The Food and Drink Federation’s latest State of Industry report for Q1 2023 reveals that investment by the UK’s food and drink manufacturers is being impacted by expected longer-term market volatility. As the voice of the food and drink manufacturing industry, which contributes over £33 billion to the country’s economy and supports over 451,000 jobs, the Food and Drink Federation (FDF) highlights the unprecedented disruption caused by Brexit, a global pandemic, and the war in Ukraine, particularly affecting the food sector. This has led to significant cost pressures on all elements of the industry, including ingredients, labor, packaging, energy, transport, and logistics.
To shield consumers from the full impact of cost rises, food and drink manufacturers have taken measures such as reducing production and freezing recruitment. However, the State of Industry report warns that this approach is resulting in the halt or postponement of vital infrastructure and innovation projects. This, in turn, is likely to have a negative impact on long-term productivity and employment opportunities for the wider economy.
According to Balwinder Dhoot, FDF Director for Growth, many food manufacturers have canceled or paused investment projects due to high-cost pressures and a challenging regulatory environment. Their aim is to absorb as much of the soaring costs as possible without passing them on to struggling households during the cost-of-living crisis. However, the industry’s labor shortages are forcing companies to restructure, leave vacancies unfilled, and reduce production, leading to rising wage bills and hindering growth.
In order to build a sustainable and resilient food supply chain that supports the economy, sustained investment is essential to drive technological advancements and innovation. Dhoot emphasizes that if the Government can create a stable and positive business environment, the UK’s largest manufacturing sector is ready to contribute to the much-needed productivity growth.
The industry is also facing uncertainties concerning energy prices in the upcoming winter, with futures markets predicting higher rates. Additionally, companies anticipate an average pay increase of 5.4% over the next year, adding further strain to operating costs and contributing to inflationary pressures.
Despite these challenges, the FDF has observed an improvement in business confidence, which has increased by 17 points to -30 in the last period. The report highlights that 84% of respondents expect production levels to either maintain or increase over the next year, reflecting a growing belief in the industry’s resilience and adaptability.
Other Findings:
- The Windsor Framework has raised concerns within the industry, particularly regarding implications on sales to the EU, the lack of clarity from the government, and evolving labeling requirements.
- Government pressure to impose additional regulations and poorly designed recycling initiatives like Extended Producer Responsibility (EPR) may unintentionally lead to further price increases for consumers.
- The government must actively engage with the food and drink sector on these issues if it is serious about driving down inflation.
- In Q1, industry labor vacancies decreased to 5.9% from 7.0% in Q4, reaching the lowest rate since Q1 2022 (5.2%). However, they remain uncomfortably high, almost double the rate of the UK manufacturing sector as a whole (3.1%) and above the UK’s rate of 3.5%.
- Global food prices have consistently fallen and are currently 22% below their peak in March 2022, but still 25% above their level in February 2020.
- Although gas prices have fallen since December 2022, when there was a seven-fold increase compared to the pre-pandemic period, volatility in energy markets remains elevated. After reaching a level 15% above pre-pandemic levels earlier this month, gas prices are on the rise again.