Inflationary pressure is set to lead to an increase in restructuring activity in 2022 as the final layers of the government safety net are pulled, financial advisers at EY have warned this week.
Supply chain disruption and spiralling inflation - which surged to its highest level in almost 30 years in December – hit the retail and food & drink industries particularly hard in the latter part of 2021, leading to a string of profit warnings.
The latest report by EY-Parthenon this week revealed profit warnings for consumer-facing sectors accounted for a third of all downgrades issued by UK-listed companies last year.
More than 30% of FTSE retailers flagged that profits would be lower than expected over the year (21 in total), while warnings issued by personal care, drug and grocery stores also increased to 39% of the sector warnings in 2021 (11 in total), with most coming from suppliers of consumer goods, including grocery producers.
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 said.
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.
Alan Hudson, EY-Parthenon partner and UK&I turnaround and restructuring strategy leader, said the rise in inflationary pressures and its impact on disposable incomes and margins would be the biggest driver of warnings in 2022.
“We have already recorded profit warnings relating to rising energy prices,” he added. “Labour shortages and wage increases are also beginning to feature more in company concerns, especially in logistics, hospitality and healthcare.
“We expect to see more restructuring activity in 2022 as the last government support measures fall away.”
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.
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.”