• January and February are traditionally tough for food and hospitality businesses, but in 2022 they may be particularly challenging.
  • Labour shortages, increasing debts, and falling consumer demand could contribute to a sharp rise in insolvencies. But those companies that ride new trends will grow fast.
  • The challenge for companies is to protect cash flow from customers at risk of collapse, while expanding trading relationships with tomorrow’s winners.

For companies in the food, food processing and hospitality industries, the end of 2021 looks to be very busy — a long-awaited festive gift. But even though tills will likely be jingling, there are substantial risks to cash flow lying in wait, like a post-Christmas hangover.

Companies need to actively manage their working capital ahead of what may be a very challenging 2022, with the first quarter of the year looking particularly tough. Companies need to monitor their supply chains for disruption and watch their customers for signs of distress and non-payment.

Kieron Franks, Assistant Head of Risk Underwriting at Allianz Trade UK & Ireland, notes that the start of the year is traditionally the most challenging for these sectors. But 2022 could be particularly difficult.

"There will be a raft of insolvencies,” he says. “For some, this Christmas will be the last hurrah."

On the demand side, there is a risk of consumers having the post-festive season blues. Consumers are already feeling higher inflation, but in the first months of 2022 they will also see their energy bills rise and tax increases. The savings many of them made during lockdown may soon be a distant memory (and may be spent). Kieron says: "After reopening, people were going out more regularly than they probably would, but that's probably not going to be sustainable."

Food and hospitality industries are also facing cost pressures. The rise in energy prices is well-documented, but less well-known are sharp rises for food and food ingredients such as bulk cream (up 12% in October according to industry data) and bulk unsalted butter (up 10% in the same month). On 1 April 2022, restaurants will start paying VAT at the standard 20% rate for the first time in almost two years, meaning they will either have to raise prices or see margins cut further.

And then there's the issue of staff shortages. From fish processing plants in Northern Scotland to meat processors in Devon, these are impacting some firms' ability to maximise their festive profits. This risks a replay of summer 2021, when many firms in hospitality were unable to capitalise on the “staycation summer” due to a lack of staff, meaningindustry revenues to the end of September were 10% down on 2019.

In August, the Food and Drink Federation told MPs that the food and hospitality sectors had 500,000 vacancies, of which 180,000 were in the hospitality sector and 100,000 were HGV drivers — whose absence has multiple knock-on effects in the supply chain.

Although some furloughed employees are now being released onto the labour market, many vacancies require specialist skills. Some businesses, such as food processing firms, are investing in equipment to reduce labour requirements, but Kieron notes: "It's not something you put in quickly, and can be expensive."

In addition, many companies, especially those in hospitality, have a higher debt burden. In October, the Bank of England noted that UK SMEs have 25% more debt than before the pandemic, but in some sectors — including food and hotels — the increase was more than a third. The result is that cash is draining away in interest payments. High debt has already seen casualties in the “fast casual” dining chain, with restaurants such as Jamie Oliver’s Italian chain collapsing even before the pandemic.

Kieron notes that with protections against winding-up orders still in place, some companies may be able to limp along a few more months. But unless the government changes the timetable, these protections will end on 1 April 2021, creditors will then be able to wind up businesses who don't pay their bills.

This doesn't mean that all firms in the sector will struggle. Kieron points out that changes in consumer choice, such as the demand for meat-free food, create substantial growth opportunities: "I've been through a number of recessions, the businesses that have reacted well have adapted and got stronger."

It is this divergence that poses a problem. A company’s customer base may range from zombie companies barely surviving, to those set for explosive growth. In this environment, working out which should be moved to pro forma terms, and which should be extended credit, is particularly difficult.

Knowing your customers is key. Ask yourself, which firms could have a cash flow crisis because of supply chain issues, leaving them potentially unable to pay your invoices? And which firms are struggling to deliver goods or services because of labour shortages?

The difficulty is that much of the information needed is unclear; the risk factors are the credit risk iceberg beneath the surface.

"This is why they should look at trade credit insurance," says Kieron. "We have people who are looking at these businesses every day, making calls on liquidity levels and their outlook."

Trade credit insurance reimburses a company if a customer fails to pay an invoice. But Kieron notes that there are very substantial information benefits too. This information flow from the trade credit insurer helps firms move zombie companies onto pro forma terms (to protect cash flow) and extend additional credit to those seizing new opportunities (to capitalise on growing order volumes).

The value of this information is long-term, because the turbulence in the sector is long-term too. Ian Wright, chief executive of industry body the Food and Drink Federation, told MPs in October: "Six months ago, almost all our businesses thought it was transitory. Now every business I know is expecting this to last until 2023 and into 2024… every single one."