- Britain's supermarket giants need to resolve operational issues to avoid recent poor performance turning into a depressed Christmas sales period, recovery specialist Begbies Traynor says.

Its latest Red Flag Alert research, which monitors the financial health of UK companies, says the food retailing industry experienced the sharpest increase in 'significant' financial distress of all sectors monitored in the third quarter, rising 11% over the past three months to 4,239 struggling businesses.

On an annualised basis, the sector's fortunes have deteriorated even further, with 'significant' financial distress increasing 53% from 2,766 last year.

Meanwhile, more severe cases of 'Critical' financial distress rose 23% over the last quarter, including seven large food retailers, categorised as businesses with more than 500 employees. Of these, three are well-known household brands, all of which have incurred adverse financial actions* over the past quarter; typically an indicator that they are failing to pay some creditors until well beyond the agreed terms. Begbies Traynor partner and retail analyst, Julie Palmer, said: "With Tesco in trouble following revelations of its £250m profits guidance overstatement, and dampened sales expectations from Morrisons and Sainsbury's, all have been forced to cut prices in a bid to encourage shoppers back through their doors and recapture market share. But despite fresh produce deflation of around four percent, this is not having the desired effect as consumer tastes are changing.

"Spoilt for choice within the traditional supermarket model and against a backdrop of falling living standards and stagnating real wage inflation, UK consumers are more aware than ever of the low prices available at Aldi and Lidl. The German discounters' focus on simpler product ranges and successful own-labelproducts means that, regardless of the ongoing price war, they can continue to lead on price while perfectly matching what shoppers now demand from their weekly shop.

"While many of the Big Four supermarkets are losing market share to the discounters due to price pressure, recent events have shown that the real issues lie within their own processes, which include supply chain disputes, inefficient legacy sites, and in some cases poor financial management. These operational issues need to be fixed quickly to avoid Q3's poor performance turning into a depressed Christmas sales period.

"Whatever the outcome of the Tesco investigation, over the coming year we can expect to see the return of a cleaner, more transparent food retail industry, which both engages more with the end customer but also allows suppliers to re-engage with supermarkets on better and more open terms."

Story provided by