FDBusiness.com

Within British manufacturing, particular pressure is being felt by companies that supply the embattled UK retail sector. Some of the worst affected companies are food, non-alcoholic beverages and clothing manufacturers, finds new research from Company Watch. Company Watch, the financial health monitoring specialists, analysed the published financial accounts of the largest 681 UK food, non-alcoholic beverage and clothing manufacturers. It found that 173 companies or 25% are currently in its Warning Area, with health ratings of 25 or below out of 100.

The Company Watch research showed that many retail manufacturers in the Warning Area, while having acceptable levels of profitability, had weak balance sheets that lacked the strength necessary to support their trading. This makes these companies particularly vulnerable if their profits dry up in the face of sector pressures for lower prices from their powerful retail customers at the same time that their input costs are rising.

A particular feature of balance sheets of retail manufacturers is the prevalence of intangible assets, usually goodwill from past acquisitions, which have limited appeal to funders such as banks, especially during difficult trading conditions.

Examples of lowly rated companies include Premier Foods, the owner of many famous food brands including Hovis, Mr Kipling and Oxo, which has a Company Watch H-Score of only 14 out of 100 and has been in the Warning Area consistently for the past five years.

Also, Dairy Crest, makers of Cathedral City cheese and the Utterly Butterly and Clover spreads, fell into the Warning Area after its March 2011 results with an H-Score of 20 and was pushed deeper when its interim figures to September 2011 produced a lower H–Score of 16.

Drinks manufacturer Britvic, owners of the Robinsons, Tango and 7Up brands, is another manufacturer which is in the Warning Area with a current H-Score of just 17/100, a financial rating partially driven by the high level of intangible assets which are almost 15 times the company’s net worth.

Nick Hood, head of external affairs at Company Watch, comments: “The accounts we examined are mainly for periods ending during the latter part of 2010 and early 2011, which means that these figures do not yet reflect fully the upward pressure on manufacturers costs from rising energy and commodity prices. Once these feed through, we can expect the financial health of the sector to deteriorate further, with more manufacturing companies falling into our Warning Area and becoming vulnerable to insolvency or restructuring.”

Statistics on all UK companies for the past 14 years show that one in four companies in this ‘red danger zone’ have either gone on to file for insolvency or have undergone a major financial restructuring.

The analysis is based on each company’s last five years published accounts as processed through the Company Watch “H-Score” risk assessment model. The average H-Score across the whole retail manufacturers sample was 52 out of a maximum 100.

Nick Hood continues: “Our survey highlights the problems facing retail suppliers. They, like the retailers themselves, are suffering a knock on effect from a fall in consumer confidence and reduced disposable incomes of shoppers. At a time when like-for-like sales are falling and consumers are demanding ever more value for money through deep discounts, retailers are inevitably making most suppliers share the pain.”