A new report this morning from insolvency specialists Begbies Traynor Group has highlighted a worrying trend for investors in food and drink manufacturers: the number of firms in significant financial distress rose by 92% to 1,410 during the final quarter of 2014.
Alongside this, the number of food and drink retailers in distress rose by 58% to 4,552 during the same period.
The moral of the story is clear — these firms are being caught in the crossfire of a vicious supermarket price war.
Squeezed hard
Food and drink suppliers such as Premier Foods (LSE: PFD) are seeing their profit margins and payment terms squeezed like never before by supermarkets like Tesco — on whom they depend completely for volume business.
Debt-laden Premier Foods would probably be in trouble even without a supermarket price war, but this certainly isn’t helping: in it last management update, Premier warned that sales had fallen by 5.6% during the first nine months of 2014, and said that trading profit expectations for 2014 were “towards the lower end of market expectations”.
Retailing ain’t easy
At the other end of the chain, smaller food and drink retailers — such as Majestic Wine (LSE: MJW), McColl’s Retail Group (LSE: MCLS) and Conviviality Retail (LSE: CVR) — are being put under pressure by the rapid spread of supermarket convenience stores.
Majestic Wine only managed like-for-like UK stores sales growth of 1.1% over the Christmas period, despite cutting its gross profit margin by 0.5% to ensure “pricing remained competitive in this more promotional environment”.
Like-for-like sales at convenience store operator McColl’s fell by 0.9% over the Christmas and New Year period, and by 1% during the final quarter of last year. McColl’s operating margin is a wafer-thin 2%, leaving little room for falling sales or price cuts.
Conviviality Retail, which runs off-licences including Bargain Booze, is due to publish its interim results next week. However, the firm’s last trading update, in November, flagged up a 1.7% fall in like-for-like sales, and Conviviality’s 2.6% operating margin does not offer much security in the face of aggressive supermarket discounting on alcohol sales.
Who will win?
Although the companies I’ve highlighted here may well survive, it won’t be easy, and I’m not convinced that the generous dividend yields offered by Conviviality, McColl’s and Majestic will remain safe.