Supermarkets are being warned they could cause the collapse of hundreds of small food suppliers if they continue cutting prices in a war for consumer loyalty.

Research by industry analysts at Begbies Traynor shows that while food sales were up at most large UK supermarkets during December, “brutal” discounting is lumping pressure on suppliers as well as independent high street grocers.

The company’s ‘Red Flag’ research for the fourth quarter of 2014 shows that food retailers in “significant financial distress” grew 58% compared to the same period last year.

In numerical terms under-pressure firms rose from 2,878 at the end of 2013 to 4,552 in the latest study, suggesting that the supermarket price war is hitting them hard.

Food manufacturers came off even worse, however, with cases of significant financial distress leaping 92% year-on-year and 1,410 business are now struggling to make ends meet.

Julie Palmer, partner at Begbies Traynor, said: “A perfect storm is brewing for SME food suppliers at the bottom of the food supply chain, with many suffering a double hit from larger suppliers demanding “loyalty” payments as well as vanishing margins as a result of the inevitable aggressive supermarket price war.

“Adding to their misery, the UK’s food producers and suppliers have failed to see any benefit from the rise in popularity of the German discounters Aldi and Lidl, since much of their canned and packaged stock is sourced from overseas.

“With shocking increases in distress among the supermarkets’ main suppliers, the largest chains need to tread very carefully if they want to prevent a new crisis creeping up through their supply chain.

“Even the Government’s appointment of a grocery code adjudicator last year seems to be having little impact, with industry insiders reporting that the new watchdog lacks real powers and is still failing to protect producers from being squeezed by the supermarkets.”