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.
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 isnt 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 aint easy
At the other end of the chain, smaller food and drink retailers such as Majestic Wine (LSE: MJW), McColls 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 McColls fell by 0.9% over the Christmas and New Year period, and by 1% during the final quarter of last year. McColls 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 firms last trading update, in November, flagged up a 1.7% fall in like-for-like sales, and Convivialitys 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 Ive highlighted here may well survive, it wont be easy, and Im not convinced that the generous dividend yields offered by Conviviality, McColls and Majestic will remain safe.
My money is on Tesco and its peers — and although you may not agree, I’d urge you to take a look at the firms highlighted in “5 Shares To Retire On“ before you make a final decision.
This wealth report includes details of two consumer goods firms that are expected to prosper, despite the supermarket price war.
The report also includes details of three other firms with a track record of outstanding dividend growth.
To receive your free, no-obligation copy today, click here now.
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