Are we seeing fundamental change in the food supply chain?

You could almost hear the sigh of relief among financial analysts last month when they saw Tesco’s first quarter results – there was clear evidence that the decline in like-for-like sales was being turned around.

New chief executive Dave Lewis highlighted the point, saying: “While the market is still challenging and volatility is likely to remain a feature of short-term performance, these first quarter results represent another step in the right direction.”

The impact of intense competition on the UK’s supermarket giants has been well documented. But now research by Begbies Traynor has highlighted the effect that it is having on the UK’s food supply chain.

Its Red Flag Alert study found that during the second quarter of 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, rising 54 per cent, with 1,622 companies now struggling to make ends meet; up from 1,052 at the same stage last year.

It said: “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 per cent of all struggling companies within this sector.”

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

And that poses the question: is what we are seeing a short-term response to increased competition, or is it a step in a broader restructuring of the food supply chain in the UK?