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Julie Palmer

Business Health Statistics

| January 16th 2015

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Supermarket price war could force food suppliers to go bust

Latest Red Flag Alert Report for Q4 2014

  • Number of smaller food suppliers experiencing financial distress has more than doubled this year
  • Ongoing price war could change the structure of UK food supply industry forever

While most of the UK’s largest supermarkets reported stronger than expected food sales over the festive period, their ongoing and brutal price war is pushing many food suppliers and smaller high street grocers to the brink, warns business recovery specialists Begbies Traynor.

According to Begbies Traynor's Red Flag Alert research for Q4 2014, which monitors the financial health of UK companies, the UK's food retailing industry experienced one of the sharpest increases in ‘Significant’ financial distress of all sectors monitored, rising 58% to 4,552 struggling businesses compared to the same quarter last year (Q4 2013: 2,878).

Meanwhile the worst performing sector was the UK’s food and beverage manufacturing industry. Companies in this sector, many of which supply the major UK headquartered supermarkets, witnessed a colossal 92% increase in ‘Significant Distress’, with 1,410 businesses now struggling to make ends meet, compared to 733 at the same stage last year.

The statistics show that the UK’s SME food retailers and suppliers have been the worst casualties so far of the enduring price war between the UK’s supermarket giants, who have been slashing prices, while squeezing suppliers’ margins and elongating payment terms in a bid to offer consumers the lowest prices available in today’s competitive retail environment.

Further analysis reveals that the number of smaller food retailers in ‘Significant’ distress rose by 61% to 4,388 in Q4 2014 from 2,731 last year (representing 96% of all struggling food retailers in the UK), while there was a 113% increase in the number of SME food and beverage manufacturers suffering ‘Significant’ distress in Q4 2014 to 1,240 from 582 last year (88% of the total).

Partner, Gary Lee provides video commentary and a regional comparison.

Julie Palmer, Partner at Begbies Traynor, said:

"In recent weeks, Asda and Sainsbury’s have promised £450m worth of price cuts between them, Morrisons has started a search for a new CEO who can return them to growth, while Tesco has set out major plans to reassert its dominance over the UK grocery market. With the battle lines drawn, the supermarket price war is intensifying and it looks like the UK’s smallest food suppliers are bearing the brunt.

”A perfect storm is brewing for SME food suppliers at the bottom of the food supply chain, with many suffering a double hit from larger suppliers demanding “loyalty” payments as well as vanishing margins as a result of the inevitable aggressive supermarket price war. Adding to their misery, the UK’s food producers and suppliers have failed to see any benefit from the rise in popularity of the German discounters Aldi and Lidl, since much of their canned and packaged stock is sourced from overseas.

“With shocking increases in distress among the supermarkets’ main suppliers, the largest chains need to tread very carefully if they want to prevent a new crisis creeping up through their supply chain. Even the Government’s appointment of a grocery code adjudicator last year seems to be having little impact, with industry insiders reporting that the new watchdog lacks real powers and is still failing to protect producers from being squeezed by the supermarkets.

“Unless the supermarkets start treating their suppliers more fairly and find longer term solutions to their cost cutting exercise, we expect that more than 100 of these 1410 ‘Significantly’ distressed food and beverage suppliers will fall into administration before the year is up. Worryingly, with 3.6 million people employed in the UK food supply chain, the economic and political risks associated with the current price war are now reaching boiling point ahead of May’s election.”

Commenting on the rise in distress among food retailing SMEs, Julie Palmer added:

“Although Tesco plans to close some of its local Express shops this year, across the rest of the industry takings at smaller stores in town centres are up considerably, demonstrating consumers’ preference for convenience, shopping little and often with more frequent shops but smaller basket sizes.

“With mini-supermarkets on every corner and Aldi and Lidl opening local shops as fast as they can find the sites, competition among food retailers on the high street is still rife, making life all the more difficult for smaller, independent convenience stores who don’t have the bargaining power with suppliers or the access to premium locations afforded by their larger peers.”

Critical problems by Sector:

Sector

Q4 2013

Q4 2014

Percent change

Q3 2014

Q4 2014

Percent change

Automotive

88

82

-7%

92

82

-11%

Bars & Restaurants

136

138

1%

130

138

6%

Construction

545

375

-31%

435

375

-14%

Financial Services

59

63

7%

75

63

-16%

Food & Bev Mfr Beverage Mfrg

15

12

-20%

18

12

-33%

Food Retailing

29

39

34%

48

39

-19%

General Retail

153

133

-13%

134

133

-1%

Hotels

26

34

31%

34

34

0%

Ind Transport & Logistics

68

53

-22%

63

53

-16%

Leisure

29

18

-38%

24

18

-25%

Media

51

45

-12%

57

45

-21%

Other Mfrg

194

155

-20%

173

155

-10%

Others

118

88

-25%

106

88

-17%

Printing & Packaging

27

17

-37%

21

17

-19%

Professional Services

68

69

1%

87

69

-21%

Real Estate

232

194

-16%

189

194

3%

Sports & Recreation

27

16

-41%

27

16

-41%

Support Services

161

146

-9%

141

146

4%

Telecoms & IT

84

73

-13%

64

73

14%

Travel & Tourism

47

28

-40%

35

28

-20%

Utilities

4

5

25%

2

5

150%

Wholesaling

110

70

-36%

98

70

-292%

All Sectors

2,271

1,853

-18%

2,053

1,853

-10%

Critical problems by Region:

Region

Q4 2013

Q4 2014

Percent change

Q3 2014

Q4 2014

Percent change

East of England

240

213

-11%

189

213

13%

London

475

423

-11%

437

423

-3%

Midlands

407

282

-31%

355

282

-21%

North East

81

54

-33%

78

54

-31%

North West

325

283

-13%

316

283

-10%

Nrthn Ireland

56

47

-16%

68

47

-31%

Scotland

157

106

-32%

129

106

-18%

South East

645

554

-14%

566

554

-2%

South West

188

155

-18%

171

155

-9%

Wales

103

68

-34%

91

68

-25%

Yorkshire & Humberside

239

168

-30%

197

168

-15%

All Regions

2,916

2,353

-19%

2,597

2,353

-9%

Julie Palmer

About the author

Julie Palmer

Regional Managing Partner

Meet our Team of Experts

Julie is a law graduate who qualified with Price Waterhouse in 1994. Julie joined Smith & Williamson in 1997 and became a partner in 2001. With Mike Stevenson, Julie set up Middleton Partners offices in Salisbury and Southampton, both of which are now part of Begbies Traynor.

Julie is a member of the Insolvency Practitioners Association and the None Administrative Receivers Association and is a Fellow of The Association of Business Recovery Professionals. Julie deals with all aspects of Corporate Recovery and turnaround work and takes all form of personal insolvency appointments.

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