According to Begbies Traynor’s latest report, the number of UK food suppliers experiencing significant financial distress had soared by 54% in past 12 months, as the big four supermarkets – Tesco, Asda, Sainsbury and Morrisons – slashed prices and delayed payments to suppliers, as part of their bid to battle hard discounters Aldi and Lidl.
The casualties of this war were the UK’s smallest food suppliers, independent grocers and farmers, warned the business recovery specialist.
Set to grow even worse
Rather than improving, the challenges for food suppliers were set to grow even worse, said the firm’s Partner and retail expert Julie Palmer.
“Unfortunately the retail environment is set to become even bleaker for the UK's small food suppliers, who are facing the harsh reality that price slashing is not just a short-term pain but something that’s here to stay,” said Palmer.
Tesco recently hailed the success of its first quarter performance, after four rounds of price cuts since January, and even premium retailer Waitrose had joined the discounting fray, she added.
The consultant’s Red Flag Alert research for the second quarter of this year, which monitors the financial health of UK companies, also revealed small-scale food retailers continued to experience rising ‘significant’ financial distress. It estimated 5,258 of businesses were struggling over the past year – a rise of 38%.
Retailers become manufacturers
“Some are even looking into launching their own food manufacturing facilities to give them even tighter control over costs and the ability to offer still more aggressive pricing – signalling yet another nightmare scenario on the horizon for the UK food supply chain.”
But it was UK’s food supply chain that kept these stores stocked that was “by far the biggest loser”.
Supermarkets had successfully counter attacked against the limited range discounters by re-basing their business models, reducing product ranges, moving away from bulk-buy offers and “squeezing supplier margins still further”, said Palmer.
Failed to clean up their act
Big retailers had failed to clean up their act on late payments, taking more than a month longer than agreed terms to settle debts with suppliers, she added.
“Some are even looking into launching their own food manufacturing facilities to give them even tighter control over costs and the ability to offer still more aggressive pricing – signalling yet another nightmare scenario on the horizon for the UK food supply chain.”
While the consultant welcomed the fact that the Groceries Code Adjudicator now had the power to fine supermarkets up to 1% of their UK turnover if found to be in breach of the Groceries Supply Code of Practice, it was unlikely to have a major positive impact for the supply chain.
“A recent sector study found that almost one in five suppliers to the UK’s 10 biggest retailers are reluctant to raise any issues with the industry regulator for fear of retribution from their largest source of income,” said Palmer.
More information about the Red Flag Alert research is available here.