SMEs are set to suffer most in winter of insolvencies

There is no escaping the seemingly never-ending doom spiral of news at the moment.

Inflation is back at a 40-year high, interest rates are set to balloon and barely believable scenes are unfolding daily at Westminster as the government stumbles from one crisis to the next.

Mixed into this toxic cauldron, perhaps inevitably, insolvencies are on the rise, with challenger confectionery brand Doisy & Dam and online retailer The Vegan Kind both going to the wall this week.

It follows the messy collapse of health food distributors Tree of Life and The Health Store that themselves have heaped more cost pressures on small suppliers.

Unfortunately, things only look like getting worse, particularly for SMEs.

Recovery firm Company Debt this week warned 300% hikes in energy costs had put 2,500 small bakeries at risk of collapse.

In its latest red flag alert yesterday, Begbies Traynor said there were now almost 610,000 UK companies in significant financial distress. That’s an 8% year-on-year increase and 4% up on the second quarter, with more county court judgements served against businesses so far in 2022 than the whole of 2021 or 2020.

After struggling to deal with input cost inflation in energy, ingredients, labour, packaging, shipping and every other area imaginable over the course of 2022, businesses across the food and drink industry now expect to face interest rates rising to more than 5%.

For many, kept afloat by a government life raft of furlough payments, coronavirus Business Interruption Loans and bounce back support or those needing to refinance, it will prove the fatal blow as servicing debt built up to survive the pandemic becomes unmanageable.

Begbies partner Julie Palmer says directors of businesses up and down the country are now facing a decision of whether to “soldier on or give in”.

Doisy & Dam co-founder Richard Wilkinson told The Grocer his business had suffered “death by a thousand cuts”, unable to cope with the sheer scale of cost inflation hitting the business in the past eight months.

Adam Draper, MD at Nurture Brands, which rescued Doisy & Dam from administration, warned there was more to come. Shipping containers from Asia to Europe are still five times pricier than they were in 2019, the pound remains 20% down on the dollar year on year and challenger brands chasing growth are running out of cash with few avenues still open to raise more.

“I suspect this is the beginning of an intense period of sector insolvencies and consolidation,” he says.

Another industry source adds, grimly: “The Grocer is going to be very busy reporting liquidations and administrations over the next few months.”

Smaller fmcg brands are at a distinct disadvantage to the industry’s big players, which are more experienced when it comes to managing input cost inflation and have the balance sheet strength to come out winning.

For many SMEs in the sector, not used to the cycle of inflation, this will be the first time they’ve faced difficult conversations with retailers about cost price increases.

Draper says there is no offset for some small brands terrified of approaching supermarkets for CPIs on fear of being delisted. As a result, they carry on absorbing the costs until they pop.

And for those not afraid of pushing for cost recovery, they’ll likely find themselves at the back of the supplier queue as the mults prioritise the needs of the giants of the industry such as Nestlé or Procter & Gamble, which yesterday revealed year-on-year price rises of 7.5% and 9% respectively.

Thea Alexander of Young Foodies adds under-resourced buying teams at supermarkets are unable to handle the massive increase in workload as suppliers submit round after round of price hikes. “The smaller suppliers most need the buyers’ responsiveness at this time because they are the ones being squeezed every day that they don’t get a response.”

Those challenger brands who don’t control their own manufacturing are also being squeezed on the production side as co-packers pass on their own CPIs. And, unlike supermarkets, brands are powerless to resist.

All this is without taking into consideration the dramatic slump in consumer confidence and corresponding declining discretionary spend and trading down into own label.

New Chancellor Jeremy Hunt may have calmed spooked markets, but he also signalled more pain to come from his Halloween Budget to fill a fiscal black hole in the UK’s finances. Expected spending cuts, tax rises and renewed uncertainty surrounding energy bills in April is doing little to soothe worried consumers and businesses.

Of course, all this wild uncertainty provides opportunities for the brave or cash-rich. As the Warren Buffett saying goes, when there’s blood on the streets, it is time to buy.

Draper expects Nurture Brands to make more acquisitions this year, while Alexander sees bigger players sweeping up more cash-strapped challengers.

But the thought of fewer, bigger suppliers is better than the alternative of innovative brands disappearing altogether.