A war over prices will hurt small food supplier, warns Begbies Traynor

More than 100 food supplier could be pushed over edge into financial collapse as the price war between the major supermarkets heats up this year, according to the latest Red Flag Alert by insolvency specialist Begbies Traynor.

The statistics showed that the UK’s SME food retailers and suppliers have been the worst casualties so far as the supermarket giants slug it out, slashing prices while squeezing suppliers’ margins and elongating payment terms.

“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,” Begbies partner Julie Palmer said. “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.”

The firm’s research for the fourth quarter of 2014 found that 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 with 2,878 in the same period of 2013

The worst performing sector was the food and beverage manufacturing industry. Companies in this sector, many of which supply the Big Four supermarkets, witnessed a 92% increase in ‘significant’ distress, with 1,410 businesses now struggling to make ends meet, compared with 733 at the same stage a year earlier.

”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,” Palmer added.

“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.”

She warned that unless the supermarkets started treating their suppliers more fairly then Begbies expected more than 100 of these 1,410 ‘significantly’ distressed food and beverage suppliers would fall into administration before the year is up.