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More food producers go bust, after ‘supermarket price war’

By Mike Stones+

12-Apr-2016
Last updated on 12-Apr-2016 at 14:01 GMT2016-04-12T14:01:08Z

The supermarket price war is costing food manufacturers dear, warns Moore Stephens
The supermarket price war is costing food manufacturers dear, warns Moore Stephens

The rate of food manufacturers going bust has tripled in five years – with an 11% rise in firms going out of business in the past year alone – as a direct result of “cut-throat competition” between the UK’s leading supermarkets, warns accounting and consulting group Moore Stephens.

Last year, 162 food production companies entered insolvency – treble the 48 insolvencies in the sector in 2010 – according to new research from the consultancy.

Small-scale food producers were unable to keep up with the “unrealistic supermarket pricing and payment strategies” of the big supermarkets, it was claimed.

Food suppliers were still bearing the brunt of the on-going supermarket price war, as their profit margins were squeezed by big supermarket chains “trying to offer consumers the lowest prices possible while maintaining their own profit margins”, said Duncan Swift, partner and head of Food Advisory, at Moore Stephens.

‘Struggling to stay afloat’

“The extreme buying and retail pricing strategies of big retailers mean smaller food producers are struggling to stay afloat,” said Swift. “Food supplier insolvencies are still rising as small producers continue to be the major casualties in the supermarket price war.

“With no end to the price war in sight, food manufacturers are finding themselves less and less able to subsidise the aggressive buying tactics of big retailers.”

Swift said manufacturers worried not just about the pressure on the headline supply price itself, but about when bills would be paid as 120-day credit terms were common.

‘Demand unilateral deductions’

“Supermarkets also demand unilateral deductions from prices for a company to remain on their suppliers’ list,” added Swift.

Also, competition is likely to become fiercer – leaving food manufacturers even more exposed to the consequences of a price war.

“With the likes of Aldi and Lidl announcing further plans for expansion, competition between budget and traditional supermarkets is only going to heat up,” said Swift. Just this month, Sainsbury reviewed its price discounting policies.

“Smaller, regional food producers often rely on one of the big chains as their main route to market. This often means their negotiating power is weak when it comes to the pricing and payment terms for their products, and many are going out of business as a result.”

 

How to protect manufacturers from supermarket price war

“With over 70% of what UK food suppliers produce going across the buying desks of the UK’s top 10 supermarkets, the buyer power of supermarkets remains enormous,” said Duncan Swift, partner and head of Food Advisory, at Moore Stephens.

“There are ways and means to mitigate destructive buyer power but all too often suppliers don’t prepare themselves early enough to survive the onslaught.

“The Groceries Code Adjudicator recently issued its first censure of a supermarket for its treatment of suppliers, particularly regarding late payment and unilateral back-margin deductions – a long anticipated move. However, as these unreasonable behaviours are prevalent throughout the supermarket sector, for the regulator to begin to positively change these behaviours it needs to be prepared to show its teeth more often.”

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