‘Damaged supply chain’ biggest loser in price war

By Michael Stones contact

- Last updated on GMT

The "meteoric rise" of the German discounters has reshaped the UK grocery sector forever
The "meteoric rise" of the German discounters has reshaped the UK grocery sector forever

Related tags: Supermarket, Retailing

The UK’s “damaged food supply chain” has proved the biggest casualty of supermarket price war, warns business recovery specialist Begbies Traynor, as it notes stability returning to the struggling UK grocery sector and their food and drink manufacturing suppliers.

The firm’s partner and retail expert Julie Palmer said: “While the major supermarkets have taken drastic action to readjust their ailing business models by slashing prices in a bid to compete, the UK's damaged food supply chain remains the biggest loser from the changing food retail environment, with levels of financial distress in this sector nearly tripling in just over two years as a result of intense margin pressure.”

‘Under pressure suppliers’

The next few months will prove a key time for supermarket suppliers, she added. “The big test over the coming months will be the extent to which retailers are able to pass higher wage costs on to consumers, as opposed to squeezing their still under pressure suppliers, especially in an environment where household budgets won't see a repeat of the recent benefit of much reduced petrol prices.”

Palmer’s comments followed Begbies Traynor’s latest financial distress report, which noted signs of improvement for large-scale retailers.  Early signs suggested the retail sector was adjusting to today's new low margin environment.

The consultant’s Red Flag Alert research for the third quarter of this year revealed that UK food retailers experienced their first quarterly decline in 'significant' financial distress in more than two years. That rate fell by 5% to 5,002 struggling businesses over the past three months.

Improvement in financial distress

The last improvement in financial distress among food retailers was during the second quarter of  2013. At that point there were 2,428 failing businesses in the sector; 51% fewer than the current number struggling to make ends meet.

UK food and beverage manufacturers, including many of the food suppliers and farmers that supply the major UK headquartered supermarkets, also witnessed their first decline in ‘significant’ financial distress in over two years. Businesses in distress fell by 4% to 1,553 firms during the second quarter of this year.

Since the second quarter of 2013, the number of grocery suppliers that are suffering ‘significant’ financial distress had soared by 147% from 628 businesses.

“The declining fortunes of the UK food retail industry and its supply chain over the past nine quarters directly mirror the meteoric rise in popularity of the German discounters Aldi and Lidl, whose no frills, low price offering has captured the imagination of British consumers, changing the face of the UK grocery sector for good,”​ said Palmer.

Begbies Traynor’s Red Flag Alerts measure corporate distress signals, drawing on factual legal and financial data from a wide range of sources for companies that have been trading for over a year.

‘The biggest loser’

“While the major supermarkets have taken drastic action to readjust their ailing business models by slashing prices in a bid to compete, the UK's damaged food supply chain remains the biggest loser from the changing food retail environment, with levels of financial distress in this sector nearly tripling in just over two years as a result of intense margin pressure.”

  • Julie Palmer, Begbies Traynor

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