Fresh produce sector headed for a ‘car crash’
© Tim Scrivener Fresh produce suppliers are under extreme strain as multiple pressures build in the sector, with one industry insider saying it is heading for a “car crash”.
These pressures include a supply chain restructure by a leading retailer, increasingly squeezed margins, labour uncertainties, and added wage and pension costs.
According to business analyst Plimsoll, out of 1,270 leading fresh produce companies surveyed, about a quarter – 345 companies – made a loss in the past 12 months.
Of those surveyed in October, 256 were categorised as in “danger” and 176 as needing “caution”.
“As a further sign of the intense competition within the UK industry, 154 companies continue to sell at a loss for the second year running,” added the Plimsoll report.
“These serial loss makers are often undercutting the rest of the market and driving down profit margins across the board.”
See also: Supermarket treatment of suppliers – the good, bad and ugly
With average profit margins at just 1.1% in the sector, things are already tight.
But industry sources say a restructure by Sainsbury’s – the UK’s second biggest retailer – is adding further pressure.
At the beginning of the year, the supermarket embarked on a mission to drive down costs in its fresh produce chains. A number of suppliers lost millions of pounds worth of contracts in the process, while others have gained.
Retailers are constantly pushing suppliers to innovate, say sources, but pressure on margins stifles this and any opportunity for increased profits is quickly pounced on by supermarkets wanting their share.
An accountant who deals with companies in financial difficulty said margins of supermarket suppliers is “constantly being eroded”, although he doesn’t think this is any worse than usual.
This is despite 41% of shoppers saying they are prepared to pay more for British food and 77% saying they think it is important to support British farmers, according to Mintel survey figures released by Defra last week.
Costs mounting
The accountant said the most common issue experienced by supermarket suppliers he sees, is when their costs go up and they can’t pass them on to the retailer.
And costs are piling up in the fresh produce sector, with the introduction of the national living wage, auto-enrol pensions and the apprentice levy.
This comes as French president Emmanuel Macron last week proposed legislation that would allow farmers and producers to pass their costs of production on to retailers.
But some progress is being made in the UK. Tesco, the UK’s biggest retailer, signed the NFU’s Fruit and Veg Pledge this week, promising to create long-term partnerships with its growers and offer greater price and production certainty.
The other “Big Four” retailers – Sainsbury’s, Asda and Morrisons – have not signed the pledge and had not answered Farmers Weekly’s requests for comments at the time of going to press (Wednesday 25 October).
Aldi, Lidl and The Co-op have also signed the pledge.
A survey by the Groceries Code Adjudicator found 54% of suppliers thought Tesco had improved its behaviour towards suppliers.
Labour shortages already a reality
There was a 29% shortfall in seasonal workers in horticulture businesses in September, raising the average shortfall for the year to 11%, according to figures released by the NFU.
The survey also shows that the number of returning workers to farms, a critical source of the workforce, fell to 16%, its lowest level all year. The returnee rate had been as high as 65% in January.
“The situation for farms has become a lot more challenging and farmers are already experiencing the serious effects a lack of workers can have on a business, with some being forced to not harvest crops.
NFU Deputy President Minette Batters said: “If the industry continues to see serious shortfalls in the availability of workers, the knock-on effects for the supply chain and the public could be serious.
‘Seasonal’ workers misnomer
A survey by the British Growers Association (BGA) also shows the issue is about far more than flexible seasonal workers, as many fresh produce crops need workers year round.
These include brussels sprouts, cabbages, onions, leeks, carrots, parsnips, leafy salads and some top fruit.
Jack Ward, chief executive of BGA, said: “Increasingly, there are parts of the industry where we face the very real threat that crops could be left in the field because there is no one to harvest or pack them.
“Since the advent of the living wage, many seasonal workers are finding that they reach the threshold of the amount they want to earn much quicker than before. In which case they go home, leaving employers with severe staff shortages.”