Retail ransom
The horsemeat scandal occupied TV news bulletins and the front pages of the tabloids for much of the early part of this year. And, as far as food manufacturers are concerned, the bad publicity has done a lot of damage to the reputation of the food supply chain.
At least, that's the belief of the vast majority of respondents to Food Manufacture's annual 'State-of-the-industry' survey. Apart from a few vocal exceptions, most (87%) believe the issue will have caused significant damage.
Some respondents thought 'horsegate' would change the rules of engagement as far as supplier-customer relationships were concerned, while others were convinced it would lead to shorter supply changes with "local provenance" becoming more important.
Rising input costs
But the industry has more than horsegate to worry about. Equally serious issues relate to rising input costs – such as ingredients and energy – and that hardy perennial: the abuse of power by their retail customers.
One manager in the dairy sector reports: "The major retailers hold food manufacturers to ransom with constant threats of de-lists and playing suppliers off against each other." Another in the dairy sector says: "The misuse of the UK retailers' strength devalues the whole industry."
A bakery manager says: "Continuous promotional activity demanded by major supermarkets, along with high cost increases of raw materials against inflation will be a major obstacle for many businesses to overcome in the coming year." And another manager in the bakery sector adds: "Major retailers are threatening the sustainability of UK food manufacturing supply chains."
A respondent from one of the UK's leading plant bakeries attributes problems to: "Supermarkets demanding price cuts and pushing suppliers to source ever cheaper raw materials and the effects of a poor summer on the UK wheat harvest."
Despite widespread accusations of supermarket abuse of power, few respondents expect the new Groceries Code Adjudicator (GCA), Christine Tacon, recently appointed to police the Groceries Supply Code of Practice, to make much difference. Of those surveyed, 57% disagree with the statement that the GCA will stop supermarkets abusing their power over suppliers. Only 18% believe she will.
Raw material prices are an even bigger issue than last year, with 88% of respondents agreeing that they will cause them problems over the coming year, compared with 85% last year – not least because of their inability to pass on these cost increases to customers –to which almost half of respondents, 49% (46%), agree.
One food industry manager says: "Our business has been adversely affected by the poor weather last summer, which will result in a significant drop in profits. We hope for better weather this summer."
Eighty-three per cent (81% last year) think pricing pressure from retailers is threatening the quality of own-label products through excessive 'value engineering'. This pressure is similarly thought by 74% (73% last year) to threaten the resources devoted to NPD or commoditise branded products via excessive promotional activity, to which 79% (78%) of respondents agree.
The issue of squeezed margins continues to threaten the sector's ability to reinvest in NPD, new processes and the facilities needed to maintain manufacturers at the top of their game.
One sales manager from the chilled foods sector, says: "A key hold-back factor is still the aggression from key retailers for more investment in promos and on-going margin [pressures]. 'Money with menaces' [demands] from the top four continues to be the most difficult issue to work with in the industry."
Another respondent from the beverages sectors says: "Rising commodity costs and intense pricing pressure from retailers is limiting the innovation that own-label companies can bring to the table." This view wins support from yet another respondent who complains: "Working in NPD is becoming more difficult when retailers look at the prices of products rather than the quality of products."
NPD is also being stifled by legislation, according to one dairy manager, who also raised the issue of the UK's possible exit from the EU. "The uncertainty of our EU membership will create difficulties in establishing and maintaining relationships with EU retailers and customers," he says.
However, 66% expect margins to improve this year, compared with 65% last year, although it is not clear from where their optimism derives. But it would seem customers are getting better at paying their bills on time. For the first time in three years, the proportion of respondents reporting that their customers were taking longer to pay their bills has fallen to below half (46%). In 2011 the figure was 56% and in 2012 it was 52%.
This year around half of respondents (51%) expect their firms to invest more in capital expenditure over the coming year – marginally down on last year's 54%. But the level of those who report problems in accessing finance remains around the same at 33% (34%).
One executive at a ready meals supplier comments: "Price pressures, delayed payments and constant challenges by customers create issues that adversely delay or change investment and profitability planning."
There is a slight increase (45% cf 40%) in those expecting to recruit more staff. However, vacancies in key roles are reported by 44% (43%) and the struggle to recruit people with the right skills gets harder – 60% compared with 54% last year. One manager worryingly reports: "The industry is still at least 15 years' behind time and full of mediocre people stuck in traditional ways."
Optimism prevails
Despite the problems they face, those in the sector remain an optimistic bunch, with a larger proportion (73% compared with 66% last year) being more positive about the future of their companies and a huge 89% (86%) predicting a long-term future for the UK food manufacturing industry generally. The once widely expressed fear of the industry relocating to cheaper countries overseas, remains relatively low, with just 14% reporting their companies were considering this option, the same as last year.
Given the Food and Drink Federation's extensive efforts to promote export opportunities, it should take comfort from the fact that exports remain a priority for the majority of firms (59%) surveyed, the same as last year. Inevitably, though, the success of exports will hinge on favourable currency exchange rates.
But, as far as the home market is concerned, one chilled food respondent expects some positives to emerge from the horsemeat scandal. However, given the other big pressures on the sector, he believes these will require careful management.
"Shorter supply chains are crucial to recapturing consumer confidence," he says. "Clear communication of how to achieve this will be a key priority for retailers. However, this will have to be balanced with competitive pricing when sourcing raw materials all year round and meeting customer specific targets around sustainability."
He concludes on an optimistic note: "Despite this, I still believe that for truly innovative products, customers are still willing to pay that little bit extra."
