On the face of it, grocery is not suffering unduly in recession. Yes there are winners and losers, but overall it appears a more benign environment than other consumer sectors. However, a two-tier market is emerging that favours the big and financially strong.
The multiples and multinational brand owners have been able to respond to the changed market circumstances. Consequently sales and profits are largely holding up, share prices are down a bit rather than a lot and they remain financially strong. Indeed, some of these companies appear to be bigger and more secure than most banks and many are raising substantial amounts of capital from the bond market to increase the level of their medium to long-term capital and reduce their reliance on the banking market.
Outside this privileged group it is a much tougher world with changes taking place in consumer and customer behaviour, the weakness of sterling, rises in commodity prices and other costs and, for those higher up the supply chain, the reduction in availability of credit insurance.
Furthermore, those that have significant levels of debt and/or other forms of leverage such as pension funds and rent can find themselves under even more pressure, particularly so where their principal competitors are financially stronger and seek to exploit this advantage.
Companies unable to access the bond markets (most) are largely reliant on the banking system to provide loans to fund working capital, capital expenditure and clearing, and other ancillary services to enable them to operate effectively on a day-to-day basis. But, as we know, the banks are not in great shape with most facing their own capital constraints and being distracted by issues like working out what their new owners or investors want, dealing with stressed borrowers, and by their own reorganisations and restructurings. This means that, at the moment, it can be difficult, even for successful companies, to engage with banks to extend, modify or refinance existing facilities, let alone seek new ones; and current share prices make it deeply unattractive for most quoted players to raise new equity capital.
So how can companies deal with this scenario? Well, they need to think a long way ahead to anticipate any need to change their existing facilities so that there is plenty of time to deal with their banks; after assessing the likely response of the banks, they need to consider all options before presenting the bank with a solution rather than a problem - and enough time to consider it properly.
It is not impossible, in our view, if handled sensibly and with early and open communication. Indeed, we saw two rather different examples last week with Northern Foods replacing its existing facilities that were due to mature next year with a smaller facility repayable in 2012; and Finsbury putting in place a package of new facilities including a number of asset-backed loans to replace its existing arrangements.
Making these sorts of changes comes with significant cost in terms of much greater margins and substantial fees. Better, however, to get the appropriate financial structure in place to allow the business to invest and respond to market opportunities than having to rush off to the bank at short notice. That is when it gets really expensive.
Clive Baker is MD of McQueen.