UK grocery sector shows green shoots of recovery as distress levels fall

Kasmira Jefford
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Pressure on the UK food supply chain remains high (Source: Getty)

Britain’s supermarket sector is showing signs of recovery, according to new research from Begbies Traynor that reveals the number of companies struggling to stay afloat declined for the first time in over two years.

The business recovery specialist’s latest Red Flag Alert research, which monitors the health of UK companies, shows levels of “significant” financial distress among UK food retailers fell by five per cent in the third quarter, with 5,002 now struggling to make ends meet.

That compares with 5,258 in the second quarter, as grocers attempt to turn themselves around and claw back sales lost to the German discounters Aldi and Lidl.

The UK food and beverage manufacturers sector, which includes many of the food suppliers and farmers that supply the major UK supermarkets, also witnessed their first decline in “significant” distress in over two years, falling four per cent to 1,553 companies during the past quarter.

However this is still almost triple the 628 businesses that were viewed as struggling in the second quarter of 2013, as suppliers’ margins remain under pressure.

Julie Palmer, partner and retail expert at Begbies Traynor, said: “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.”

Last month Tesco boss Dave Lewis insisted the company’s balance sheet was on the mend after selling its Korean business Homeplus and carrying out a number of cost-cutting measures including shutting its headquarters in Cheshunt and disposing of a number of its supermarket sites. It has also pledged to introduce fairer terms for suppliers including quicker payments for smaller businesses.

Sainsbury’s has also been bolstering its balance sheet after selling its pharmacy business for £125m this summer. The grocery brought some relief to investors last month after reporting a better-than-expected 1.1 per cent decline in like-for-like second-quarter sales last month.

However with the crucial Christmas season ahead and no let-up in competition from the discounters, it is still too early to tell which supermarkets will come out on top.

Palmer said: “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.”

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