Longbenton Foods failure could be first of many, warns insurance expert
Kieron Franks, risk underwriting manager for credit insurer Euler Hermes UK, said that small to medium-sized enterprises, in particular, faced tough times due to their reliance on larger firms, which supply major multiples involved in fierce price wars.
“The only way a supermarket can drive the price down for the consumer is by further squeezing the supply chain,” Franks said.
“This has always been the case, but with raw material prices increasing, fuel prices up, the cost of borrowing increasing … there is no more ‘fat’ for suppliers to cut, and further failures are inevitable.”
Private equity pressures
He said Newcastle-based Longbenton’s collapse – shortly after the failure of Polestar Foods – suggested that private-equity backed and highly-geared businesses were under particular pressure.
Longbenton, which had a licence from the Findus Group to produce Crispy Pancakes, has been in administration since March; several sources contacted this publication shortly before the administrator stepped-in saying the firm owed them money.
“Leveraged businesses that require refinancing are having to negotiate [with banks] from a much weaker position,” said Franks.
“The terms being agreed are more stringent, and potential rises in future interest rates could bring many more companies to the brink”
Interest rate fears
Only today the Organisation for Economic Co-operation and Development (OECD) advised the Bank of England to raise interest rates from their current record low of 0.5% to 1% by the end of 2011 and 2.25% by the end of 2012, to curb inflation.
This will increase the cost to businesses of borrowing money and repaying loans, while a stronger pound could also hurt exports. “Businesses have got used to low interest rates and have probably absorbed some margin pressure as a result,” said Franks.
“But if Mr Food Manufacturer agrees to lower his price to a customer one day, he can’t then go back the next and complain that interest rates have risen.”
Franks added that there was evidence to suggest that industry payment terms were up from a recent average of 56 days to 75 as a “bit of a norm” nowadays, and even 90 days, with “major businesses” as customers to food sector suppliers leading the way.
Trade credit insurance
All of which makes the need for trade credit insurance – where food producers found it hard to access policies during the recession – more acute, given the risk of unpaid invoices, while the Food and Drink Federation said last April that lack of insurance made banks more reluctant to lend unless firms could guarantee payment upon delivery of goods.
Franks said trade claim trends fell throughout 2010 against a“nadir” in 2009, when insurers saw a huge increase in both the number and seriousness of claims.
Euler Hermes UK had "relaxed our approach to risk" compared to 2009, he said, when it was hit with a huge number of claims that lacked up-to-date information that enabled the insurer to make a decision. But he said the firm was now adding £3bn in cover each month, and was looking "to write cover where we can".
“Of course, there are always industry pockets where it’s harder to get cover. Both the industry and we ourselves know who the risky parties are, where the risk is. And that’s where the difficulty lies,” he said.
Greater consolidation
Given lengthier payment terms, cost increases and cut-throat competition in an oversubscribed food production sector, where the latter makes it “easier for customers to switch from one supplier to another”, Franks predicted an increase in merger and acquisition activity over the next 18 months.
Greencore cfo Alan Williams told FoodManufacture.co.uk earlier this week that the chilled and convenience food sector was ripe for more consolidation. Discussing the group's cake division, for instance, he said that fierce competition in the sector made it hard for the group to raise prices to customers.
“We have already seen with the merger of Kerry Food and Headland Foods (another private equity owned business) that there is excess capacity,” Franks said.
He added that any takeover and break-up of Uniq would also reduce capacity; he also believed the Northern Foods/2 Sister’s Food Group synergy would result in “greater efficiencies and savings…which will act as a catalyst for others to consolidate and look at their own efficiency potential”.
