Food business insolvencies are expected to increase by about 15% in 2015.
Market performance at a glance
- The British food sector is facing decreasing proft margins due to a combination of intensifying price wars in the retail segment, a general decline in volume sales (leading to factory inefficiencies), wage growth and high energy prices. That said, lower commodity prices provide some support to the supply chain, and food importers benefit from the stronger pound against the euro.
- Capital requirement is high in the food sector, as many food companies operate with credit cycles that require high working capital funding. There is a general trend of increased payment terms, causing the credit cycle to increase and leading to additional funding requirements.
- The average payment duration in the UK food industry is 45-60 days. The number of protracted payments, non-payments and insolvency cases has increased in the last six months due to increased pressure on businesses´ margins and larger players squeezing payment terms and prices along the supply chain. Payment delays and insolvencies are expected to increase further in the coming months due to increasing competition for shelf space and adverse contractual terms with retailers. Food business insolvencies are expected to increase by about 15% in 2015.
- Our underwriting stance remains open for businesses in the food sector, but these are subject to close monitoring. We are more relaxed with buyers that currently benefit from lower commodity prices and from the current strong pound Sterling. However, due to volatility, raw material prices and exchange rate developments have to be carefully monitored. For instance, the stronger pound sterling has been beneficial to fruit and vegetables importers, but at the same time contract losses with retailers have negatively affected some businesses in this subsector. As a result of lower lending appetite in the small and medium-sized (SME) segment, we are generally more cautious about smaller food businesses.