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Food Firms Face Up to Financial Distress as Supermarkets Squeeze Supply Chains

Written by: Julie Palmer

Published: 19th January 2015

high street

The ongoing price wars between the UK’s supermarket chains are leaving more and more small-scale food suppliers facing financial distress, according to a new set of figures on the subject.

Begbies Traynor reports that there were almost twice the number of British food suppliers facing financial woes in the final quarter of 2014 as compared with the same period of the year before.

Supermarkets are the leading retailers of grocery produce around the country and their determination to offer eye-catching low prices to consumers is apparently taking its toll throughout the associated supply chain.

Begbies Traynor’s Red Flag Alert research for Q4 2014 shows a 58 per cent increase year-on-year in the number of food retailers experiencing “significant” financial distress. Meanwhile, the food and beverage manufacturing sector, which relies largely on supplying supermarkets, now has more than 1,400 businesses struggling to make ends meet. That figure is up from 733 recorded for the final three months of 2013.

The Red Flag figures also suggest that smaller sellers of food and drink are being hit particularly hard by pressures within the industry. Of the retailers facing serious difficulty, 96 per cent are categorised as being small-scale operations.

"In recent weeks, Asda and Sainsbury’s have promised £450m worth of price cuts between them, Morrisons has started a search for a new CEO who can return them to growth, while Tesco has set out major plans to reassert its dominance over the UK grocery market,” commented Julie Palmer, partner at Begbies Traynor.

“With the battle lines drawn, the supermarket price war is intensifying and it looks like the UK’s smallest food suppliers are bearing the brunt,” she said.

According to Palmer, smaller companies towards the lower end of the food industry supply chain in the UK are seeing their margins squeezed more and more as supermarkets look to maximise their respective share of the multi-billion pound grocery retailing sector.

In many cases, suppliers are also being tied in to unfavourable arrangements and obliged to make so-called “loyalty” payments to some of the giants of the industry.

“With shocking increases in distress among the supermarkets’ main suppliers, the largest chains need to tread very carefully if they want to prevent a new crisis creeping up through their supply chain,” said Palmer.

“Unless the supermarkets start treating their suppliers more fairly and find longer term solutions to their cost cutting exercise, we expect that more than 100 of these 1,410 ‘significantly’ distressed food and beverage suppliers will fall into administration before the year is up,” she said.

The bad news for hundreds of suppliers to supermarket chains around the country came as the supermarkets themselves recorded higher-than-expected food and beverage sales over the recent festive period. 

Julie Palmer

Julie Palmer
Regional Managing Partner

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Julie is a vastly experienced business recovery specialist and advises directors and sole traders during times of financial insecurity. She is highly regarded across the industry and is a member of the Insolvency Practitioners Association and a Fellow of The Association of Business Recovery Professionals.

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