The number of profit warnings issued by food producers in the first quarter of 2006 has increased to a two-year high, thanks to pressure from rapidly emerging consumer trends and the pricing power of supermarkets, research by accounting firm Ernst & Young revealed yesterday (9 April).
Four food companies offered five product warnings in the quarter, meaning that 11% of the overall sector experienced financial difficulties, Ernst & Young found. Eleven profit warnings were issued in the 12-months to Q1 2006, an increase of 44% on the preceding period.
Traditionally, smaller companies with a turnover of less than GBP200m (US$349m) account for the majority of warnings. However, this quarter half the companies who issued warnings had turnover in excess of GBP1bn, Ernst & Young said.
Food companies cited “customer problems” as a chief cause of financial trouble, with strong resistance to the price rises needed to offset higher energy costs. “Delays and discontinued contract negotiations” also proved challenging for food producers. “Supermarkets don’t want to pay prices and will drag their heels in contract negotiations until the offer is improved,” Ernst & Young said.
Food producers have found themselves under increasing pressure from supermarkets and consumer trends, Keith McGregor, corporate restructuring partner at Ernst & Young observed. “Supermarket chains are insisting on broader and new product choice, lower prices and rapid response to fast changing promotions putting food producers under pressure like never before. If this were not enough to contend with, some food companies are feeling the pressure of the focus on healthy eating, as seen in many recent television programmes and magazine articles. Consumers are paying attention.”
Asda, the UK’s number two supermarket, has attracted criticism of late over its ‘buy for less’ round of negotiations. Reports have suggested that the UK unit of Wal-Mart is demanding one-off payments from suppliers in order to fund consumer price cuts. However, the supermarket denies putting increased financial strain on food manufacturers.
“We have a reputation for being tough but fair,” a spokesperson for the company told just-food. “In terms of our customers, they expect us to deliver low prices. In terms of our suppliers, they need to grow with us and that’s really what ‘buy for less’ is about.”
Rather than adding to the challenges facing suppliers, Asda said that it wants suppliers to reap the benefits of the company’s increased market share. The supermarket chain told just-food that it wasn’t asking for up-front payments without first formulating a joint agreement for growth. “We want the benefit of our growth to be shared between ourselves, our customers and our suppliers,” Asda stated.