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'Some food firms aren't worth investing in'

03 December 2010

Many company owners in the food processing industry are bemoaning the scarcity of bank lending to businesses but market analysts Plimsoll says the banks are right – many companies in the market are just not worth the risk

“Recent high profile failures in other sectors (namely the travel and construction sectors) show the danger of operating on micro-profit margins and the same thing could be heading to the food processing industry in 2011,” says Plimsoll.

“342 companies in the market exist on low profit margins of less than 1.5% with 168 of these making a loss. Any bump in the road will be enough to see them fail because they cannot rely on cheap credit to see them through anymore.”

Plimsoll further states that there are some perfectly good companies being turned down and it's essential banks should play their part in getting business moving again. “However, nobody should blame them for refusing credit to companies that might not be able to pay it back.”

Many companies are turning up at the bank saying “We spend almost as much as / more than we make”, says Plimsoll. “The financial sector was correctly vilified for reckless lending that lead to the economic crisis but in at least 342 cases in the food processing industry they are right. If banks are to meet government and electorate demands to lend responsibly then many companies with consistently low margins pose too big a risk.”

Plimsoll says it also seems debt levels have little to do with the ability to secure funding. “Even companies with minimal or no debt are struggling to get credit if they have thin margins, there is simply too much risk attached. We picked 113 such companies in the UK Food Processors industry who have little to no debt but have profit margins that are just too thin.”

On the flipside, there is good news for 97 prudent companies that made tough decision early and focused on the bottom line instead of chasing sales over the last few years – they now have the edge in the market, says Plimsoll. “Ironically, these are the companies that the banks are most willing to lend to. One or two of these solid companies should look to capitalise on this advantage and borrow money to invest in their future through a couple of smart acquisitions.”

Readers of Food Processing are entitled to a £50 discount of this new special edition of the Plimsoll Industry Analysis – Food Processors. Call 01642 626400 for further details and quote reference PR/FI38.

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