The battle between the UK’s biggest supermarkets to lower prices and win back customers from Aldi and Lidl has led to a 54% jump in the number of food suppliers in “significant” financial distress.
Conditions in the food retail industry have never been tougher for the UK’s smallest suppliers, independent grocers and farmers as the largest supermarkets slash prices and delay payments, warned Begbies Traynor.
According to the business recovery firm’s latest Red Flag Alert research for the second quarter of 2015, which monitors the financial health of UK companies, food retailers continue to experience rising “significant” financial distress, increasing 38% to 5,258 struggling businesses over the past year, 97% of which are SMEs. However, Begbies said that in reality the UK’s food supply chain which keeps these stores stocked was “by far” the biggest loser.
During the quarter, UK food and beverage manufacturers, witnessed the highest year-on-year increase in “significant” distress of all sectors monitored by the Red Flag research, rising 54%, with 1,622 companies now struggling to make ends meet – up from 1,052 at the same stage last year.
“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,” said Julie Palmer, partner and retail expert at Begbies Traynor.
“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.”
Palmer welcomed the new powers of the Groceries Code Adjudicator to fine supermarkets up to 1% of UK turnover but added it was “unlikely” to have a major positive impact for the supply chain.
Shares in Finsbury Food Group (FIF) have continued to rise following last week’s pre-close trading update in which the bakery and cake supplier said it would outperform its current EBITDA and profits expectations. Its stock was up 6.3% on Friday and has this morning climbed another 2.4% to 97.8p.
B&M European Value Retail (BME) has also risen 0.6% to 344.3p this morning after an up-down-day on Friday. Its shares opened 10p up to 350p after revealing it planned to opened 80 stores this year – up from previous guidance of 60 – but they settled back down to just 3p higher than Thursday’s 340p close as sales at the discounter slowed in its first quarter.
Premier Foods (PFD) is down 0.3% to 42.4p so far as it prepares for a trading update and AGM on Thursday.
This week in the City
PZ Cussons (PZC) will report its full-year figures tomorrow with sales and profits expected to have fallen as a result of political uncertainty in Nigeria, its biggest market.
Thursday looks to be a busy day on the markets as SABMiller (SAB) and Premier Foods (PFD) update on recent trading ahead of AGMs. And Unilever (ULVR) releases quarter two results, with a rise in half-year sales expected. However, underlying growth, after taken currency headwinds into account, is set to slow.