Manufacturers to ‘absorb extra costs … but something has to give’

Commenting on rising costs, ahead of the Autumn Statement, the FDF director general said: “Companies will absorb the extra costs as far as they can – by reducing product margins and overheads, reformulating the product in some way, investing in automation, or increasing export activity (although this will take time to bear fruit) – but most will reach a point where something has to give.”​

Wright made the comments to BBC Two’s Newsnight​ programme, as part of a feature on former Sainsbury boss Justin King’s warning that grocery supermarket prices were likely to rise by at least 5% in the next six months. King also warned that a high street supermarket was likely to disappear due to cost and competition pressures.

High street supermarket likely to disappear​

The FDF boss said: “Food and drink producers and retailers typically operate on very tight margins in the notoriously competitive UK grocery market. Partly as a result of this competition, consumers have enjoyed falling food prices since 2014. ​

“The devaluation of the currency against the Dollar and euro means all imported goods and services have become more expensive. Companies also face additional costs from the Apprenticeship Levy and the National Living Wage also on the horizon.”​

Some food and drink manufacturers have avoided cost pressure because of long-term arrangements to secure their ingredients at fixed cost, until the end of year in many cases, said Wright. But other producers, particularly small-scale producers, were not in a position to negotiate fixed costs on high volumes, and therefore, with immediate effect, face these price increases.

Agreed contracts at fixed prices​

“Manufacturers and their retail customers will have unique relationships and agreements – most will have agreed contracts at fixed prices, in many cases until the end of this year, others will be to the end of 2017 and even beyond,”​ said Wright.

“They'll now be talking about next steps and, realistically, a modest increase in the price the consumer pays is expected, as several retailers, producers and the Bank of England have indicated recently.”​

King warned of “profound change”​ ​affecting high street supermarkets in a Newsnight ​interview last night (November 22).

Meanwhile, Chancellor Philip Hammond’s decision to raise the National Living Wage for over 25s – from £7.20 per hour to £7.50 per hour – in today’s Autumn Statement would cause “another headache for food and drink manufacturers”​, warned law firm Gordons.