Member Article

Consequences of retail and food manufacturing companies’ difficulties

As the UK’s major supermarkets continue to conduct an aggressive price war, smaller food retailers and food and drink manufacturing companies – who might supply goods to the supermarkets - are suffering.

Prices at the major retailers are said to have fallen for 19 consecutive months, according to press reports in early December 2014.

Research by Red Flag Alert, a subsidiary of corporate insolvency and business recovery specialists Begbies Traynor, shows that the number of food retailing companies experiencing ’significant financial distress rose by 58% between December 2013 and December 2014. In the food and drink manufacturing industry, the equivalent figure rose by 92%.

The Red Flag Alert Report goes on to describe some of the possible consequences should the current state of affairs continue, or get worse. It is unclear whether the major supermarkets are in any way concerned by this data, as although they may see some of their traditional UK-based suppliers go to the wall, they would still have the option of importing from overseas. The ‘rising stars’ of the supermarket industry, such as Aldi and Lidl, already rely heavily on overseas suppliers. According to a This Is Money report, these two retailers experienced massive annual increases in sales of 25.5% and 16.8% respectively in 2014.

Julie Palmer, Regional Managing Partner at Begbies Traynor, predicted “that more than 100 … food and beverage suppliers will fall into administration” during 2015. A figure of 100 represents a significant minority of the 1,410 food and drink suppliers which the report identified as being in ‘significant financial distress’.

Ms Palmer went on to reveal that 3.6 million people are employed in food and drink supply companies in the UK, and suggested that widespread job losses could damage the economy as a whole.

Accountants Moore Stephens revealed in November 2014 that 146 food producers went bust in the UK in the 12 months to September 30 2014, compared to 114 in the year to September 2013. Over the same period, liquidations in all sectors fell by 8%, demonstrating the particular pressures that this one industry is facing.

“The supermarkets are going through the bloodiest price war in nearly two decades and are using food producers as the cannon fodder,” said Moore Stephens partner Duncan Swift, the leader of the Food Advisory Group at the accountancy firm.

“UK supermarkets are trying to compete on price with Aldi and Lidl but with profit margins that are far higher than these discount chains. To try and make the maths work, the big supermarkets are putting food producers under so much pressure that we have seen a sharp increase in the number of producers failing,” added Mr Swift.

Moore Stephens believes that these figures do not show the true scale of the problem, as many food suppliers are sole traders or partnerships, where a business failure would not appear in official insolvency statistics. Closures of smaller food retail outlets can also be expected. Previously, these outlets might have believed that they enjoyed a lucrative niche market whereby consumers would come to them for small, convenience-type purchases. But with the likes of Sainsbury’s, Tesco and Waitrose opening their own smaller shops (Sainsbury’s Local, Tesco Express/Tesco Metro and Little Waitrose), the retail giants are starting to dominate this market as well. There are over 600 Sainsbury’s Local outlets, according to the company’s website; while Tesco claims to have almost 2,500 Express or Metro stores.

This was posted in Bdaily's Members' News section by Rick Walker .