2008 will be tough for small firms, but big boys are secure

The food and drink industry faces a rocky ride in 2008, but there remain opportunities for growth if businesses are shrewd, according to processors and analysts.

Smaller manufacturers would be "constantly playing catch up" to recover rising input costs, said Bob Waldschmidt at Merrill Lynch International. "If you're a £10M or a £100M turnover own-label supplier, I suspect things will be more difficult than if you're Nestlé."

Andrew Johnson, chief executive of cake and desserts firm Elisabeth the Chef, predicted raw material and commodity price inflation would expose weaker businesses. He added: "Businesses will find it tough because of consumers tightening their belts. Discretionary spend will be affected. Premium food and restaurants may suffer."

However, Evolution Securities analyst David Hallam said big names such as Dairy Crest, Northern Foods and Uniq were in good shape. "Northern Foods' management finally appears to be getting a grip on the business, while Dairy Crest continues to increase the percentage of its sales from branded goods."

Simon Peacock, food specialist at investment expert Catalyst, said rising interest rates and the credit crunch would make private investors careful about investing in the industry, adding: "The credit crunch is still making any deal at the top end quite difficult."

He forecast increased consolidation in the commodity industries and greater overseas investment in the UK.

There could also be hope for exporters, said export market development consultancy Food from Britain (FFB). It predicted record growth in 2008 as markets in China, India, central and eastern Europe grew and UK producers capitalised on areas such as health and wellbeing.

The latest figures - to be released shortly - are expected to show food and drink exports in 2006 were a record £10.5bn. In the first nine months of 2007 these were exceeded and 2008 exports would exceed £11bn, despite foot and mouth disease and adverse exchange rates, said FFB.

Meanwhile, Duncan Swift, head of Grant Thornton's food and agribusiness recovery group, feared retailers could use the economic climate as a licence to bully suppliers. "My concern is rising prices will be used as an excuse for inaction at a time when we should be stamping on the worst abuses by the supermarkets such as sudden changes in payment terms, and retrospective discounts," he said.