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Supply chain issues and rising costs are driving profit warnings

Supply chain issues and rising costs are driving profit warnings of UK listed companies back to pre-pandemic levels, according to new research from EY.

Profit warnings issued by those in consumer-facing sectors, including retail and grocery producers, accounted for 33% of all warnings in the third quarter of the year as rising energy prices, supply bottlenecks and labour shortages spread across the economy.

EY-Parthenon’s latest Profit Warnings report reveals that FTSE retailers have issued 14 profit warnings in the first three quarters of 2021, the lowest pace of warnings since 2014. The reopening of the economy and release of pent-up consumer spending has boosted the sector, but – as recent profit warnings show – supply chain issues are starting to spread and impact product availability in the crucial final quarter of the year.

Stresses are also building in the food sector, where FTSE Food Producers have issued four profit warnings so far in 2021, the highest pace of warning since 2017 outside the exceptional peak of 2020. The sector is facing a perfect storm of shortages, rising prices and transport issues, with concerns rising ahead of the Christmas period. Overall, 65% of consumer-facing company profit warnings cited cost or supply issues in Q3 2021.

Silvia Rindone, EY UK&I Retail Lead, said: “The re-opening of the economy has released huge untapped demand, especially in homewares and fashion. Households have accumulated an unprecedented £200bn of ‘excess savings’, with a strong labour market also helping to fuel spending.

“But the flipside is that the cost and availability of stock have become critical issues, due to the interaction between exceptional demand, rising energy costs, a tight labour market and a broad range of supply chain issues. The level of retail profit warnings remained low over the summer, but almost all cited supply chain disruption. The rising cost of living – alongside tax and benefits changes – could also hit consumers’ ability and willingness to spend.

“Supply issues could make this quarter’s sales lumpy and even less predictable than usual. Consumers may decide to stockpile and there is likely to be little excess stock for retailers to clear in the Black Friday sales – which may also change spending patterns this year. But overall, we expect strong consumer spending this Christmas and into 2022.”

In total, the number of profit warnings issued by UK listed companies rose to 51 in the third quarter of the year, up 19 from Q2 2021, with supply chain issues also remaining acute in many FTSE industrial sectors compounded by delayed or cancelled contracts, as companies suspended or limit production in response to the direct or knock-on impacts of rising costs or the lack of goods and labour.

Rising energy prices have also generated considerable stress in the retail energy supply sector, with EY expecting the number of UK suppliers to consolidate to under 20, from 70 at the start of 2021.

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