My previous blogs have detailed the threats and challenges being faced this year by businesses across the country, many of which have been macroeconomic / geopolitical and beyond the realms of directors being able to fully control.
Combined with record levels of debt and creditor arrears on balance sheets, this has inevitably led to rising insolvency numbers as companies have faced up to either being unviable or unable to restructure outside of an insolvency procedure, or creditors’ have taken action (analysis indicates HMRC in over 50% of cases). With depressed levels (when compared to long term averages) through and since the pandemic, this bounce in insolvencies was likely to happen once the vast Covid support measures were scaled back and removed, but they have been accelerated by rising inflation including wage pressures and spiralling energy costs, rising interest rates and falling consumer and business confidence.
Insolvency Service statistics highlighted a stark increase in corporate insolvencies in October, up 16% on September to 1,948, and even more striking a rise of 32% when compared with October 2019. The rising volumes now include numbers of administrations, traditionally used as an insolvency tool for restructuring or closing down larger businesses than liquidations.
Whilst there are some sectors bucking the trend, such as Technology, IT and pharmaceuticals, many are struggling. Retail and leisure / hospitality businesses will be holding out for a Christmas and / or World Cup lifeline, but what of the food and drink sector itself, including those businesses involved in the growing, production, processing and manufacturing of food and drink.
The Food and Drink Federation (FDF) industry report for Q3 highlighted that the industry’s confidence fell to its lowest level since it had reported (2018), with a pessimistic near-term outlook driven by eroded margins. Widespread labour shortages and unprecedented energy costs – up to 22% of operating costs compared to 12% in 2021. Lots of food and drink businesses are highly capitalised, so could be exposed to significant rising borrowing costs eroding profits and cash. As a result, capital expenditure / investment is on pause by approaching 50% of those businesses – something which may further be impacted by the reducing capital allowances rates announced in the recent Autumn Statement. Businesses are prioritising investments that can help alleviate internal cost pressures or ensure an efficient use of energy and continued new product development (including packaging). The post-Brexit costs and burden of doing business with the EU, the sectors principal export market, also continue to weigh on business.
Sector analysis of the Insolvency Service data (based on SIC codes) shows how these concerns are translating in to a significant rise in company insolvencies in England and Wales, at a higher rate than other sectors. There were 65 food and drink manufacturer insolvencies in Q3 2022, compared to just 18 and 21 in the same period in 2021 and 2019 respectively. On a YTD basis, there were 155 insolvencies in 2022 over 3 times those in the same 9 month period last year and up from 90 in 2019.
Should this be a surprise? The factors mentioned above are acutely felt in F&D (as well as more general) manufacturers, usually being capital intensive and therefore highly leveraged businesses as well as high users of energy – the National Farmers Union has warned that British food yields of energy-intensive crops are likely to hit their lowest levels since records began in 1985. And whilst input cost rises are being keenly felt throughout the sector supply and delivery chain, this is compounded by labour shortages hitting both the agriculture, fisheries and forestry producers, as well as the hospitality industry, probably caused by a combination of Brexit and less post-pandemic worker migration into the UK. The EU is also the sector’s largest export market, which saw a 15% decrease in total exports by value between 2019 and 2021 (9% decrease 2020-21).
Regionally, the sector is an important part of the West Midlands economy, with the number of businesses approaching 1,000 (out of c11,700 across the UK). Whilst insolvency data by region and sector is not readily available, in terms of good news, our region outperformed the UK nationally when measured in terms of exports, increasing 13% between 2020 and 2021, to a value of £0.8bn.
F&D manufacturing has multiple directly related industries, not least agriculture, logistics, packaging, general manufacturing / engineering and retail. It would seem all are in for a tough time in 2023. For the F&D manufacturing sector, with the UK recession predicted to be longer and deeper than our international counterparts, identifying and seeking opportunities to drive export growth, particularly as new trade deals deliver increased market access, may be key.
As ever, those businesses that have financial resilience and flexibility can survive and thrive, but preparing for and planning for the tough times is a must, including taking relevant expert advice in areas such as funding, debt structure, forecasting and restructuring.
To discuss this or hear more about RSM’s Restructuring for Growth guide please contact firstname.lastname@example.org or visit our webpage, Restructuring for growth – review, reset, rebuild | RSM UK