Supermarkets are putting pressure on food producers, pushing many into insolvency, says Moore Stephens
This is a follow up on an article I wrote a while ago about allowing buyers credit.
This new report which is based on information from the UK is likely to apply to most other places that have Supermarkets irrespective of where they are.
The frightening thing is that this process by the Supermarkets of screwing the food producers has been going on for decades and is likely to get worse unless the food producer is prepared to stop supplying the Supermarkets due to their onerous contracts.
Anyway here is information from this report. It is not good reading if you are a food producer dealing with Supermarkets.
The number of UK food companies entering bankruptcy is up 28% this year compared to 2013, according to research from accountancy firm Moore Stephens.
The firm said the large increase in bankruptcy contrasts with an 8% fall in company liquidations across all sectors. In the food industry, 146 companies entered insolvency in 2014, compared to 114 in 2013.
Moore Stephens Partner, Duncan Swift, who leads the firm’s Food Advisory Group, said in a statement: “The supermarkets are going through the bloodiest price war in nearly two decades and are using food producers as the cannon fodder…The fact that food producer bankruptcies are rising so rapidly, while business insolvencies are falling overall, shows just how much pressure the sector is under.”
The research found that over the past five years, too, insolvencies in the UK as a whole have decreased while they have increased among food producers.
“UK supermarkets are trying to compete on price with Aldi and Lidl but with profit margins that are far higher than these discount chains,” Swift said. “To try and make the maths work, the big supermarkets are putting food producers under so much pressure that we have seen a sharp increase in the number of food producers failing.”
The firm said that its figures may not tell the whole story, as many small producers and farmers act as sole traders or in simple partnerships, so their financial situations are not easily researched.
Meanwhile, food producers that are being squeezed by supermarkets often do not complain because they are afraid of losing key contracts, Moore Stephens said.
“It’s a raw deal for food producers who need the supermarkets to reach the public, but who can’t afford the terms of business that the supermarkets foist on them,” Swift said.
Some of the terms of business set by Supermarkets are;
- Paying for shelf space.
- Paying part or all of advertising for products
- 90 – 120 days credit terms
- Product on sale or return basis (Supermarkets only acting like giant warehouse). Fresh produce often falls in this category.
- Supermarkets want exclusive rights to product.
- Supermarkets often want your product rebadged, so the food producer loses any market recognition. This moves them into the price taker area which is not where they want to be.
- Supplier pays for transport to and from Supermarkets. Another added cost outside their control.
- Supermarkets carry out cost audits on food producers operation to find out costs and to screw the price down as far as possible.
Our view on Supermarkets
While getting an order from a Supermarket or any other large organisation might seem like a dream come true, the reality may be quite the opposite. The food producer is no longer working for themselves, but is just another cog in the Supermarkets food-chain destruction mechanism.
We have flirted with getting our 100% Pure Wasabi products into Supermarket chains, but found they were more trouble than it was worth. The increased investment to meet their projected requirements showed an unrealistic time-frame to recover that cost and move back into the black. That coupled with the Supermarkets approach to paying their bills (accounts) showed us we were better off going the “direct to end-user” route. Over the last 25 years that has proved to be the case – no credit = lower costs + less stress!