Whole Foods Market, Inc. recently lost a major supplier to bankruptcy, according to BusinessInsider, leaving certain locations with completely bare grocery shelves. Whole Foods stated that finding a new supplier could take months; forestalling them from restocking inventory in Virginia, Washington D.C, and New York. Consequences of this supplier’s bankruptcy are the immediate loss of store sales and reputational damage, notably on social media. One dissatisfied Whole Foods customer summarized the shopper experience on Twitter:
“Conversation today at Whole Foods amongst the shoppers. All agree that since Amazon takeover quality of produce has plummeted and now there are empty shelves. A great opening for a competitor nationwide, maybe @sprouts @OrganicConsumer”
Supply chain professionals should be asking themselves:
- Could a similar supply chain disruption happen to my company?
- How can I identify this ahead of time?
- What can I do to prevent it?
Scenarios like this are avoidable. Grocery stores, restaurants, transportation, and food manufacturers should always evaluate the financial condition of their counterparts to maintain and ensure a healthy supply chain. CreditRiskMonitor® continually monitors corporate bankruptcy risk across all sectors, including the U.S. grocery wholesale industry.
The FRISK® score assesses company financial health, measuring the risk of bankruptcy based on a “1” (highest risk) to “10” (lowest risk) scale, with anything between “1” and “5” categorized in the “red zone.” Subscribers can see which of their counterparties are the most vulnerable to bankruptcy. Conversely, the DBT Index measures monthly dollar-weighted historical payment performance (similar to Dun & Bradstreet’s PAYDEX® score), which are notoriously non-predictive in volatile times and potentially misleading in the case of public companies (see Cloaking Effect). According to our research, payment performance has missed bankruptcy 80% of the time before the filing while the FRISK® score has accurately captured 96% of them over the last decade.
Why do payment performance-based scores miss so many public company bankruptcies? Managing payments to suppliers is a very important task for the CFO and Treasury functions at most companies. Maintaining timely payments is important to ensure that suppliers continue to ship goods, providing inventory to the company. CFOs who do not manage their payments are sending signals to the market (and their suppliers) that they may have a cash conversion issue which in turn creates a self-fulfilling vicious cycle for those firms. If the firm is public, the CFO can raise cash to continue making timely payments right up to the point of filing for bankruptcy by tapping capital markets via debt raising or stock selling.
For a contextual example, let us consider a set of wholesale food distributors, all of whom are paying their bills on time, yet some have completely different financial risk profiles.
|Company||FRISK® score||DBT Index|
|U.S. Foods Holding Corporation||7||9|
|Performance Food Group Company||7||9|
|Core-Mark Holding Company, Inc.||5||9|
|United Natural Foods Inc.||2||9|
In 2020, the broader grocery industry maintains an average FRISK® score between “6” and “7.” Therefore, best practice for companies like U.S. Food Holding Corp, Performance Food Group Co, and Core-Mark Holding Company, Inc. would be to conduct periodic reviews.
Going further down the list, the FRISK® scores of SpartanNash Co and United Natural Foods are deep within the high-risk red zone, indicating elevated financial stress and heightened risk of bankruptcy. Those subscribers who are doing business with these wholesalers need to examine them carefully, regularly, and begin establishing substitution plans. Specifically, when reviewing red zone companies, best practice would include frequent reviews of our industry peer comparisons, financial statement ratios and trends, news alerts, and management Discussion & Analysis (MD&A) statements.
Most of all, the Sarbanes Oxley Act ensures that CEOs and CFOs demonstrate ownership of their companies’ financial statements. SOX requires these executives to certify their company’s financial reports and enforces significant penalties (including personal criminal liability) for executives who are found to have acted fraudulently. The MD&A must fully disclose any material liquidity risk and the content often provides significant insight into the firm’s stability and whether it could default and/or file for bankruptcy.
Using the FRISK® score with the company’s MD&A is the most effective way to analyze supplier risk. United Natural Foods’ MD&A, for example, reveals that its ABL Loan Agreement carries a minimum fixed charge ratio of 1.0x. The company remains in compliance, but in the first fiscal quarter of 2020, the company swung to an operating loss even when excluding impairment charges tied to its SuperValu acquisition. A sustained deterioration in operating performance could lead to a default.
If a premium grocery chain like Whole Foods can experience a multi-month SKU disaster, chances are that it can happen to your company too. Evaluate the financial health of your supply chain, see which vendors are most at risk of failure, and take the necessary steps to safeguard against them. Our bankruptcy risk scores, industry peer analysis, and other tools help supply chain professionals accurately evaluate and proactively monitor their vendors. Tap our accuracy and insights today to make better decisions and avoid costly breaks in your supply chain.