Supermarkets' emergency plans to keep shelves full

by Zoe Wood

Fears that scores of supermarket suppliers will go bust next year have led the country's major chains to draw up emergency plans to replace them, The Observer can reveal.

Separately, on the high street, bailiffs are getting ready for their busiest Christmas ever, with a slew of retailers expected to go into administration.

Supermarket chain Asda, led by Andy Bond, is working on 'worst-case scenarios' across the board - combing its supplier base and examining alternatives to them. 'Suppliers are under a lot of pressure and there will be casualties,' said a senior executive at another store chain, which has already stepped in to pay troubled suppliers ahead of schedule. 'We need each other, it is not a zero-sum game.'

The need for alternative supply lines has been brought into focus by the collapse of Woolworths and its distribution arm, EUK, which supplied the supermarkets as well as Zavvi, the former Virgin Megastores, with CDs. However, cracks have been showing in other areas, with milk processor Dairy Farmers of Britain in the midst of a restructuring that will see two dairies close and up to 640 jobs lost.

The damage a collapsed supplier can do is laid bare at Zavvi, which has been destabilised during the most important sales weeks of the year. It has been forced to suspend its website with former parent Virgin stumping up a £5m 'fighting fund' to keep shelves filled in the key trading days left between now and Christmas. But with no obvious successor to step into the void left by EUK, Zavvi faces a grim outlook in 2009.

Tesco said it was supporting suppliers that needed extra help by giving an indication of future orders. 'The worst thing for a supermarket is for a supplier to go under, because you are left with a big hole and investing in a new one is a big deal,' said a Tesco spokesman.

Analysts say the supply of ready meals is vulnerable. Major players include the heavily indebted Premier Foods and Icelandic group Bakkavor. The latter has £140m trapped in collapsed Icelandic bank Kaupthing, although it says its UK operation, which supplies all the major grocers, is not affected.

Relationships between supermarkets and suppliers are often tense at the best of times. Suppliers hoping for additional protection from the powerful supermarkets - who have been accused of making unreasonable demands in price negotiations - look set to be disappointed as the Competition Commission's plan to create an ombudsman looks doomed. Asda will not sign up to the scheme, so the matter looks set for referral to the government's business department in the new year.

The collapse of Woolworths has come to symbolise the dire state of the high street, where retailers are facing the worst trading conditions in a generation. And with a spate of administrations expected early in the new year, bailiffs are gearing up for a festive feeding frenzy around 'quarter day' - when even struggling retailers must find three months' rent - which falls on Christmas Day.

'We have had more instructions than ever before and I've been in this career for 21 years,' said Jon Dawkins, chief executive of bailiffs' firm Dawkins, whose clients include the Crown Estate, Transport for London, asset managers Prudential and Threadneedle, as well as all the major property agents.

Landlords want to get their cash while retailers still have money in the tills after the Christmas rush - and before administrators are called in and cash is ringfenced for secured creditors.