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Supply chain squeeze: How supermarkets can benefit from trade credit insurance

As today’s economic uncertainty and supply chain challenges persist, trade credit insurance can help supermarkets be more resilient.
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By Sharon Sweeney , 

Client Executive, Trade Credit

03/05/2023 · 3 minute read

From eggs to beef to vegetables — many popular household ingredients used in everyday meals have experienced shortages in recent weeks. These supply challenges, exacerbated by today’s difficult economic landscape, are putting unprecedented pressures on UK supermarkets. Aside from managing their current supply chain risks, supermarkets in the UK should also explore whether trade credit insurance can help them prepare for future challenges.

Supermarkets grapple with supply chain disruptions

Food shortages at many UK supermarkets have become a top news item. Eggs, beef, tomatoes, and oranges have all been notably absent from shelves in recent weeks, coinciding with food inflation’s surge to 15%; the highest since records began in 2005. Concurrently, a more cost-conscious consumer is leading to increased competition, with many supermarkets trying to retain market share by offering promotions and deep discounts. Despite this effort, grocery prices are still rising at a record pace, aggravating current supply challenges.

Shortages are mainly due to supply chain disruptions stemming from various issues, including:

  • Staff shortages due to the current tight labour market leading to soaring labour costs.
  • Deteriorating consumer sentiment and an increased focus on price when making purchase decisions.
  • Elevated global energy prices putting pressure on companies’ finances.
  • Regulatory issues surrounding intercountry imports following the United Kingdom’s exit from the European Union.
  • Disrupted harvests due to weather changes in both Europe and North Africa, leading to a dramatic decrease in food production.
  • A dearth in the supply of agricultural fertilizer due to the conflict between Russia and Ukraine forcing two of the world’s biggest fertiliser manufacturers offline.

Although the majority of supermarkets have to contend with these issues, some are more acutely impacted. For example, supermarkets that refrigerate the vast majority of their products are prone to heightened energy costs eroding more of their profitability. Similarly, geopolitical tensions can swiftly cripple supply chains that are more vital for some organisations. Further, supermarkets that source more products from regions experiencing extreme weather patterns may see a higher impact on their supplies.

Growing in times of adversity

Challenging economic conditions tend to have a more profound impact on organisations with operational challenges. Trade credit insurance can enable finance and mitigate risk, providing an attractive option for growing securely when faced with economic disruption. Inflation, which in the UK has remained in excess of 10% since September 2022, may swell turnover. However, profitability may remain low, requiring supermarkets to possess solid funding and correct capital management.

As today’s economic uncertainty and supply chain challenges persist, trade credit insurance can help supermarkets be more resilient through providing specific cover for agreements and commerce with suppliers. Trade credit insurance can also provide cover for financial losses when customers are unable to pay for purchases. Benefits include:

  • Non-payment protection: As business failures and insolvency rise, the financial risks associated with non-payment become abundantly clear. Cover against losses and fallout from non-payment is a sensible precaution for all organisations.
  • Strengthened credit control: Trade credit insurance policies bring greater discipline to credit control.
  • Creating business with confidence: Trade credit insurance can also offer credit-worthiness insight around potential new partners, allowing focus on opportunities where the risk of future payment default is lowest.
  • Becoming more attractive: Businesses are able to review their balance sheet and current cash position. As a company de-risks itself, it subsequently becomes more attractive for financiers.

The supermarket sector, similarly to retail and the food and beverage industry, can also benefit from this form of insurance. However, securing coverage has become more difficult; especially due to depleted capacity. Additionally, some insurers have pulled out of the market in recent years.

Positively, the recent improvement in communication and transparency between insurers and insured has been a marked progression and capacity challenges are easing.

A brighter future

Despite the challenging landscape there are still reasons for optimism. With inflation forecast to recede as the year progresses, current pressures on supermarkets may ease. The expected economic respite, however, should not lead to complacency and organisations should take steps to become more resilient to both evolving and emerging risks.

Understanding supply chain dynamics is imperative for managing and transferring risk. Furthermore, a trade credit insurance policy could help gain access to superior financing rates and additional capacity.

To find out more about our trade credit services, please contact your Marsh UK representative.

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