Drinks sector facing further distress

The figures were startling but unspecific. While the pace of inflation slipped back to 4% in March, the British Retail Consortium reported the worst slump in high street spending since it started to compile the figures back in 1995.

Total sales values were 1.9% down in the month, so in real terms they were almost 6% below those in the same month last year. And that was before the new tax and benefit measures hit.

Most households will find their disposable incomes lower when they receive their April pay cheques and with one in five 18- 24-year-olds (the target group for much leisure spending) out of work, it doesn’t take much imagination to realise that times are tough across the board. But what about the drinks sector in particular?

Creditors are awaiting news of Deloitte’s attempts to sell Oddbins as a going concern following its £20 million-plus collapse; some are wary about the ominous silence from the administrator who had initial hopes that it might be sold “within a week or so”. But if the latest data is anything to go by, Oddbins will not be the only notable failure in the drinks sector this year.

The corporate restructuring specialist Begbies Traynor says that bars, restaurants and leisure operators are the business sectors showing the worst signs of corporate distress as consumers draw the purse strings ever tighter.

Using a scoring system based on data from courts and company accounts, the group calculates that some 186,000 UK businesses were in distress at the end of March – a 15% rise on the first quarter in 2010 and 26% up on the final three months of last year.

Frighteningly for suppliers, in the first quarter of this year, the number of bars and restaurants in distress soared by a whopping 68% compared with 2010, while the number of leisure operators facing trading difficulties rose by 60%.

While a competitor’s failure can boost a surviving rival’s trade, that is no consolation to creditors left unpaid for orders. Worse, the number of potential sales outlets is reduced, further restricting the prospects of gaining new listings to compensate for importers’ and wholesalers’ lost volumes. And here there is depressing news.

Data compiled by the Financial Times suggests that in the next four years Britain’s “big four” supermarket chains plan to build 19m sq ft of new selling space – that’s more than the amount of space already occupied by Sainsbury or Asda today.

While much of that new space will be targeted at making further inroads into “non-grocery” markets, their core grocery business is slowing fast.

One estimate suggests that growth decelerated from 4% in the four weeks to February 20 to 2.8% by mid March. So sales are being outstripped by inflation. But another survey suggests that supermarket food selling space will increase by 2.5% this year.

The Bank of England’s economic strategy is based on inflation (ie retail prices) being squeezed by consumers cutting back their spending and resisting price rises. So just as the supermarket giants are expanding their floor space, their sales values are coming under pressure, especially as there are already signs of price wars as the big four play beggar my neighbour. That means ever more demands on suppliers to meet keener price points.

That, of course, puts even more competitive pressure on independent retailers. Never have suppliers’ credit controllers had a more pivotal role to play.

Finance on Friday, 15.04.2011