The fierce level of competition in the cut-throat supermarket sector is forcing more and more food producers out of business.
According to the latest research by accountancy firm Moore Stephens, producer insolvency in the last year increased to 162. That represents an 11 percent rise on figures for last year and a three-fold increase on 2010.
In 2010, there were just 48 insolvencies in the food production industry. However, this figure has risen sharply year-on-year as a result of new low cost supermarkets entering the market. The figures for food producer insolvencies over the last five years are as follows:
Year No. of Insolvencies
Fierce price competition drives producers out of business
The food suppliers’ profit margins are being increasingly squeezed by the ongoing supermarket price wars and many entering into pre-pack administration, creditor voluntary liquidation or company voluntary arrangements. Unfortunately, it is the food producers who are bearing the brunt of the low in-store prices, as chains try to offer consumers the best prices while maintaining their own profit margins. This situation is clearly not sustainable, as the number of insolvencies in the sector clearly shows.
The root of the problem is thought to be the expansion of the budget supermarkets in the UK market. This has put the traditional supermarkets under increasing pressure to cut their prices in an attempt to retain their market share.
Earlier this year, the budget supermarkets, Aldi and Lidl, announced their plans to expand their presence in the UK. This has forced the established supermarkets like Tesco, Asda and Morrisons to cut their prices in order to compete. So-called premium supermarkets like Waitrose and Sainsburys are less embroiled in the price wars due to their differing customer bases.
The pressures food producers face
The leading food retailers use their size to dictate not only the price, but also the terms of deals with their suppliers. It’s not only the headline supply price that is causing so many smaller producers to struggle. 120-day credit terms are commonplace in the sector, making cash-flow levels extremely precarious for some operators.
Smaller food producers commonly rely on the big chains as their main route to market, which gives the supermarkets the power to call the shots. In some cases, the supermarkets demand significant price discounts for a company to remain on their supplier lists.
The Groceries Code Adjudicator has been set up to regulate the industry and mitigate the destructive buying power of the supermarkets, but it is clearly not doing enough. Recently, the regulator issued its first regulatory act against a supermarket in its treatment of a supplier, relating to late payments and hefty deductions. However, these behaviours are still commonplace.
Prices are continuing to fall
A study by the consumer research body Kantar Worldpanel, has found that consumer prices have fallen in the supermarket sector for the past 18 months. This squeeze on prices only looks set to continue given the expansion of the budget supermarkets.
Earlier this year, Aldi announced plans to open 80 new supermarkets to compete with the Big Four. This will take Aldi’s expanding presence in the UK to more than 700 stores. By 2022, it aims to boost that number to 1,000 stores.
Clearly, until the regulator decides to bare its teeth and take decisive action against the supermarkets, the prognosis for food producers will continue to look bleak. The extreme buying and pricing strategies of big retailers will mean more food producers will struggle to stay afloat. Ultimately, the result will be a further increase in insolvencies.
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