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Food manufacturers face challenging times: survey
Uncertain times ahead was the common theme emerging from the business community, following the Brexit vote last month.
Such concern was mirrored by food and drink manufacturers, that agreed with the statement: ‘A vote to leave the EU on June 23 will be bad for my business’ , by a clear majority of 60%, with just 21% disagreeing, in this year’s Food Manufacture ‘state-of-the-industry’ survey.
The survey was carried out in May prior to the referendum on EU membership.
This uncertainty will manifestly exacerbate a difficult business environment for a sector already forced by its retail customers to cut prices as the retail price war continues.
In this tough world, suppliers are faced with the threat of delisting as the major retail multiples reduce their stock-keeping units to compete against the limited assortment discounters.
Respondents to the survey complained of the damage this was doing – curtailing innovation and threatening long-term sustainability.
“Retailers cutting back on ranges has had a massive effect on our business,” claimed one chilled own-label supplier. “It will cost us more in new product development [NPD] to recover.”
One NPD specialist with a snack foods firm also criticised “rising costs, the high level of promotions, fast, knee-jerk NPD, lack of retailer project resource, health trends – sugar especially – and the highly competitive arena”.
Meanwhile, another senior technical manager at a snack foods company complained: “Food deflation will have an adverse effect on our potential growth.”
While multiples have cut their supplier numbers since the 2013 horsegate scandal, one positive change detected has been a move to longer-term contracts.
Longer-term contracts (Back to top)
It was highlighted by Patrick Coveney, chief executive of own-label convenience firm Greencore, in his Campden BRI annual lecture last month. Others agreed.
“Retailers are increasingly signing up suppliers on longer-term deals, which will bring more certainty for planning capital investment,” reported a sales manager for a large meat processor. But not everyone is benefitting.
One NPD specialist complained “frequent tender policies at retailers mean building long-term investment strategies are undermined”.
However, overall, 73% of respondents remained positive about the future of their companies, compared with 75% last year.
Around 67% expected profit margins to improve over the coming year (75% last year). And consumer spending was anticipated to rise in the coming year by 67% (73%).
Some 89% (86%) expressed a long-term future for UK food manufacturing. It would be interesting to see how the responses might differ following the Brexit vote.
Capital investment plans have been scaled down slightly this year, with 57% expecting to spend more compared with 60% last year. Around 49% (51%) expected to take on more staff; and 46% (49%) reported key vacancies.
While just 21% expected the new Apprenticeship Levy coming in next April to be damaging, those planning to take on more apprentices had increased to 47% (44%).
Just 29% expected the introduction of the National Living Wage to damage their businesses. But some were more concerned about its impact.
“The Living Wage is the biggest issue facing the industry, as the increased costs to produce cannot be passed onto the supermarkets as they refuse to pay more,” warned a manager at a large poultry firm.
Complaints about supermarkets’ demands (Back to top)
Complaints about supermarkets’ demands were widespread. As one plant bakery maintenance engineer remarked: “When retailers sneeze, we all get pneumonia.”
Similarly, a financial controller with an own-label supplier said: “The inability to pass on likely future price increases is a looming issue as inflation returns.”
Some respondents even predicted that the focus on suppliers cutting costs would lead to corners being cut and more food fraud.
“The food industry is rife with non-compliance and food safety issues,” said a regulatory affairs expert, who claimed the industry was reluctant to acknowledge it as a problem.
A quality assurance manager with a chilled own-label convenience manufacturer reported that his company was devoting a lot of effort to the sourcing of certified sustainable of ingredients, such as palm oil, together with ‘threat analysis critical control points’.
Thus, the finding that 71% (68%) of respondents would be happy to share information with the Food Standards Agency’s National Food Crime Unit about food fraud, will be music to the ears of its boss Andy Morling, who will be speaking at Food Manufacture’s food safety conference on October 13 in London.
“The continuing pressures from the multiples to cut prices is souring relationships with our own suppliers whom we are asking – not demanding as per the supermarkets – to contribute to our cost cuts,” said one food company manager.
“Some of these suppliers have been solidly behind our business for over 20 years – the smaller family-run growers are expressing concern that they cannot continue supply to us at lower prices. In turn, we are turning to larger growers.”
Noticeably, there was much concern about health lobby groups demanding tougher regulation on food and drink firms to curb the obesity crisis.
Respondents were worried about the risk of mandatory targets for fat, salt and sugar. But sugar is inevitably in the spotlight, following Chancellor George Osborne’s surprise announcement in his March budget of plans for a soft drinks sugar tax.
Introduce tougher regulation (Back to top)
There was a huge jump from 74% last year to 85% this year in the number of respondents that expected the government to introduce tougher regulation on the composition and marketing of foods high in fat, salt and sugar.
“The sugar tax and the obesity debate are big issues for my company,” said a quality assurance manager with a soft drinks company.
Another quality control specialist with a large confectioner added “the stupid fixation [is] on single issues, eg sugary drinks being responsible for obesity, when it is actually a balanced diet and exercise that is required”.
“Price pressures from retailers matching discounters and healthy eating all challenge volume and profit,” said a regulatory affairs specialist with a biscuit manufacturer.
“However, sweet snacks are very strong in discounters, which suggests a widening gap between well off families concerned with health and nutrition, and poorer families.”
But a general manager for a health foods company lamented industry’s slow progress in adopting “next generation nutrition” designed to meet the health and wellness agenda.
“A key issue for us is that the traditional food industry is being too slow in responding to or driving this trend,” he remarked.
Despite this view, 70% (69%) of respondents reported that their companies planned to invest more in new product development this year, with 66% (63%) moving towards cleaner labels on their products. However, concerns that retail pressure on prices was cutting into resources devoted to NPD remained high (69%).
But it isn’t just the cost burdens that supermarkets are placing on their food and drink suppliers, that are hurting them. There is also a widespread feeling that they are subjected to too many audits by their retail customers.
“There are too many audit burdens on industry as each retailer now wants their own standard and appear not to take so much notice of the British Retail Consortium audit,” said a quality assurance manager with a large dairy processor.
Meanwhile, watch out for our video report on the key findings of the survey later this week.
