After a major shakeup of the UK supermarket industry last year, new research shows that the domestic food retail sector may have finally turned a corner following a strong end to 2016. However, Begbies Traynor warns that the sector’s improved financial position has been achieved to the detriment of its supply chain, where nearly 6,000 food suppliers are experiencing increased levels of financial distress.
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 one percent decrease in ‘Significant’ financial distress over the past 12 months (8,188 businesses in Q4 2015 versus 8,067 in Q4 2016, 98 per cent of which were SMEs).
However, this fragile recovery appears to have come at a cost to the sector’s downtrodden suppliers, who continue to bear the brunt of heavy discounting activity and significant margin pressures from their main buyers; the UK’s largest supermarkets.
Begbies Traynor’s research shows that the UK’s food and beverage manufacturing industry, which supplies the major UK headquartered supermarkets, experienced a 13 per cent 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 per cent of companies in distress within the sector (Q4 2016: 5,621 SMEs).
Julie Palmer, partner and retail expert at Begbies Traynor, thinks that, 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.
She adds, ‘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.
‘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.’
Palmer concludes, ‘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.’