BUSINESS
SUPPLIERS FEEL PRESSURE OF RETAILERS ’ PRICE WARS
by Paul Nixon of Wilkins Kennedy
RECENT REPORTS HAVE REVEALED THAT THE NUMBER OF FOOD PRODUCTION COMPANIES ENTERING INTO INSOLVENCY HAS TRIPLED DURING 2015 AS AROUND 162 COMPANIES WENT IN TO ADMINISTRATION . THE REASON HAS BEEN TIED TO THE AGE-OLD WAR ON PRICES , WHICH HAS ALLOWED BIGGER NAMES IN THE RETAIL GAME TO SQUEEZE THE LIFE OUT OF THEIR SUPPLIERS .
The blame has laid at the doors of the big four food retailers , who for some time now have been involved in a lengthy and historical price war . As a way of securing more footfall , supermarkets undercut their competition with the aim of winning new customers based on lower price . However , someone ultimately has to pay that price and it looks as though the food suppliers are bearing the brunt of it .
The extreme scales upon which these retailers operate their pricing strategies is based on keeping them as low as possible without having too big an impact on their own profits . So the supplier is faced with growing pressure to squeeze their own in order to meet these retailer ’ s demands .
There is also added pressure from the budget retailers , similar to the likes of Aldi and Lidl , for larger supermarkets to keep their prices in check . Aldi and Lidl ’ s recent publicised expansion plans are not going to help as it could force other food retailers to remain more closely in competition .
This will mean further unwelcome news for the already stretched suppliers , who are evidently having issues staying afloat . But the heavy clout of the big-name retailer , which is likely to be a smaller food producer ’ s only route to market , leaves businesses with little choice but to squeeze their own profit margins dry .
However , according to recent reports , retailers such as Sainsbury ’ s and Morrisons have abandoned their price match campaigns , instead promising to focus on consistently lower prices . Earlier this year , Morrisons announced that they would no longer be price matching against Aldi and in March , Sainsbury ’ s axed a scheme that gave its customers cash coupons at the checkout if their shopping was more expensive than Asda .
This would indicate that retailers could be changing tack , adopting a less aggressive approach to retaining customers – although it is likely that the price cutting will still be going on behind the scenes .
However , it might not all be bad news for suppliers of FMCG as there could be a thing or two to learn from the fashion industry which has also been facing difficulty of late .
For many months now , retailers of fashion stores have been reporting terrible sales due to the unprecedented warmer winter months and recent cold spell in early spring . This has resulted in consumers holding on to their money as they either prolong their winter purchases , or , wish to make them once the season has passed and the spring / summer stock has hit stores . So , the poor retailer is left out of pocket , unable to capitalise on the seasons or shift the stock from previous .
What is beginning to happen here , is a faster , more flexible supplier model , which has almost made fashion become part of the FMCG world . We know that the weather in the UK can be notoriously fickle , so retailers gave up long ago trying to second guess the seasons . Instead , they have had to adapt to a “ want it now ” approach , which sees more fast fashion go through stores as quickly as the liquid sunshine .
In other words , when there is a hot spell on the horizon , fashion retailers are capturing that market and capitalising on it , ordering their suppliers to produce summery clothing at barely two weeks ’ notice . Then , just as soon as the good weather passes , newer stock can come in to the stores for the gloomier weather .
It sounds like an ideal world , doesn ’ t it ? But , the fact is , it is already happening . High street retailer , Zara , is already doing it and it allows them to work much more closely with their suppliers , as opposed to squeezing them out , to move from conception to display in just weeks . This model is likely to be preferred by suppliers , because short-ordering means less money needs to be tied up on their behalf in
stock purchased through large forward orders . The retailer wins too , because it allows them to capitalise on this “ once it ’ s gone , it ’ s gone !” fast fashion turnaround .
Perhaps in the future we could see food suppliers facing a similar deal , as weatherdependent items such as ice cream , cold beers and things to cook on the barbeque can be ordered in line with the impending demand .
For food suppliers currently facing difficulty , or even potential insolvency , Wilkins Kennedy can help . We can work with you to monitor your cash flow and identify areas where overheads could be minimised and provide general business advice . We can also advise upon the options for companies facing insolvency and give guidance upon the responsibilities of directors of companies in this position .
For more information , email Partner , Paul Nixon , at paul . nixon @ wilkinskennedy . com or call on 01233 629255 .
www . wilkinskennedy . com
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