As the UK’s largest supermarkets up their game in the race to win back customers from the German discounters, their means of slashing prices and delaying payments to suppliers means that the food retail industry has never been tougher for the UK’s smallest food suppliers, independent grocers and farmers, warns business recovery specialists Begbies Traynor.

According to Begbies Traynor's Red Flag Alert research for Q2 2015, which monitors the financial health of UK companies, the UK's food retailers continue to experience rising ‘Significant’ financial distress, increasing 38% to 5,258 struggling businesses over the past year (Q2 2014: 3,804), 97% of which (5092) are SMEs. However in reality the UK’s food supply chain that keeps these stores stocked is by far the biggest loser.

During Q2 2015, the UK Food and Beverage Manufacturers, which include many of the food suppliers and farmers that supply the major UK headquartered supermarkets, witnessed the highest year on year increase in ‘Significant’ distress of all sectors monitored by the Red Flag research, rising 54%, with 1,622 companies now struggling to make ends meet; up from 1,052 at the same stage last year.

Within this sector, 1,436 SME food suppliers are bearing the brunt of the supermarkets’ drastic turnaround strategies and the new savage landscape in the UK retail food industry, representing 89% of all struggling companies within this sector.

Julie Palmer, Partner and retail expert at Begbies Traynor, said:

“With Tesco recently hailing the success of its Q1 performance after four rounds of price cuts since January and even Waitrose now joining the sector’s discounting foray, clearly the novelty of a bargain continues to resonate with consumers. Unfortunately the retail environment is set to become even bleaker for the UK’s small food suppliers who are facing the harsh reality that price slashing is not just a short term pain but something that’s here to stay.

“The supermarkets have managed to successfully rebase their own models by reducing product ranges, moving away from bulk-buy offers and squeezing supplier margins still further, while failing to clean up their act on late payments, taking more than a month longer than agreed terms to settle debts with suppliers. Some are even looking into launching their own food manufacturing facilities to give them even tighter control over costs and the ability to offer still more aggressive pricing – signalling yet another nightmare scenario on the horizon for the UK food supply chain.

“While it’s a welcome development that the Groceries Code Adjudicator now has the power to fine supermarkets up to one percent of their UK turnover if found to be in breach of the Code, this is unfortunately unlikely to have a major positive impact for the supply chain, as a recent sector study found that almost one in five suppliers to the UK’s 10 biggest retailers are reluctant to raise any issues with the industry regulator for fear of retribution from their largest source of income.”