The recovery of the supermarkets has piled increasing pressure on the supply chain, with almost 6,000 food suppliers experiencing increased levels of financial distress, according to recovery firm Begbies Traynor.
Tesco and Morrisons have made significant progress in turning their respective businesses around in the past year. Begbies confirmed this morning that the food retail sector had “finally turned a corner” following a strong end to 2016.
Its latest Red Flag Alert research, which monitors levels of financial distress among UK companies, for the final quarter of 2016 revealed the health of the UK’s food retailing industry was showing tentative signs of stability, with a 1% decrease in ‘significant’ financial distress over the past 12 months (8,188 businesses versus 8,067 a year earlier).
However, the recovery has come at a cost to the sector’s suppliers, who continue to bear the brunt of heavy discounting activity and significant margin pressures, Begbies added.
Food and drink makers experienced a 13% increase in ‘significant’ distress over the past year, with 5,986 businesses now struggling, compared with 5,312 at the same stage last year.
The research indicates that small suppliers have been most affected, with SMEs making up 94% of companies in distress within the sector.
“Following a fundamental shakeup of the UK supermarket industry over the past 18 months, which has seen countless investor revolts, numerous CEO resignations, a renewed focus on customer service and drastic cost cutting, the largest players in the UK food retail sector are finally seeing the turnaround that they have been working towards,” said Begbies partner Julie Palmer.
“With Morrisons reporting stronger Christmas trading than forecast, and discount supermarket Aldi delivering a 15% rise in December sales, early signs indicate that the leading lights of the sector have turned a corner, with expectations that Sainsbury’s, Tesco and Marks & Spencer will continue this positive trend when they announce their updates later this week.”
She added that despite an improved financial position, supermarkets were still playing “hardball” with their supply chain when deciding who takes on the burden of higher manufacturing costs, rising fuel prices and adverse currency fluctuations.
“Our research shows that the UK’s smallest food suppliers are struggling most in a market beset by miniscule margins, lengthy payment terms and overzealous cosmetic specifications for fresh produce, with thousands of farmers, producers and food manufacturers experiencing higher levels of financial distress as a result,” Palmer said.