Supermarket price wars taking toll on food firms

Food suppliers and manufacturers in Scotland are increasingly being squeezed by supermarket price wars, according to a new report.

Ken Pattullo, group managing partner in Scotland for Begbies Traynor. Picture: Contributed

Figures compiled by business rescue and recovery specialist Begbies Traynor have shown a significant rise in business distress indicators north of the Border during the past three months.

Across all business sectors there were 13,640 instances of “significant” distress among firms during April, May and June, up by 8 per cent year-on-year and 13 per cent compared with the previous quarter.

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Food and drug retailing and food and beverage manufacturing saw huge rises in distress signals such as late payment of 45 and 29 per cent respectively compared with 12 months ago.

Ken Pattullo, group managing partner in Scotland for Begbies Traynor, said the impact of supermarket price wars on suppliers was a “massive factor in these rises”.

“Suppliers, mostly SMEs, are being squeezed harder and harder in an already very tight margin sector,” he said.

“The very slim margins and high volume of sales involved in supplying to the supermarket giants can mean that relatively small shifts in price, sales or costs can be catastrophic.

“The price wars are good news in the short term for shopping bills, but the long-term effects are business failures and job losses in the supply chain. It is also worrying how rapidly firms in the supply chain, who depend on a few huge contracts can see relatively healthy businesses collapse,” he added.

The latest data showed the level of more serious critical distress instances, including decrees totalling more than £5,000 or winding-up petitions, were down by 42 per cent in the last quarter compared with the previous three months according to the latest Red Flag Alert research.

“The critical numbers suggest there are fewer businesses in severe distress than this time a year ago, and that is obviously a good thing for the immediate state of the economy. The bad news outweighs any positives though, as the warning lights are flashing for distress in the coming year, especially for suppliers to the supermarkets and independent retailers in that sector.” said Pattullo.

The construction sector also continues to account for a large proportion of significant business distress in Scotland and again saw rises year on year, up by 26 per cent.

Elsewhere in the Scottish economy, bars and restaurants – where distress levels were up by 50 per cent year-on-year, and travel and tourism (21 per cent) – showed signs of concerning increased distress despite the success of last year’s Commonwealth Games that it was hoped would result in a boost for the sector in years.

“The legacy of the Games here in Scotland hasn’t been immediately obvious, but last year was a bumper year for many in the tourism sector, and the windfall from the big events could have been masking the underlying problems,” said Patullo.

Julie Palmer, a retail expert at Begbies Traynor, said the landscape was “set become even bleaker for the UK’s small food suppliers” with price cuts “not just a short-term pain but something that’s here to stay”.

“The supermarkets have managed to successfully rebase their own models by reducing product ranges, moving away from bulk-buy offers and squeezing supplier margins still further, while failing to clean up their act on late payments, taking more than a month longer than agreed terms to settle debts with suppliers.”