Supermarket Price Wars take a Bite out of Food Company Profits

A recent study has suggested that a 28 percent annual hike in insolvencies at food production companies is the result of the ongoing supermarket price wars.

In the last year alone, there has been a 28 percent hike in the number of insolvencies at food production companies across the UK. Recent research has suggested the sharp rise in failure rates could be the result of the ongoing supermarket price war, which has taken a big bite out of food company profits.

Recent research by the accountancy firm Moore Stephens, has revealed that 146 food producers entered into administration and became insolvent in 2014, compared to 114 the previous year. The trend looks all the more bleak when compared to the general insolvency picture, which shows a fall in company liquidations over the last five years.

It’s not just private limited companies that are feeling the affect of tightening profit margins. The ongoing price feuds are having an affect all the way down the supply chain. The actual failure rate is likely to be far worse than reported, as farmers and other horticulturalists who operate as sole traders or simple partnerships cannot be readily researched.

The root of the problem

The falling profit margins of the supermarket giant Tesco are indicative of the wider problem. The sector Tesco once dominated has been subject to a number of new entrants from foreign markets, namely Aldi and Lidl.

These cut price supermarkets entered the market at a time of austerity and ongoing stagnant wages, further increasing the appeal of discount chains. In an attempt to retain their ailing market share, the more established supermarkets like Tesco are competing with the low cost supermarkets on price. To make the maths work, increasing pressure is being placed on the food producers, causing an increasing number to fail.

Supermarket buyers’ bonuses

Much like the furore caused by bankers’ bonuses, the recent accounting problems at Tesco have placed the unscrupulous culture of buying teams at some of the UK’s leading supermarkets under the spotlight.

The bonuses of buyers’ at some supermarkets are reliant on their ability to secure cash contributions from their suppliers, which can manifest as spurious deductions from supplier payments and even short-notice cancellations of orders. For many food producers, this additional strain on cashflow is enough to push them over the brink and into insolvency.

Could fraud prevention be the answer?

A separate study by the Centre for Counter Fraud Studies, has suggested that part of the solution to the insurmountable strain placed on food and drinks companies could be a clampdown on fraud.

The report, Minimising Fraud and Maximising Value in the UK Food and Drink Sector 2014, suggests that UK listed food and drink producers are losing in excess of £11.2billion a year as a result of fraud and error. This is equivalent to a staggering 85 percent of total profits.

The review of more than 73 listed food and drink companies suggests that tougher action on fraud could boost the industry’s profitability by over 34 percent. This would result in consumer savings of five pence in the pound.

Jim Gee, the co-author of the report, said: “Food and drink fraud is the crime in our baskets. It results in food and drink being more expensive than it should, and its reduction can significantly improve value for money. The good news is that addressing fraud can cut the cost of fraud by up to 40 percent and increase profitability significantly.”

If you have any concerns around trading whilst insolvent and you are considering liquidating your company; call 08000 746 757 to speak to one of our specialists for no strings attached free help and guidance.

Written by: Mike Smith