Food manufacturers lose £400M as productivity falls

24-Sep-2017 - Last updated on 25-Sep-2017 at 12:12 GMT

Workers' productivity fell last year, resulting in 5% less revenue per worker

Falling productivity cost food and drink producers an extra £400M in labour costs last year, a report has revealed, as manufacturers are urged to make strategic changes ahead of more challenging market conditions.

Cheaper labour cut the incentive for producers to invest in improving efficiency, according to the report by OC&C Strategy Consultants. The producers saw revenue per worker fall 5% last year, which meant total labour costs increased to £8.6bn last year, up from £8.2bn in 2015.

The labour cost squeeze will worsen after the government’s planned National Minimum Wage rise comes into effect before 2020, as 37% of workers will see their pay rise, the report claimed. Manufacturers must prepare for the rising labour costs immediately, according to OC&C Strategy Consultants.

Partner at the consultancy firm, Will Hayllar, said: “UK food and drink producers are under pressure from all sides amid challenging market conditions and macro-economic headwinds.

‘Labour costs set to jump’

“With labour costs set to jump and the future status of EU migrant workers still uncertain, manufacturers must act now to understand the implications for their business and make the necessary strategic adjustments.”

The potential ramifications of Brexit were fuelling concern about falling productivity in food and drink manufacturing. The industry employs the highest share of EU migrant workers (30%), compared with any other UK sector.

The report also revealed capital investment in UK food and drink manufacturing subsidiaries fell 9.8% last year. The volume of mergers and acquisitions in food and drink production fell to its lowest level since the 2008 financial crisis.

Deflation and intense competition in the sector meant revenue growth for the 150 biggest producers fell 0.8% – a second consecutive year of falling revenue.

Invest in automation

Manufacturers should invest in automation to protect themselves against rising productivity costs, and other future challenges, the consultancy said.

Hayllar said: “It is possible to find impressive growth by developing strategies around prevailing consumer trends, as well as leveraging new technologies and capital.

“With volatile market fluctuations squeezing already fragile margins, and fresh labour challenges on the horizon, manufacturers must consider investing in technologies like automation to protect productivity and profitability against future challenges.”

The report was released in collaboration with FoodManufacture.co.uk’s sister title The Grocer.

Meanwhile, Associated British Foods, Boparan Holdings and Arla Foods topped the report’s largest companies in 2016.