Supermarket price wars threaten manufacturers
Food manufacturers are being hit hard, as supermarkets slash their prices in the face of slowing consumer spending, warn consultants and advisory groups.
As the credit crunch evolves, supermarkets are fighting for consumer spend by slashing prices and introducing new lines of own-label foods, said Steve Gates, managing partner of the consultancy group The Gap Partnership.
“We saw Morrison’s sales rise sharply, just two days since Tesco suffered its weakest sales growth since the mid-1990s,” he said. “The Morrison’s price crunch range has drawn extra customers using quality products at cheap prices.”
Last week Morrison said that like-for-like sales, excluding petrol, rose by 8.1% over the 13 weeks to November 2, partly because its value range was “extremely popular”. Marks & Spencer also repeated its 20%-off pre-Christmas sale, while Tesco also revealed that it had “cut prices heavily”
Andy Bond, chief executive of Asda, added: “Our strategy of offering shoppers everyday low prices across both food and non-food continues to deliver strong sales and market-share gains.”
Advisory group Vantis Business Recovery Services (BRS) said the biggest headache for manufacturers right now was maintaining a healthy cash flow. “As supermarkets slash prices, they are squeezing already shrinking margins, which in turn is reducing levels of working capital,” said Nick O’Reilly, client partner at BRS.
Therefore, manufacturers must “act now” to make it through the tough economic climate in one piece, added O’Reilly. What was important, he continued, was that there were still institutions willing to lend, but manufacturers must be prepared with robust forecasts and evidence of a strong management team to improve their chances of re-financing successfully.
He said manufacturers should critically review their businesses and operations to see if there were any skill gaps in their managements that could be filled by interim managers. He also suggested reviewing portfolios to make them more “recession proof” by moving more towards staple, value range products for instance.
“There remains a number of asset finance packages available that allow managers to free up capital previously tied up in assets; whether property, machinery, tools, vehicles or debtors,” he added. “In the aftermath of the banking crisis, these alternative methods of finance have become more common, as institutions prefer to lend according to the shape of a business’s balance sheet.”
O’Reilly said manufacturers could also talk to key suppliers or landlords to renegotiate payment terms. Businesses could be restructured to reduce human capital costs: “Bolstering working capital inevitably involves making tough decisions, but it is vital these decisions are made quickly to safeguard the business as a whole.”
O’Reilly’s comments come as Dairy Farmers of Britain announced plans to axe up to 640 jobs. Cadbury and Dairy Crest have also recently announced job cuts.
