United Kingdom

A year on from Palmer and Harvey: 'Knowing your Customer' is key to survival

Could the recent high level of failures in the retail and wholesale sectors indicate that Palmer & Harvey may have just been the tip of the iceberg? Aon’s Credit Solutions Deborah Peters and Ian Leslie explore the reasons behind the mounting insolvencies and explain why – for food and drink businesses –'knowing your customer' could save your business in an uncertain economic climate.

2018 will go down as a year of less boom and more bust in the UK retail and wholesale sectors. Figures from credit insurer Euler Hermes show a 27% rise (over 2017) in credit insurance claims from food and drink companies, with the total claims value also up by more than 100%. As even seemingly secure businesses hit the rocks – witness the near perilous fall of Patisserie Valerie following a potential case of financial fraud – it’s clear that for many food and drink suppliers into the retail and wholesale sectors (as well as hospitality), the need to ‘know your customer’ has never been as high a priority as it is today if they are to avoid the potential ruinous consequences of a buyer going into administration and being unable to pay their debts.

Not too big to fail

It’s almost a year ago that groceries wholesaler Palmer & Harvey went under with debts estimated to be around £700m. Few saw that coming. Despite being a highly leveraged business, it was seen by many as too big to fail. In April 2018, another notable casualty hit the news in the shape of drinks retailer and supplier Conviviality, with administrators appointed in April. Fortunately, they were able to secure a buyer and only a small part of the business resulted in credit insurance claims. As well as challenging economic conditions, changing consumer habits are having a huge impact on food and drinks businesses. Take the casual dining sector in particular as consumers choose to order food in or go to a takeaway, impacting businesses like Jamie’s Italian, Strada, Byron Hamburgers and restaurant group Gaucho, which have all run into problems this year.

Consumer demand for cheaper shopping is also boosting the discount grocery retailers – Lidl and Aldi for example – which in turn is driving change such as Tesco’s opening of Jack’s, its own discount provider. Tesco will be looking to drive margin improvement from its suppliers to ensure that Jack’s can outcompete its rivals, but in turn this will force more efficiencies to support that lower cost price.

Check your receivables risk

In such an uncertain environment – compounded by the uncertainty of Brexit – it is key that suppliers have a forensic understanding of their receivables risk; that they really know their customers and keep close to them. In the past it might have been enough to simply rely on annual credit agency reports but these are not close enough to the risk to give suppliers the confidence that their customers are in robust financial health and represent a good credit risk. It is one of the reasons why working with the credit insurance market can be so valuable: credit insurers look at much more detailed and regular management information – in addition to payment data from their policy holders – which gives a more accurate picture of how a business is performing. The core reason for buying credit insurance is to protect against bad debt but it’s an interactive policy. Unlike other policies where the only interaction might be at renewal time or when there is a claim, a credit insurance policy doesn't just sit in a drawer. There is constant interaction around new customers, new markets, and changes in customers' financial strength (good or bad) – if a customer's finances are deteriorating for example, it could be the trigger to exit from that risk, or manage it to mitigate any potential future losses. But if a customer's finances are improving, credit insurance can be used as a tool to promote growth by offering that customer an increased credit limit and the opportunity to do more business. Credit insurance can also help business growth by allowing companies to quickly extend credit terms to new customers.

Is your business covered?

Given the high number of insolvencies in the UK, credit insurers have had some criticism that cover is being withdrawn but figures from the Association of British Insurers show that the insurance market paid out £1m in claims per day in the second quarter of 2018 across all industries. And, as Euler Hermes’ figures show, food and drink companies are second only to construction in the UK for the number of claims being made against customers becoming insolvent and unable to pay their bills.

There is capacity in the insurance market and, for companies considering credit insurance, Aon is still able to place credit insurance cover with a good level of coverage. As these losses in the retail and wholesale sectors continue however, there is a possibility that capacity will reduce so it is important for any company that is looking for credit insurance, does so quickly.

Ultimately, whether a company chooses to buy credit insurance or not, it is key that every business thinks carefully about how they’re assessing their receivables risk and how that will change in the future given the economic and political headwinds. 'Knowing your customer' is a great first step towards effectively managing that risk.

Take advantage of an Aon receivables health check

We offer all our clients a receivables health check as part of their credit insurance. The health check grades their customers green, amber and red – while also providing a numbered rating within that grade – so businesses can have a clear idea of which of their customers represent a genuine credit risk.

To help you understand how valuable this information could be for your company, we’re offering food and drink businesses – you do not have to be an Aon client – a receivables health check for their top 20 customers.

For your receivables health check, contact:

Ian Leslie | ACMA CGMA | Business Development Director | Aon |


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For your receivables health check, contact:

Ian Leslie
ACMA CGMA | Business Development Director