BEGBIES TRAYNOR GROUP PLC October 22, 2014
Latest Red Flag Alert Report for Q3 2014
- Three national supermarkets have incurred adverse financial actions* over the past quarter
- Supply chain issues and changing customer spending patterns prove the biggest threats
The bitter price war between the UK's largest supermarkets will do little to entice shoppers back from the value German food retailers as consumer spending patterns are changing for good, warns business recovery specialists Begbies Traynor.
According to Begbies Traynor's Red Flag Alert research for Q3 2014, which monitors the financial health of UK companies, the UK's food retailing industry experienced the sharpest increase in 'Significant' financial distress of all sectors monitored, rising 11% over the past three months to 4,239 struggling businesses. On an annualised basis, the sector's fortunes have deteriorated even further, with 'Significant' financial distress increasing 53% from 2,766 last year.
Meanwhile, more severe cases of 'Critical' financial distress rose 23% over the last quarter, including seven large food retailers, categorised as businesses with more than 500 employees. Of these, three are well-known household brands, all of which have incurred adverse financial actions* over the past quarter; typically an indicator that they are failing to pay some creditors until well beyond the agreed terms.
Julie Palmer, Partner and Retail analyst at Begbies Traynor, said:
"With Tesco in trouble following revelations of its £250m profits overstatement, and dampened sales expectations from Morrisons and Sainsbury's, all have been forced to cut prices in a bid to encourage shoppers back through their doors and recapture market share. But despite fresh produce deflation of around four percent, this is not having the desired effect as consumer tastes are changing.
"Spoilt for choice within the traditional supermarket model and against a backdrop of falling living standards and stagnating real wage inflation, UK consumers are more aware than ever of the low prices available at Aldi and Lidl. The German discounters' focus on simpler product ranges and successful own-label products means that, regardless of the ongoing price war, they can continue to lead on price while perfectly matching what shoppers now demand from their weekly shop.
"While many of the Big Four supermarkets are losing market share to the discounters due to price pressure, recent events have shown that the real issues lie within their own processes, which include supply chain disputes, inefficient legacy sites, and in some cases poor financial management. These operational issues need to be fixed quickly to avoid Q3's poor performance turning into a depressed Christmas sales period.
"Whatever the outcome of the Tesco investigation, over the coming year we can expect to see the return of a cleaner, more transparent food retail industry, which both engages more with the end customer but also allows suppliers to re-engage with supermarkets on better and more open terms."
Critical problems by Sector:
Sector | Q3 2013 | Q3 2014 | Percent change | Q2 2014 | Q2 2014 | Percent change |
Automotive | 83 | 92 | 11% | 88 | 92 | 5% |
Bars & Restaurants | 120 | 130 | 8% | 146 | 130 | -11% |
Construction | 494 | 435 | -12% | 499 | 435 | -13% |
Financial Services | 77 | 75 | -3% | 49 | 75 | 53% |
Food & Bev Mfr Beverage Mfrg | 12 | 18 | 50% | 17 | 18 | 6% |
Food Retailing | 37 | 48 | 30% | 39 | 48 | 23% |
General Retail | 165 | 134 | -19% | 144 | 134 | -7% |
Hotels | 34 | 34 | 0% | 22 | 34 | 55% |
Ind Transport & Logistics | 61 | 63 | 3% | 62 | 63 | 2% |
Leisure | 30 | 24 | -20% | 20 | 24 | 20% |
Media | 62 | 57 | -8% | 68 | 57 | -16% |
Other Mfrg | 216 | 173 | -20% | 195 | 173 | -11% |
Others | 122 | 106 | -13% | 114 | 106 | -7% |
Printing & Packaging | 23 | 21 | -9% | 18 | 21 | 17% |
Professional Services | 86 | 87 | 1% | 83 | 87 | 5% |
Real Estate | 238 | 189 | -21% | 211 | 189 | -10% |
Sports & Recreation | 16 | 27 | 69% | 25 | 27 | 8% |
Support Services | 167 | 141 | -16% | 154 | 141 | -8% |
Telecoms & IT | 95 | 64 | -33% | 97 | 64 | -34% |
Travel & Tourism | 35 | 35 | 0% | 41 | 35 | -15% |
Utilities | 5 | 2 | -60% | 5 | 2 | -60% |
Wholesaling | 114 | 98 | -14% | 90 | 98 | 9% |
All Sectors | 2,946 | 2,606 | -12% | 2,740 | 2,606 | -5% |
Critical problems by Region:
Region | Q3 2013 | Q3 2014 | Percent change | Q2 2014 | Q3 2014 | Percent change |
East of England | 232 | 189 | -19% | 237 | 189 | -20% |
London | 523 | 437 | -16% | 471 | 437 | -7% |
Midlands | 394 | 355 | -10% | 347 | 355 | 2% |
North East | 67 | 78 | 16% | 77 | 78 | 1% |
North West | 335 | 316 | -6% | 332 | 316 | -5% |
Nrthn Ireland | 41 | 68 | 66% | 38 | 68 | 79% |
Scotland | 146 | 129 | -12% | 145 | 129 | -11% |
South East | 642 | 566 | -12% | 611 | 566 | -7% |
South West | 210 | 171 | -19% | 183 | 171 | -7% |
Wales | 118 | 91 | -23% | 86 | 91 | 6% |
Yorkshire & Humberside | 214 | 197 | -8% | 196 | 197 | 1% |
All Regions | 2,922 | 2,597 | -11% | 2,723 | 2,597 | -5% |
* adverse financial actions include County Court Judgements (CCJs) totalling more than £5,000 within a three month period, typically an indicator that businesses are failing to pay creditors until well beyond agreed payment terms
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