Fewer companies are falling into administration

The number of food and drink companies having to call in the administrators is on the decrease, data from Grant Thornton shows. 

A total of 70 companies went into administration in 2012, but that number plummeted to 45 last year. The downward trend has continued into 2014, with only 21 companies calling in the administrators in the first half of the year.

This should be cause for celebration. The economy is coming out of recession and it is therefore only natural that fewer companies should be struggling. But this is not what is actually going on.

The grocery market is in fact experiencing weaker sales growth than at any time during the so-called ‘Great Recession’. Indeed, market growth is at its lowest level in 11 years, according to Kantar.

As the supermarkets fight over a shrinking pie, suppliers are caught in the middle. Life is especially difficult for brand owners. Their sales are being hit by shift in trade from the big four supermarkets to the discounters. The likes of Aldi and Lidl offer a far more limited range of brands that the leading supermarkets – therefore affording brands much more limited opportunities.

The impact was clear to see in Premier Foods half-year results last week. The owner of brands like Mr Kipling and Sharwood’s said underlying sales had fallen 6.1% on last year.

The market fundamentals would suggest there should be more, not fewer business failures. So why are fewer companies calling in the administrators? The short answer is low interest rates.

Cheap debt has allowed otherwise weak businesses to keep their heads above water. Availability of financing has also improved gradually, but significantly since 2008 and food and drink companies now have a broader range of options available. Non-bank lenders are entering the market. Whether it be crowdfunding for smaller businesses or institutional investor for larger ones, these lenders often offer longer-term financing options and potentially lower levels of interest.

The scary thing for the food and drink industry is that it faces the very real prospect that interest rates will rise. Although the Governor of the Bank of England has been at pains to reassure the country that rate rises will be gradual, unlike other sectors of the economy, there is no market recovery in sight that would compensate. Companies face falling sales at home and the strength of the rest of the economy is bolstering the pound and making it harder to grow exports. Things could well get worse before they get better for UK food and drink.