During the initial period of the recovery which followed the recession, it was easy to imagine that the problems facing businesses were all but eliminated. Unfortunately, the latest data from consultancy firm EY demonstrates that this is entirely false as profit warnings have now reached their highest level since 2008.
According to the report by EY, the third quarter of this year saw 69 profit warnings issued by participating firms, compared to just 56 in the same period in 2013. This marks the highest level for the three months to the 30th of September in six years, furthering fears that the recent period of growth may not be as sustainable as initially thought.
Alan Hudson, head of restructuring for UK and Ireland at EY, believes that a number of factors including low disposable income, structural changes within numerous sectors and high levels of competition have combined to cause this result.
He says; “New entrants, new technologies and shifting consumer behaviour continue to challenge established business models and nowhere is this more visible right now than in food retailing.
“The pressure on sales and margins is largely focused on established supermarkets, struggling to adapt to the move away from the big weekly shop and the challenge posed by an expanding group of warehouse, supermarket and high street discounters.”
Tesco is one of the major firms listed which issued a profit warning during the third quarter, following a run of financial difficulties which caused high profile resignations within the management structure of the supermarket brand. This, along with a further five profit warnings within the sector, saw the retail industry record its highest level of profit warnings in three years.
The construction and materials industry also posted a higher than expected number of profit warnings, with the total of five reaching a peak not seen since the second quarter of 2012. Mr Hudson believes that this is due to the number of older contracts which are now experiencing squeezed margins. In addition, material and operating costs for the construction sector have risen significantly in the past year.
Capital transformation leader for Europe, Middle East, India and Africa at EY, Keith McGregor, warns that this high level of profit warnings seen in the UK seems set to continue as the year draws to a close.
He says; “Profit warnings have continued apace from the third into the fourth quarter.
“This implies that, at best, companies and markets are misreading the post crisis economy and are struggling to adapt to rapid structural changes and, at worst, have once again over-estimated the pace and nature of this recovery.”
With big names within the retail industry seemingly having a worse time at present than at the height of the recession, and even the booming construction industry struggling to widen profit margins, it seems that the illusion of a smooth economic recovery is over.
