Credit: Sharon Mollerus/Flickr

The supermarket price war has hit suppliers hard

Cheaper food isn't good news for everybody.

by Jack Torrance
Last Updated: 07 Aug 2015

Food keeps on getting cheaper. That’s a boon to the hard-pressed British consumer after years of stagnating wages, but it’s not so great for farmers and food manufacturers who are increasingly under the cosh.

There’s fresh evidence of this today from business recovery firm Begbies Traynor.  Its research found that 1,414 food manufacturers are in ‘significant’ distress, defined as having minor CCJs or being having experienced a sustained or ‘marked’ drop in their key financial figures. That’s up from 728 this time last year, a 94% increase.

‘With £1 deals for fresh produce goods such as bread and milk remaining a firm feature at the major supermarkets, it’s no wonder that suppliers lower down the food chain are struggling to achieve a fair price for their produce,’ said Julie Palmer, a partner and retail expert at Begbies Traynor.

‘Meanwhile, wastage on farms continues to be a problem as suppliers are increasingly struck by last-minute order cancellations and overzealous cosmetic specifications set by the large supermarkets when it comes to the look of food that it will accept from farmers.'

The squeeze has been particularly acute for small and medium-sized companies, with a 120% increase of those in significant distress. ‘Mass price reductions have severe consequences for less established food retailers and suppliers, particularly SMEs, who now seem to be locked in a David and Goliath-style battle; although this time it appears David can’t win,’ added Palmer.

There’s little sign of things getting better any time soon though. Latest data from Kantar Worldpanel showed grocery price inflation had fallen further to -2% in the three months to the end of March, the lowest level since at least 2006.

The Groceries Code Adjudicator is getting new powers to fine misbehaving retailers but will only be able to tackle specific instances of wrongdoign rather than deflation in general. Palmer said that the increasing prominence of discount supermarkets could also make the problem worse. Though Aldi and Lidl both source their fresh produce in the UK, Palmer suggests much of their processed food is sourced abroad.

'Looking to the future, the picture only gets bleaker for small UK food suppliers, as German discounters, Aldi and Lidl, are predicted to capture 20% of UK market share,' she said. 'As the majority of Aldi and Lidl’s packaged stock comes from overseas, struggling UK suppliers could find themselves squeezed even further, if not stamped out altogether.' That might be a bit of an overstatement but it's certainly true that Britain's food manufacturers aren't out of the woods yet.

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