Manufacturers feel the credit squeeze

A growing body of evidence shows many small and medium-sized food manufacturers are struggling to stay afloat as commodity costs rise and banks slap restrictions on lending facilities.

More than a third of the top 500 companies in the sector are showing signs of recessionary behaviour, according to the latest survey from Plimsoll Publishing to be published on May 1. Plimsoll warned that as many as one-in-five food manufacturers could disappear completely if this trend continued or worsened.

The company reported that 60 firms had seen their margins fall. But of even more concern, more than a quarter of these were running at a loss, it added. These companies were struggling against rising costs and declining sales.

Almost half of the food manufacturers Plimsoll surveyed had seen an increase in their need for short term finance, a sign that costs were running ahead of cash flow. This was doubly dangerous at a time when banks and financiers were looking hard at their loan books and placed these companies in an even more vulnerable position, concluded Plimsoll.

Duncan Swift, head of Grant Thornton’s UK food and agribusiness recovery group, said: “Much of the food supply chain is now regarded by banks as being at high risk of adverse impact with the backdrop of substantial input cost increases and a relative inability to pass them on by dint of the supermarkets’ continued price wars.”

Thanks to the credit crunch, banks were comprehensively reviewing lending facilities to see if limits could be either directly reduced or capped in some way, said Swift. He added: “We are already seeing an increase in the number of food processors experiencing financial difficulties and seeking our assistance to alleviate those difficulties.”

Speaking at the Food and Drink Federation’s biscuit, cake, chocolate and confectionery sector conference in Rugby on April 25, Nestlé’s Godfrey Rowland said the combination of rising demand from emerging markets, poor weather, growth in biofuels and speculative buying from hedge funds had created a ‘perfect storm’ in the commodities market, which was putting manufacturers under immense pressure.

The Confederation of British Industry (CBI) claimed manufacturers were raising their prices to counter the fiercest increases in unit cost since 1990, driven by more expensive energy and raw materials. It based its comments on its quarterly Industrial Trends Survey produced last week.

The CBI’s chief economic adviser Ian McCafferty remarked: “Fears of slowing demand alongside rising prices have become a reality in the manufacturing sector over the past quarter as it readjusts to a weaker economic outlook. Manufacturers are being forced to pass on higher costs to customers by increasing prices and are no longer able to absorb continuous cost increases into their profit margins.”