Manufacturing & Supply Chain

Expected longer-term market volatility is impacting investment by the UK’s food and drink manufacturers, according to the Food and Drink Federation’s latest State of Industry report for Q1 2023. The Food and Drink Federation (FDF) is the voice of the food and drink manufacturing industry – the UK’s largest manufacturing sector, which contributes over £33 billion to the country’s economy, supporting over 451,000 jobs.

In recent years, there has been unprecedented disruption across the supply chain following the quick succession of three structural shocks – Brexit, a global pandemic and the war in Ukraine – which has disproportionately impacted food. This has led to substantial upward pressures on all cost elements of the industry, from ingredients, labour and packaging to energy, transport and logistics.

Faced with these cost rises, food and drink manufacturers have used a variety of ways to shield consumers from the full impact of these increases, compared with the other industries and parts of the food chain, including reducing production and freezing recruitment.

The State of Industry report reveals this approach means vital infrastructure and innovation projects are being halted or postponed, which is likely to have a negative impact on long-term productivity and jobs for the wider economy.

FDF Director for Growth Balwinder Dhoot said: “Because of high-cost pressures and a challenging regulatory environment, many food manufacturers have had to cancel or pause investment projects over the last year as they absorb as much of the soaring costs as possible, to avoid passing them on to struggling households during the cost-of-living crisis.

“The industry’s significant labour shortages are forcing some companies to restructure their businesses, leave vacancies unfilled and reduce production – all of which contributes to rising wage bills and hampers growth, which is vital for a strong economy.

“Building a sustainable and resilient food supply chain which supports the economy requires sustained investment to drive technological advancements and innovation. If the Government can create a stable and positive business environment, the UK’s largest manufacturing sector, is ready to play its part in driving the productivity growth that our country needs.”

There is also significant uncertainty about the energy prices in the winter, with the futures markets expecting higher rates. Companies also anticipate an average pay increase of 5.4% over the next year. These add further strain to operating costs and contribute to inflationary pressures.

Despite this challenging landscape, the FDF has found business confidence is starting to move in a more positive direction, climbing 17 points in the last period to -30. 84% of respondents expect production levels to maintain or increase over the next year, reflecting a growing belief in the industry’s resilience and ability to adapt.

Other Findings

• The Windsor Framework has raised apprehensions within the industry. Uncertainties surrounding implications on sales to the EU, a lack of clarity from the government, and evolving labelling requirements have emerged as focal points of concern.
• Continuous pressure from Government to impose additional regulations within the Windsor Framework and poorly designed recycling initiatives like EPR, while well-intentioned, will inadvertently lead to further price increases for consumers.
• If the government is serious about driving down inflation it must actively engage with the food and drink sector on these issues.
• Industry’s labour vacancies fell to 5.9% in Q1 compared to 7.0% in Q4, the lowest rate since Q1 2022 (5.2%). However, they remain uncomfortably high at almost double the rate of UK manufacturing as a whole of 3.1% and above the UK’s rate of 3.5%.
• Global food prices have persistently fallen – they are now 22% below their Mar-22 peak, but still 25% above their Feb-20 level.
• Gas prices have also fallen since Dec-22, when we saw a seven-fold increase compared to pre-pandemic. But volatility in energy markets remains elevated, after having reached a level of 15% above their pre-pandemic levels earlier this month, gas prices are now on the rise again.