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UK supermarket price war hits smaller companies

23 January 2015
by redflagalert -- last modified 27 January 2015

As the price war being waged by the UK’s major supermarkets continues, companies in two business sectors are being badly hit as a result. As might be expected, smaller food retailers, who are quite simply unable to sell their produce at a loss, are struggling to compete with the retail giants. But the supermarkets’ tactics are also affecting food and drink manufacturers who supply goods to large retailers. These manufacturers are in many cases finding that their profit margins are being reduced, or that the supermarkets are offering them less favourable payment terms, or both.


In the closing weeks of 2014 and the first few days of 2015, Asda announced £300 million of price cuts, while Sainsbury's revealed plans for £150 million worth of discounting.

Research by Red Flag Alert, a subsidiary of corporate insolvency and business recovery specialists Begbies Traynor, has revealed the scale of the problems being experienced by companies in these two sectors. The number of food retailers experiencing difficulty has risen by more than 50%, while the number of struggling manufacturers has almost doubled.

Each quarter, Red Flag Alert reports on the financial health of UK companies, and its results for the final quarter of 2014 show that 4,552 food retailing companies and 1,410 food and beverage manufacturing companies are experiencing 'significant financial distress'. These figures represent increases of 58% and 92% respectively when compared to the equivalent figures for the final quarter of 2013, which were 2,878 and 733.

These increases are even more marked when only smaller companies in these sectors are considered. The number of small food retailing companies experiencing 'significant financial distress' has risen by 61% from 2,731 to 4,388 over the same period, from which it can also be deduced that 96% of the food retailers in distress are smaller outlets.

The number of small and medium sized food and drink manufacturers experiencing significant distress has risen by 113% (i.e. it has more than doubled) from 582 to 1,240. 88% of the struggling companies in this sector are smaller organisations.

Many of the problems being experienced by smaller food retailers are made worse by the fact that most supermarkets now have their own 'convenience store' equivalents. For smaller purchases, many customers are now drawn to their nearest branch of Sainsbury's Local, Tesco Express or Little Waitrose, rather than visiting their local independent food shop.

Although retailers such as Aldi and Lidl have joined the traditional supermarket giants (such as Sainsbury's, Tesco and Morrisons) as big names in the world of grocery retailing, many food and drink suppliers are finding themselves unable to secure contracts with the likes of Aldi and Lidl. These chains are much more likely to source their goods from overseas.

Julie Palmer, Regional Managing Partner at Begbies Traynor, spoke of "a perfect storm [that is] brewing for SME food suppliers," adding that these companies were "suffering a double hit from larger suppliers demanding 'loyalty' payments, as well as vanishing margins as a result of the inevitable aggressive supermarket price war."

Regarding the difficulties of smaller food retailers, Ms Palmer commented: "With mini-supermarkets on every corner and Aldi and Lidl opening local shops as fast as they can find the sites, competition among food retailers on the high street is still rife, making life all the more difficult for smaller, independent convenience stores."

In December 2014, the British Retail Consortium reported that food prices were experiencing deflation for the first time since it began compiling figures in 2006. Food prices in November 2014 were 0.2% lower than was the case 12 months previously, although the falling oil price, as well as the aggressive discounting of the major supermarkets, was said to be a factor in this reduction.

Red Flag Alert is a business database containing over 6 million records on businesses in the UK, from sole traders through to limited and quoted companies.

Red Flag Alert

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Red Flag Alert is a business database containing over 6 million records on businesses in the UK, from sole traders through to limited and quoted companies.