Big Four price wars send alarm bells ringing along supply chain

THE price war between the UK’s largest supermarkets, including Asda and Morrisons, is setting off alarms in the supply chain industry, according to new research from business recovery firm Begbies Traynor.

The firm has found that the number of UK food suppliers experiencing “significant” financial distress has increased 54% in 12 months.

There were 5,258 struggling businesses in the quarter, up from 3,804 in the same period last year, 97% of which are SMEs.

According to Begbies’ Red Flag Alert research for Q2 2015, smaller food retailers are feeling the pinch as price wars between the major supermarket brands continue.

Delayed payments and cutting costs to keep up with German discounters Lidl and Aldi have taken their toll, and SMEs, which make up the majority of the market, are prevented from speaking out about unfair treatment by larger supermarkets for fear of losing their biggest source of income.

Yorkshire food retailers themselves are also bearing the brunt of competitive discounting by the large supermarkets. The sector saw an annual increase of 19% in “significant” distress to the second quarter of this year, affecting 419 businesses, compared with 351 a year ago. The trend was reflected nationally with a UK average 38% increase in food retail business distress year on year.

Julian Pitts, regional managing partner for Begbies Traynor in Yorkshire, said: “With Tesco recently hailing the success of its Q1 performance after four rounds of price cuts since January and even Waitrose now joining the sector’s discounting foray, clearly the novelty of a bargain continues to resonate with consumers.

“Unfortunately the retail environment is set to become even bleaker for the UK’s small food suppliers who are facing the harsh reality that price slashing is 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.

“Some are even looking into launching their own food manufacturing facilities to give them even tighter control over costs and the ability to offer still more aggressive pricing – signalling yet another nightmare scenario on the horizon for the UK food supply chain.

“While it’s a welcome development that the Groceries Code Adjudicator now has the power to fine supermarkets up to 1% of their UK turnover if found to be in breach of the Code, this is unfortunately unlikely to have a major positive impact for the supply chain, as a recent sector study found that almost one in five suppliers to the UK’s 10 biggest retailers are reluctant to raise any issues with the industry regulator for fear of retribution from their largest source of income.”