mccoll's store

McColl’s was one of a number of retailers to issue a profit warning caused by supply chain disruption in 2021

Profit warnings at retailers and food & drink suppliers accounted for a third of all warnings issued by UK-listed companies in 2021 as supply chain disruption and spiralling inflation hit at the back end of the year, according to a new report.

More than 30% of FTSE retailers issued a warning over the year (21 warnings in total), with more than 70% of sector warnings in the second half coming from online retailers, EY-Parthenon’s latest Profit Warnings report found.

Warnings issued by FTSE personal care, drug and grocery stores also increased to 39% of the sector warnings in 2021 (11 warnings in total), with most coming from suppliers of consumer goods, including grocery producers.

In total, 203 profit warnings were issued in 2021 across all FTSE sectors, down from the record-breaking 583 witnessed in 2020 thanks to a strong post-lockdown rebound and “exceptionally low” levels of warnings in the first half, EY said. However extensive supply chain disruption and rising costs in the second half hit consumer-facing companies particularly hard.

The ending of lockdown restrictions helped grow retailers’ top lines but also created significant cost and supply chain issues in the run up to Christmas, EY added.

All seven of the profits warnings issues by retailers in the golden quarter cited these pressures in their market updates, including c-store chain McColl’s, which was hit with availability problems for important lines in December.

Overall, UK-listed companies issued 70 warnings in the fourth quarter of 2021, up 19 from the 51 issued in Q3, with a record 44% blaming supply chain disruption (compared with just 2% between 2009 and 2019), and a further 27% citing rising cost pressures.

Private label household products manufacturer McBride was forced to issue two profit warnings in the year as it struggled to pass on rising costs to its retail partner at a fast enough pace.

DTC ready meal supplier Parsley Box also struggled with availability issues, leading to a downgrading of its profit expectations.

Increased costs also led to the likes of Unilever, Reckitt Benckiser, Fever-Tree and Greggs all warning of margins being squeezed.

Silvia Rindone, EY UK&I retail lead, said: “Whilst supply chain issues are likely to continue this year, the biggest unknown for the retail sector in 2022 is how much consumers will spend and what they’ll spend it on.

“We have yet to see any major wave of retail restructurings, but there are certainly retailers that would have failed in the last two years without government assistance – even in the absence of Covid-19.

“The end of the rent moratorium in March removes the final layer of government support and it will be interesting to see how the arbitration process plays out – and how other stakeholders react to any increase in sector distress.”

Alan Hudson, EY-Parthenon partner and UK&I turnaround and restructuring strategy leader, added: “The biggest driver of warnings in 2022 is likely to be the rise in inflationary pressures and its impact on disposable incomes and margins.

“We have already recorded profit warnings relating to rising energy prices. Labour shortages and wage increases are also beginning to feature more in company concerns, especially in logistics, hospitality and healthcare – including care homes.

“We expect to see more restructuring activity in 2022 as the last government support measures fall away and businesses feel the full force of, not only economic and structural pressures, but the increasing focus on environmental, social, and governance (ESG) metrics, as funders increase their focus on supporting ‘sustainable’ businesses. The ability to demonstrate purpose and long-term value has never been so vital.”