Profit margins squeezed by big supermarket chains trying to offer consumers low prices while maintaining own profit margins, says Moore Stephens
BIG supermarkets are literally squeezing the life out food producers, research from Top Ten accountancy firm Moore Stephens reveals as insolvencies have tripled in five years.
The firm’s analysis shows 162 food production companies entered insolvency last year, more than treble the 48 insolvencies in the sector in 2010 and 11% more than just a year ago.
Moore Stephens says food suppliers are still bearing the brunt of the on-going supermarket ‘price war’ as their profit margins are squeezed by big supermarket chains trying to offer consumers the lowest prices possible whilst maintaining their own profit margins.
And the expansion of budget retailers in the UK market over the last five years has piled even more pressure on traditional supermarkets to slash prices in order to compete and survive.
The firm says that in the last month alone both Lidl and Aldi have revealed plans to expand their presence in the UK, forcing domestic supermarket groups to find extra savings in their supply chains in order to compete more closely with the discounters.
Duncan Swift, partner and head of food advisory at Moore Stephens, said: “The extreme buying and retail pricing strategies of big retailers mean smaller food producers are struggling to stay afloat. Food supplier insolvencies are still rising as small producers continue to be the major casualties in the supermarket price war.
“With no end to the price war in sight, food manufacturers are finding themselves less and less able to subsidise the aggressive buying tactics of big retailers. “It’s not just the pressure on the headline supply price itself, there are concerns about when that price will be paid as 120-day credit terms are commonplace.”
Supermarkets also demand unilateral deductions from prices for a company to remain on their suppliers list,” said Swift.
“Smaller, regional food producers often rely on one of the big chains as their main route to market, explains Swift, which often means their negotiating power is weak when it comes to the pricing and payment terms for their products, and many are going out of business as a result.
Swift added that with over 70% of UK food suppliers produce “going across the buying desks of the UK’s top 10 supermarkets, the buyer power of supermarkets remains enormous”.
The Groceries Code Adjudicator recently issued its first censure of a supermarket for its treatment of suppliers, particularly regarding late payment and unilateral back-margin