As the coronavirus pandemic continues to spread, its economic impact continues to grow. The pandemic is shaping up to be the most significant economic shock of a generation, with widespread implications in all sectors.
The global reach of COVID-19 will mean that supply chains will be affected as more and more countries enter sustained periods of lockdown and social distancing.
Here we take a look at five key sectors in the UK that are particularly at risk due to a killer combination: high reliance on imports plus existing financial distress.
The sectors we are going to look at are: pharmaceuticals, food and drink, construction, automotive and retail.
The UK imported £21.9bn of pharmaceutical products in 2019, with over 80% of those imports coming from within the EU. At the time when their products could be needed most, supply chain issues could cause big problems for pharmaceutical companies.
As critical hubs for pharmaceutical manufacturing within Europe, such as Germany, are already starting to lockdown populations and close their borders, the supply chain impacts for UK business are likely to be significant.
While the government will likely prioritise medical supplies, it may leave smaller pharmaceutical businesses struggling. Red Flag Alert’s most recent data shows that many firms in this area are already facing significant distress.
- 157 companies that manufacture basic pharmaceutical products are in significant distress (an 8% increase on the same time last year).
- 706 dispensing chemists are experiencing significant financial distress.
- 1,556 specialist medical practice activities are experiencing significant distress (an increase of 100 since last year).
Food and Drink
The UK imported £48.5bn of food and drink last year – around 9% of all imports. Again, the majority of this (about 70%) came from the EU. Countries that grow a lot of our fresh fruit and vegetables, such as Spain and Italy, have already been struck by the virus and the production, picking and packing of food is very likely to slow significantly over the next few months.
This will affect not only supermarkets, which are already struggling to restock fast enough in the face of consumer panic and stockpiling, but also individual manufacturers that rely on ingredients from worldwide suppliers. Coca Cola, for example, has already announced that its suppliers in China were experiencing delays in the production of the sweeteners found in Diet Coke.
And, of course, bars and restaurants that have already been struggling with huge demand-side issues will likely start to suffer supply chain problems as well – a situation that is far from ideal for those businesses hoping to capitalise on the increase in takeaway orders. Over 17,000 of them are already experiencing significant distress (a 3% increase from last year), while 50 restaurant businesses are in critical distress.
- There are 4,871 takeaway food businesses in significant distress (a 5% increase on last year), and with many of them relying on imported products it may become challenging to maintain the same food offerings.
- Specialised food stores have performed well over the past 12 months, with significant distress reducing by 6%. Supply chain disruption for those that rely on importing may reverse that trend.
The UK also imports a large proportion of the raw materials and tools needed in construction, importing nearly £25bn of products such as wood, iron, steel, tools and glass last year alone. If supply chain disruption creates a lack of critical materials, it may mean a further hit to an industry reeling from a period of uncertainty and business failures.
The construction industry has been in difficulty for some time, and it is the sector with the second highest number of firms experiencing extreme or significant distress in our analysis after support services. Over 63,000 are in significant distress and over 500 are in critical distress.
The outlook for infrastructure is particularly bad, with a 26% increase in significant distress over the past year in companies constructing bridges and tunnels, 12% for railways and 7% for those constructing utility projects. These firms are also likely to rely on imports of various precious metals – this was the UK’s largest single category of imports last year at £69bn.
Again, the potential shutdown in operations abroad could have a significant knock-on effect on businesses that are already vulnerable.
- 13,686 companies involved in the development of building projects are in significant financial distress (a 7% increase since last year).
- 6,360 companies that build domestic buildings are in significant financial distress (a rise of 4% since last year).
- Companies engaged in specialist construction activity often have intricate international supply chains – 4,477 of those businesses are already in significant financial distress.
The UK imports a lot of cars. Vehicles are our third biggest import category, with over £58bn of imports in 2019. The disruption in the industry began in February, when companies with factories in China (including Volkswagen and Nissan) began to halt production.
But while China opens up again, this is unlikely to ease the pressure for UK firms as 84% of our car imports come from within the EU. Fiat Chrysler announced on 11 March that it would close four factories in Italy as part of the country’s broader efforts to address the situation and minimise the risk of employees catching coronavirus. In Germany, a BMW employee has already tested positive for it.
Over 14,000 automotive firms are already experiencing significant distress according to our analysis. There’s also been a 12% increase since last year in automotive firms experiencing critical distress.
On the demand side, the economic shock is likely to mean consumers are tightening their purse strings and not rushing out to buy a new car. This could further compound difficulties in this sector, leading to several firms struggling to make it through.
- There are 1,029 car parts and accessories retailers in significant distress; it seems likely these retailers will experience supply chain challenges.
- 5,892 vehicle maintenance and repair businesses are in significant financial distress. Issues with acquiring parts will likely add pressure.
- There has been a 7% increase in distress since last year in companies that rent and lease vehicles – supply chain issues may exacerbate this distress.
Every retail sector is going to be affected with supply chain issues; there are 31,000 general retailers already experiencing significant financial distress and pressure on these businesses is likely to increase.
Retailers of electronic equipment are going to be hit hard. We’ve already seen a significant impact on the technology industry from China’s shutdown, with the cancellation of key conferences and the closing of factories that supply big brands such as Apple.
With the production slowdown spreading to other technology powerhouses such as South Korea and Germany, the supply chain issues look to worsen through 2020.
According to Red Flag Alert’s analysis, there has been a 15% year-on-year increase in distress in retailers of telecommunications equipment, a 12% year-on-year increase for mobile retailers and a 9% increase for computer retailers.
As with the automotive sector, supply chain issues in retail are likely to be combined with a reduction in demand from consumers as the country hunkers down to see off the virus. Here are some other retail sectors that are in for a tough time.
- 2,925 specialist clothing stores are in significant distress.
- There has been a 14% increase in distress in toys and games retailers. With a reliance on international supply chains, these businesses look set to struggle for stock as far ahead as next Christmas.
- Furniture and lighting stores have international supply chains – 1,545 of these businesses are already in significant financial distress.
Reg Flag Can Help in These Risky Times
Several organisations are there to help offer support through Covid-19 with managing cash flow, negotiating a Time to Pay arrangement with HMRC, through to sourcing emergency finance. Though the UK government is already taking action to try to protect the economy, many businesses will inevitably find the next six months challenging.
For this reason, it’s essential to know how well the firms you work with are coping with these problems. If you have warning that a business in your supply chain is struggling, you can take steps to protect yourself.
Red Flag Alert is a business intelligence solution that provides real-time business data on 6.5 million UK businesses. It provides health ratings that predict insolvency in the next 12 months, so if one of your clients is struggling you can take immediate action and reduce the impact.
Business health ratings are updated in real time and take over 100 data points into account so that even in a rapidly changing situation, you’ll be protected.