A leaner year for UK food manufacturers?
After the excesses of the Christmas period and the unwelcome sight in January of those few strange Quality Street languishing at the bottom of the tub, it seems hard to comprehend that UK food manufacturers are having to tighten their belts at a time when the rest of the country is probably loosening theirs….
And yet that is exactly what is being predicted for the UK food manufacturing industry in the first six months of 2019. Atradius – one of the country’s largest credit insurers – has predicted that there is an increasingly high risk of company insolvencies in the food manufacturing sector this year.
There are many factors which play into this. Margins are increasingly being squeezed with so many suppliers vying for market share and coveted contracts with retailers. The big supermarkets can almost dictate their terms which can be perilous for the smaller suppliers. When Unilever wanted to increase the price of their portfolio of food products to retailers, Tesco took the decision to remove some of Unilever’s products from its stores – the resulting “Marmite War” of 2016 showed what little leverage a large player like Unilever had: reports suggest that Unilever could only negotiate a third of the price rise it had originally intended. If this is what can happen to such a large food manufacturer then the small local supplier really has no say in the amount for which he can sell his goods.
The food industry says the price wars, which are so good for the consumer, are near catastrophic for the supplier. This is highlighted further by the rise of the so called “budget supermarkets” such as Aldi and Lidl who have increased their market share by 10% in recent years. Suppliers have reported that payment terms with all large supermarket chains can be changed unilaterally and that payments are often delayed with no recourse for the supplier. Tesco had their wrists slapped by the Ombudsman for delaying payments to suppliers by up to a year to make their own cash flow position seem better.
In the third quarter of 2018, Begbies Traynor reported that 9,625 food suppliers/manufacturers were in “financial distress”, a 60% rise on the last two years. The UK produces only half of what it consumes and yet still manages to have the third lowest food bills in the world (behind the US and Singapore) according to the World Economic Forum, such is the squeeze on margins.
Of course, none of this is helped by Brexit and the uncertainty this brings. Food manufacturers and suppliers will be affected regardless of the political agreement (or otherwise) of how we extricate ourselves from the European Union.
The food manufacturing industry is heavily reliant on import/export into the European Union and often, the seasonal workforce required to pick the fruit produced, for example, is largely made up of migrant workers from Europe. At present, the food and manufacturing industry accounts for 13% of national employment figures and contributes £28bn to the national economy. Therefore, it is clear that the trend predicted by Atradius of more insolvencies in this industry in the coming months is worrying not only for those employed within it, but also concerning for the UK’s economy as a whole.
Posted on 9 January, 2019 by Ortolan