew Hancock, the business minister, welcomed Diageo’s decision. “Late payment can cause real havoc on a small firm’s finances,” he said, adding that a strengthened code sets 30-day payment as the norm, and 60 days as the limit.
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Mr Orford said: “We will be pressing other large business to [adhere] to the new payment guidelines and in doing so, give their suppliers the breathing space they need to grow.”