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Cost cutting supermarkets pile pressure on food producers


Supermarkets such as Tesco, Asda and Morrison’s are forcing some food production companies into insolvency, according to accountancy company Moore Stephens.

The number of food production companies who entered insolvency increased by 28% in the 12 months leading to September, despite an improving UK economic outlook.

It is believed that the reason for this unexpected pressure on the sector is a result of supermarkets trying to compete with discount stores, such as Aldi and Lidl.

However, supermarkets are attempting to compete with these discount stores on price, whilst retaining their higher profit margins, meaning that the suppliers are being pressured into absorbing the cost of the price cuts.

The supermarket industry has come under intense pressure in recent months, which has resulted in a 0.2% fall in UK grocery sales. Kantar World Panel data, the company that supplied this information said that this was the first fall in grocery sales since records began two decades ago.

Crisis could get worse

It was also warned that things could get even worse, as the data available only takes into account insolvencies that have registered with Companies House, the government agency that has the main function of incorporating and dissolving limited companies.

However, many local food producers are sole traders and partnerships, meaning these insolvencies would not be dealt with by Companies House, therefore suggesting that things are likely to be even worse than the latest set of data has suggested.

Additionally, it has also been suggested that suppliers are facing additional cash flow problems, as the length of time a supplier can be expected to get paid from a supermarket is increasing.

The average farmer has to wait 47 days before being paid by a supermarket, according to the Asset-Based Finance Association (AFBA). Whilst they also claimed that 23% of suppliers now have payment terms of more than 60 days with supermarkets.

Speaking about the cash flow problems that many suppliers are facing, Jeff Longhurst, chief executive of the AFBA said: “Many in the food and drink sector believe the problems with payment terms have now become endemic.”

Duncan Smith, a partner at Moore Stephens elaborated on this further, by suggesting that food producers have a “raw deal”, where cash flow problems with supermarkets can “tip them into insolvency”.

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