Supermarkets ramp up pressure on UK food sector

The number of UK food suppliers experiencing “significant” financial distress has risen by over 50%, according to research from professional services firm Begbies Traynor.

The escalation of the supermarket price war, which has seen supermarkets cut shelf prices and tighten payment terms with suppliers, has affected food suppliers, independent grocers and farmers, Begbies Traynor has warned.

Begbies Traynor’s Red Flag Alert research for Q2 2015 found a 54% increase in the amount of food and drink suppliers suffering “significant” financial distress, rising to 1,622 in the quarter from 1,052.

SME brands represented 89% of these companies under pressure. Begbies Traynor said the 54% increase was the largest year-on-year growth in distress of all sectors monitored by its Red Flag research.

Food and drink manufacturers that have fallen into administration in recent months include Johnstone’s Just Desserts, Pomegreat and Mariner Foods.

UK food retailers are also experiencing financial pressures, with those under pressure rising by 38% to 5,258 struggling businesses over the past year (up from 3,804 in Q2 last year), 97% of which are SMEs.

Julie Palmer, partner Begbies Traynor, said: “With Tesco recently hailing the success of its Q1 performance after four rounds of price cuts since January and even Waitrose now joining the sector’s discounting foray, clearly the novelty of a bargain continues to resonate with consumers. Unfortunately the retail environment is set to become even bleaker for the UK’s small food suppliers who are facing the harsh reality that price slashing is not just a short term pain but something that’s here to stay.

“The supermarkets have managed to successfully rebase their own models by reducing product ranges, moving away from bulk-buy offers and squeezing supplier margins still further, while failing to clean up their act on late payments, taking more than a month longer than agreed terms to settle debts with suppliers. Some are even looking into launching their own food manufacturing facilities to give them even tighter control over costs and the ability to offer still more aggressive pricing - signalling yet another nightmare scenario on the horizon for the UK food supply chain.

“While it’s a welcome development that the Groceries Code Adjudicator now has the power to fine supermarkets up to one percent of their UK turnover if found to be in breach of the Code, this is unfortunately unlikely to have a major positive impact for the supply chain, as a recent sector study found that almost one in five suppliers to the UK’s 10 biggest retailers are reluctant to raise any issues with the industry regulator for fear of retribution from their largest source of income.”

Levels of ‘Significant’ financial distress (Q2 2014 vs Q2 2015)