Probably the biggest finding to arise from the survey is that the big multiple retailers are now far more reluctant to accept price rises as raw material costs rise often by large amounts due to world shortages and price speculation. This is putting margins especially for own-label manufacturers under severe pressure. Their very survival will inevitably come down to cost control.
At the other end, consumer budgets are under pressure as incomes are hit by food and fuel inflation and government action to reduce the huge public sector budget deficit. In this harsh economic environment, retailers are reluctant to impose further price rises on shoppers, which risk damaging their stores' footfall and their own profitability.
Our survey shows general confidence at around 68%, which is slightly down on last year's 76%. Optimism about profit margins improving is also down at 60% (65%). But most respondents remain optimistic about a long-term future for the sector and few (10%) believe that business will disappear offshore as companies seek novel ways of reducing costs.
A huge 94% of respondents claimed that raw material prices would cause problems for them in the year ahead. And, unless they can cut costs elsewhere, the only option is to seek price rises through innovation. However, this seems to be more easily achieved by entrepreneurs operating in growth sectors such 'free-from' foods rather than the bigger beasts, who have considerable capital tied up in producing legacy products.
But even for those seeking margin increases through innovation, there is a problem of 'risk aversion' by the high street retailers. As one respondent put it: "There is a noticeable lack of risk taking on the part of the major grocers in terms of listing new product development (NPD) lines. We have been quite disappointed that our new launches have been assessed so cautiously only our tried and tested stock keeping units are being listed."
Our survey seemed at odds with a recent business confidence survey by the Food and Drink Federation (FDF), which suggested slightly more optimism in the sector and said manufacturers were continuing to invest in innovation. So we decided to follow up our own survey by canvassing the views of delegates that attended our Business Leaders Round table this year, to disentangle the discrepancy. The responses were quite illuminating.
While some shared the cautious optimism of the FDF's findings, their comments were qualified by caveats about the direction of travel, which held out the prospects for encountering some potentially big icebergs along the way. Reservations were particularly held by the "bears" in the sector.
Paul Wilkinson, chairman of the food and drink sector skills council Improve and chair of Food Manufacture's Business Leaders Round Table, remarked: "It is very tough at the moment; with cost pressures making for big stand-offs with the retailers resisting price increases, and wary consumers. I think manufacturers will find it very difficult to grow and ought to be very focused on costs."
This view was supported by Malachy McReynolds, md of confectionery firm Elizabeth Shaw. "We are seeing a great degree of caution on the part of our customers, reflecting their view of how constrained consumer spending power will be going into winter," said McReynolds. "Higher energy costs, and retrenchment as the saving instinct comes back to the fore, seem set to be uppermost in consumers' minds this coming Christmas".
Another leading industry source was even more pointed: "Take the massive swing into own-label products that the onset of recession brought. This caused a number of producers (and retailers) some difficulties as the economics of their product portfolios were challenged. An example would be a manufacturer that historically made a good margin from the branded products they were able to sell (for example 70% of sales) and as a result they were able to subsidise the less profitable own-label elements (30% of sales). In many cases, companies like this had the proportions switched, and all of this in an environment where input costs continued to put pressure on results."
He added: "A second own-label boom and/or a second (and potentially more sustained) switch from mainstream retailers into the value sector are very real possibilities in a number of minds."
Our survey suggests the sector will invest slightly more on capital equipment this year: 54% compared with 50% last year. But this should be put in context. Alan Starkey, chief executive of frozen foodservice specialist Green Gourmet, while in general agreement with the FDF's comments, said: "Investment and innovation are happening not 'despite' the upward cost pressures [as implied by the FDF] but 'because' of them. You can protect this quarter's profits by reducing investment, but since we all expect the cost of energy and basic commodities to increase into the foreseeable future, we can only protect next year's profits by innovating."
Another food business director agreed that "a large number of companies" in the sector across a range of categories were making "significant capital investments". However, he added: "An optimist's view on this would be a return of confidence, whilst a pessimist may argue that this is just companies having to accept that they cannot delay essential machinery replacements/upgrades for any longer given that they froze expenditure during the main recessionary period."
On the employment front, businesses are still reluctant to increase costs by employing more staff although 36% said they would take on more this year, compared with 26% last year. However, vacancies in key roles are rising slightly (42% compared with 36%). But the Agency Workers Directive, which comes into force in October and will affect the terms and conditions of temporary staff employed, are not seen to be a threat to the sector.
Thus, in conclusion, it appears that while "cautious optimism" is the order of the day, there continues to be uncertainty about future events. Also, expect to see further polarisation in the sector. As one meat processor put it: "Premium products and offerings from Waitrose and Marks & Spencer will continue to show strong growth at the same time that campaigns such as 'feed the family for £50 a week' are finding favour among consumers."
l Food Manufacture will once again be staging a Business Leaders event in January 2012. If you are a senior executive working for a UK food and drink manufacturing firm and would like to attend this free invitation-only event, please email: rick.pendrous@wrbm.com.