UK grocery industry fights back, with first signs of sector recovery

As the UK’s supermarket price war rages on, with Tesco and Sainsbury’s recently reporting further price cuts to stem the flow of falling sales, new research from business recovery specialists Begbies Traynor indicates that stability may finally be returning to the struggling UK grocery sector, as the industry shows the first tentative signs that it has adjusted to today’s new low margin environment.

According to Begbies Traynor's Red Flag Alert research for Q3 2015, which monitors the financial health of UK companies, UK food retailers experienced their first quarterly decline in ‘Significant’ financial distress in over two years, decreasing 5% to 5,002 struggling businesses over the past three months (Q2 2015: 5,258). The last time that UK food retailers saw any improvement in financial distress was during Q2 2013 when there were 2,428 failing businesses in the sector; 51% fewer than the number struggling to make ends meet today.

During Q3 2015, the UK Food and Beverage Manufacturers, which include many of the food suppliers and farmers that supply the major UK headquartered supermarkets, also witnessed their first decline in ‘Significant’ financial distress in over two years, falling 4% to 1,553 companies during the past quarter (Q2 2015: 1,622). Since Q2 2013, the number of grocery suppliers that are suffering ‘Significant’ financial distress has increased 147% from 628 businesses.

Julie Palmer, Partner and retail expert at Begbies Traynor, said:
“The declining fortunes of the UK food retail industry and its supply chain over the past nine quarters directly mirror the meteoric rise in popularity of the German discounters Aldi and Lidl, whose no frills, low price offering has captured the imagination of British consumers, changing the face of the UK grocery sector for good.”

“While the major supermarkets have taken drastic action to readjust their ailing business models by slashing prices in a bid to compete, the UK’s damaged food supply chain remains the biggest loser from the changing food retail environment, with levels of financial distress in this sector nearly tripling in just over two years as a result of intense margin pressure.

“Whilst the UK grocery sector is not out of the woods yet, our latest quarterly findings indicate that it is seeing the first green shoots of recovery. After a protracted period of job cuts, price readjustments and forced efficiency improvements, businesses across the sector now appear to be better equipped for the new normal of a low margin landscape.”

“The big test over the coming months will be the extent to which retailers are able to pass higher wage costs on to consumers, as opposed to squeezing their still under pressure suppliers, especially in an environment where household budgets won’t see a repeat of the recent benefit of much reduced petrol prices.”