Food Suppliers Squeezed As Recovering Supermarkets Push To Remain Competitive

Amid signs that the major supermarkets are finally turning a corner following a strong end to 2016, insolvency firm Begbies Traynor has warned that the sector’s improved position has been achieved to the detriment of its supply chain. It says thousands of food suppliers are experiencing increased levels of financial distress due to the competitive trading conditions and burden of higher costs.

According to Begbies Traynor’s Red Flag Alert research for Q4 2016, which monitors levels of financial distress among UK companies, the health of the UK’s food retailing industry is showing tentative signs of stability, with a 1% decrease in ‘Significant’ financial distress over the past 12 months (8,188 businesses in Q4 2015 versus 8,067 in Q4 2016, 98% of which were SMEs).

However, this fragile recovery appears to have come at a cost to the sector’s suppliers, who continue to bear the brunt of heavy discounting activity and significant margin pressures from buyers in the leading supermarket chains.

Begbies Traynor’s research shows that the UK’s food and beverage manufacturing industry experienced a 13% increase in ‘significant’ distress over the past year, with 5,986 businesses now struggling, compared to 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.

Julie Palmer, Partner and retail expert at Begbies Traynor, commented: “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.

“With Morrisons reporting stronger Christmas trading than forecast, and discount supermarket Aldi delivering a 15 percent 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: “However, it seems that the industry’s improved financial position is not being felt by their suppliers. Despite customers becoming more accustomed to rising food prices, unfortunately the supermarkets are 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.”

NAM Implications:
  • Where at: Surprise, surprise! Whilst pragmatic NAMs do not expect retail buyers to roll over and accept cost-price increases, some state of equilibrium will be required to minimise supplier concentration and less choice…
  • Where headed: …if fewer, more powerful suppliers emerge in the coming months
  • Effect on you: Smaller players in niche categories can survive by optimising their (realistic) place in the market
  • Action: Time to revisit fundamentals of real consumer demand vs. available alternatives to define core proposition. Then numbers, numbers, numbers to calculate cost and value and build a financial rationale