More supermarket woe to come, warns Begbies Traynor

BUSINESS recovery specialist Begbies Traynor has warned that the bitter price war between mainstream supermarkets will do little to draw customers back from value retailers such as Aldi and Lidl.

In its Red Flag research for Q3 2014 – which monitors the financial health of UK companies –  it said the UK’s food retailing industry experienced the sharpest increase in ‘significant’ financial distress of all sectors monitored, rising 11% with 4,239 food retailers exhibiting adverse financial markers.

The accountancy firm – which has operations in Birmingham and Stoke-on-Trent – revealed that on an annualised basis, the sector’s fortunes have deteriorated even further, with ‘significant’ financial distress increasing 53%.

Meanwhile, more severe cases of ‘critical’ financial distress rose 23% over the last quarter. Within this group are seven large food retailers, categorised as businesses with more than 500 employees. Of these, three are well-known household brands, all of which have incurred adverse financial actions over the past quarter – typically an indicator that they are failing to pay creditors until well beyond the agreed terms.

The woes were felt in the Midlands too. Food and drug retailers in Birmingham have experienced a 45% annual increase (55 to 80) in significant financial distress, whilst quarterly distress levels rose at a slower rate of 25% (64 to 80).

When it comes to critical financial distress levels across the Midlands region, food and drug retailers have witnessed a quarterly increase of 40%.

Looking at the broader picture across all sectors, Midlands businesses experienced a 10% fall (394 to 355) in critical financial distress during the past year. Between the second and third quarters of 2014, however, the region suffered a small 2% increase (347 to 355) in firms experiencing critical financial problems.

Significant financial distress levels in the Midlands rose by 9% (26,683 to 29,176) year on year but remained broadly flat between Q2 and Q3 2014 (29,114 to 29,176).

In Birmingham, however, there were respective annual and quarterly rises in Critical financial distress of 17 and 7% (53 to 62 and 58 to 62). Significant financial distress levels also continued to climb year on year, with a 5% rise (3,666 to 3,854), however, between the second and third quarters of the year there was a modest 2% drop (3,939 to 3,854).

Breaking down the sectors in the Midlands, Construction and manufacturing have fared well over the past quarter, posting respective decreases in critical financial distress of 28% (69 to 49) and 18% (43 to 35).

Meanwhile, financial services and professional services have struggled, posting respective quarterly increases in critical financial distress of 500% (0 to five) and 55 % (nine to 14).

John Kelly, regional managing partner and retail analyst at Begbies Traynor, said: “With Tesco in disarray following revelations of its £250m profits  overstatement, and dampened sales expectations from Morrisons and Sainsbury’s, all have been forced to cut prices in a bid to encourage shoppers back through their doors and recapture market share. 

“But despite fresh produce deflation of around 4%, this is not having the desired effect as consumer tastes have changed.

“And whilst the household name food retailers fight for space on the national  stage, we are seeing some distinct trends for food retailers right here in the Midlands.

“We have seen annual and quarterly increases in significant  distress levels  as  they continue to battle for every penny. And, of course, the food retailers’ woes of today will be the suppliers’ financial problems of tomorrow as they seek to pass on price reductions to their suppliers.

“Spoilt for choice within the traditional supermarket model and against a backdrop of falling living standards and stagnating real wage inflation, UK consumers are more aware than ever of the low prices available at Aldi and Lidl.

“The German discounters’ focus on simpler product  ranges and successful own-label products means that, regardless of the on-going price war, they can  continue to lead on price while perfectly matching what shoppers now demand from their weekly shop.

“The biggest supermarkets have been quick to blame the discounters for their plummeting profits but recent events have shown that the real fault lies within their own processes, which are rife with supply chain issues, inefficient legacy sites and poor financial management.

“These operational issues and soured relationships with suppliers need to be  fixed quickly to avoid Q3’s poor performance turning into a depressed Christmas  sales period.”