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Analysts warn that UK’s food supply chain could be in financial peril

A supply chain is an intricate and delicate thing—actions taken by just one link of the chain can ripple throughout from end to end. This is the s...

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|Aug 3|magazine10 min read

A supply chain is an intricate and delicate thing—actions taken by just one link of the chain can ripple throughout from end to end. This is the situation currently facing the UK’s food and beverage supply chain sector. As major UK supermarkets like Tesco and Asda have resorted to drastically slashing prices in order to turn profits and compete with discount market chains, the effect on the manufacturers who supply their stock is becoming a serious problem.

According to a recent “Red Flag Alert” study by Manchester-based professional services consulting firm Begbies Traynor, monitoring the financial health of UK companies in Q2 2015, UK food retailers have experienced a 38 percent rise in what is described as “significant financial distress.”

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This is of course an issue in and of itself. But Begbies Traynor also found that businesses further along the supply chain are facing further problems, due to a combination of crisis-based retail practices including slashed prices and delayed payments to suppliers. In its study, the firm found that UK food and beverage manufacturers—many of whom supply the region’s major supermarkets—saw “the highest year on year increase in ‘significant’ distress” compared to any other sector measured, with a 54 percent increase against the year before.

"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,” said Julie Palmer, partner and retail expert at Begbies Traynor, in response to the study. “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.”

It is critical to understand that no business exists in a vacuum—every action that retailers take affects the businesses that they work with to keep their consumers supplied with product. Palmer warned that, while radical undercutting may go a long way to bring consumers in and help retailers stay afloat, these practices are ultimately hurting their supply chains and could create serious long-term problems for growers and manufacturers.

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"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,” she added. “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.”

It’s a touchy issue, and one that suppliers may be reluctant to speak on out of concern that they could lose the trust and business of their retail partners. But it’s an issue that analysts see as a rising concern that will only continue unless steps are taken to find compromise and make the UK’s food supply industry healthier—not just in one area, but on the whole. [SOURCE: Stock Market Wire]

For more information and to read the original Begbies Traynor research, please visit: http://www.begbies-traynorgroup.com/news/business-health-statistics/uk-food-supply-chain-on-the-brink-as-supermarkets-tighten-belts-still-further