One in three fresh produce companies has taken a hit on margin to maintain sales levels.

A study into just how desperate to cling on to sales the UK's top 1,500 fresh produce companies have become has revealed that 35 per cent have accepted a reduction in margin or have fallen into loss as a sacrifice for maintaining or increasing sales levels.

Some statistics extracted from the analysis reveal the extent to which profitability is being compromised as companies' sales targets come under increasing pressure.

• 19 per cent of companies are already selling at a loss

• 7 per cent of companies are losing money for the second year

• 60 per cent of companies' margins have fallen

• 35 per cent of companies have maintained sales yet with reduced margins

• 2.2 per cent is the average margin in the industry, down from 2.4 per cent last year.

• 5 per cent is the average return on investment.

David Pattison, of researcher Plimsoll, said: "We have seen how recently the retail sectors, furniture, electrical goods, and clothing have been in the news as companies fight on the high street for consumer spend. We could b seeing the early signs of similar intensity in the fresh produce sector.”

A key question, of course, is what is driving this issue? Pattison’s response is: "As companies become increasingly desperate to win sales or to retain existing customers against aggressive competition, they are forced to up the ante. By reducing prices, extending special sales terms, or putting more value into their services, many must take a hit on their margins. You could argue that this is because the customer has so much choice."

He believes low profitability is a long term problem. "Once customers get used to getting better value or paying less, getting them to increase their spend can often take years. Many companies, although in this current analysis, will not last that long based on their present results."

So will we see some companies fail in the next 12 months? Pattison said: "It can take between three and five years for a company to fail; large corporations can take 10 years. Low industry margins and loss making will, more often than not, lead to increasing debts, particularly if the company is expanding and taking on extra costs. Interest payments then further reduce margins. These companies are then forced into extra sales incentives to maximise capacity. High levels of debt and low margins are a recipe for disaster."

The full analysis of the Top 1500 UK Fresh Produce companies is aimed at the busy managers that need to understand their competitors' behaviour and their commercial decisions. It concludes by separating out the 285 weakening companies whose strategy must change, from the 686 companies that are so fundamentally strong that any downturn in profitability is merely an inconvenience.

Copies of the analysis are available for £305 including free couriered delivery by calling 01642 626400 or visit plimsoll.co.uk. Readers of freshinfo are entitled to a five per cent discount.

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