Fresh produce companies are faced with a stark choice, according to the latest industry analysis from Plimsoll - hold on to sales at reduced margins, or opt to reduce in size and scale.
The latest findings from the analyst show that 2008 has not been a comfortable year and economic conditions are accelerating the rate of change in the market.
To put this into context, 342 of the 1,200 firms analysed by Plimsoll are losing money - a direct consequence of rising costs and price reductions, set against a slowing market.
Of most significance is the amount of fresh produce firms using an overdraft as a permanent means of finance - a dangerous position for any company to find itself in, said Plimsoll senior analyst David Pattison. “The banks are taking a critical look at all unsecured finance and are reassessing their exposure to small businesses,” he said. “This could leave these firms in a position where their overdraft would need paying back on demand. Many of these firms simply cannot afford to do this.”
At least 207 companies identified in the analysis are running a dangerously high chance of failure, unless their problems are addressed.
Plimsoll analysed previously failed companies, and noticed two characteristics in eight out of 10 buinesses. First, the financial performance of the company is allowed to slide; costs are not brought under immediate control and, as a knock-on effect, debts increase and interest payments then further deplete profitability.
Second, an outside factor often hits the company, such as the loss of a large contract, a bad debt, or a slowdown in business. The failing company simply does not have the financial resources to adjust in time and the inevitable occurs.
However, there is some good news. Proving their resilience, 168 of the 1,200 firms analysed have reported a return to profit after having previously reported losses - a result of tighter cost control and a reduction in overheads.
Short term, Plimsoll predicts increased acquisition activity. There will be “the classic distress sales as predators are able to profit from other’s misfortunes, snapping up essentially sound businesses at bargain prices,” said Pattison. “Larger players in the market may use the opportunity to snap up smaller players in the market who add value to their core business. These companies will be prepared to pay well for these niche companies, as they offer a clear and easy route to new markets.”
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