Begbies Regulatory News (BEG)

16 Janaury 2015

SupermarketS PRICE WAR could FORCE MORE THAN 100 FOOD SUPPLIERS TO GO BUST

· Number of smaller food suppliers experiencing financial distress has more than doubled this year

· Ongoing price war could change the structure of UK food supply industry forever

While most of the UK's largest supermarkets reported stronger than expected food sales over the festive period, their ongoing and brutal price war is pushing many food suppliers and smaller high street grocers to the brink, warns business recovery specialists Begbies Traynor.

According to Begbies Traynor's Red Flag Alert research for Q4 2014, which monitors the financial health of UK companies, the UK's food retailing industry experienced one of the sharpest increases in 'Significant' financial distress of all sectors monitored, rising 58% to 4,552 struggling businesses compared to the same quarter last year (Q4 2013: 2,878).

Meanwhile the worst performing sector was the UK's food and beverage manufacturing industry. Companies in this sector, many of which supply the major UK headquartered supermarkets, witnessed a colossal 92% increase in 'Significant Distress', with 1,410 businesses now struggling to make ends meet, compared to 733 at the same stage last year.

The statistics show that the UK's SME food retailers and suppliers have been the worst casualties so far of the enduring price war between the UK's supermarket giants, who have been slashing prices, while squeezing suppliers' margins and elongating payment terms in a bid to offer consumers the lowest prices available in today's competitive retail environment.

Further analysis reveals that the number of smaller food retailers in 'Significant' distress rose by 61% to 4,388 in Q4 2014 from 2,731 last year (representing 96% of all struggling food retailers in the UK), while there was a 113% increase in the number of SME food and beverage manufacturers suffering 'Significant' distress in Q4 2014 to 1,240 from 582 last year (88% of the total).

Julie Palmer, Partner at Begbies Traynor, said:

"In recent weeks, Asda and Sainsbury's have promised £450m worth of price cuts between them, Morrisons has started a search for a new CEO who can return them to growth, while Tesco has set out major plans to reassert its dominance over the UK grocery market. With the battle lines drawn, the supermarket price war is intensifying and it looks like the UK's smallest food suppliers are bearing the brunt.

"A perfect storm is brewing for SME food suppliers at the bottom of the food supply chain, with many suffering a double hit from larger suppliers demanding "loyalty" payments as well as vanishing margins as a result of the inevitable aggressive supermarket price war. Adding to their misery, the UK's food producers and suppliers have failed to see any benefit from the rise in popularity of the German discounters Aldi and Lidl, since much of their canned and packaged stock is sourced from overseas.

"With shocking increases in distress among the supermarkets' main suppliers, the largest chains need to tread very carefully if they want to prevent a new crisis creeping up through their supply chain. Even the Government's appointment of a grocery code adjudicator last year seems to be having little impact, with industry insiders reporting that the new watchdog lacks real powers and is still failing to protect producers from being squeezed by the supermarkets.

"Unless the supermarkets start treating their suppliers more fairly and find longer term solutions to their cost cutting exercise, we expect that more than 100 of these 1410 'Significantly' distressed food and beverage suppliers will fall into administration before the year is up. Worryingly, with 3.6 million people employed in the UK food supply chain, the economic and political risks associated with the current price war are now reaching boiling point ahead of May's election."

Commenting on the rise in distress among food retailing SMEs, Julie Palmer added:

"Although Tesco plans to close some of its local Express shops this year, across the rest of the industry takings at smaller stores in town centres are up considerably, demonstrating consumers' preference for convenience, shopping little and often with more frequent shops but smaller basket sizes.

"With mini-supermarkets on every corner and Aldi and Lidl opening local shops as fast as they can find the sites, competition among food retailers on the high street is still rife, making life all the more difficult for smaller, independent convenience stores who don't have the bargaining power with suppliers or the access to premium locations afforded by their larger peers."

- Ends -

For further information contact:

MHP Communications

Katie Hunt / Jade Neal / Giles Robinson / Jennifer Iveson / Charlie Bristow

Tel: 0203 128 8100

Email: Begbiescorporate@mhpc.com

Notes to editors:

About Begbies Traynor Group

Begbies Traynor Group plc is a specialist professional services consultancy providing independent professional advice and solutions to businesses, financial institutions, the accountancy and legal professions and individuals in the areas of recovery, corporate finance, investigations and risk management. It is listed on AIM (Ticker: BEG). Further information can be found at: www.begbies-traynorgroup.com.

About Red Flag Alert

Red Flag Alert measures corporate distress signals through a comprehensive and complex methodology, drawing on factual legal and financial data from a wide range of relevant sources for companies that have been trading for over a year.

The release refers to the numbers of companies experiencing 'Critical' problems which are those with CCJs totalling over £5,000 within a three month period or winding-up petitions against them or which have entered Corporate Voluntary Arrangements.

The release also refers to the numbers of companies experiencing 'Significant' problems, which are those with minor CCJs (of less than £5k) filed against them or which have been identified by Red Flag's proprietary credit risk scoring system which screens companies for a sustained or marked deterioration in key financial ratios and indicators including those measuring working capital, contingent liabilities, retained profits and net worth. 

Red Flag Alert is commercially available to all businesses, on an annual subscription basis, to help them better understand risk and exposure and help prepare them for the future. Further information about Red Flag Alert can be found at: www.redflagalert.com