FDF flags 30% investment decline since 2019 as regulatory burdens and labor shortages take a toll

21 May 2024 --- Investment in F&B manufacturing in the UK is falling, according to a Food and Drink Federation’s (FDF) report and survey. Brexit, the global COVID-19 pandemic, geo-political unrest, extreme weather conditions and inflationary pressures have led to labor shortages and regulatory burdens that continue to hamper the sector’s growth. And, around half of F&B manufacturers have no intention of increasing their investment levels this year.

Manufacturers are now calling for government collaboration and urging a stronger focus on restructuring operations to safeguard the nation’s food security, bolster supply chains and relieve F&B businesses from burdensome paperwork and escalating costs.

“If we are to build a sustainable and resilient food supply chain that supports the economy and feeds the nation, we need the government to work with us to help foster a climate that encourages greater capital expenditure and investment in innovation,” says Bal Dhoot, director for sustainability and growth at FDF.

Mid-sized businesses are facing some market uncertainty caused by labor shortages and the impact of poorly designed and implemented regulations, he adds. 

“This is having dire unintended consequences for businesses by adding costly and unnecessary burdens to supply chains.”

The surveyed businesses included 19% small businesses with a turnover of £5 million (US$6.35 million) or less and 11% with a turnover exceeding £1 billion (US$1.27 billion). Almost a third (28%) were ingredient manufacturers and 20% represented bakery goods.

Cost of living crisis is prompting consumers to look for discount and promotional deals.Some 84% of manufacturers are “primarily focused” on UK sales to grow their business. Meanwhile, NPD (53%) is the second-highest growth strategy.

Limited investments 
Nearly 50% of F&B manufacturers plan on maintaining “similar levels” of investment over the coming year to focus on R&D, plant and machinery, skills and training and buildings. Around 40% aim to increase it.

However, the “State of Industry Report” for Q1 2024 highlights that funding is 30.5% below its 2019 levels and Q1 intentions indicate it will take time before companies can return to pre-pandemic investment levels. 

Changing business environments (47%), demand uncertainty (43%) and the cost of finance (26%) are some of the factors that influenced this drop.

Meanwhile, small and medium-sized enterprises (SMEs) are more prone to being limited by the cost of finance and a shortage of internal finance.

Apart from investment, labor shortages also put upward pressure on wages. Some 42% of businesses offered pay rises of 4.1 to 6% and 23% of 2.1 to 4%.

Ease in inflation
UK’s food price inflation has fallen from its peak of close to 20% last year to 4% in March this year. But cost pressures continue, rising by 9.2% over the year to March.

“Annual inflation slowed for most of the 49 categories reported by the Office for National Statistics (ONS), with eight in deflationary territory and another 19 categories seeing price rises of 5% or less,” highlights the report.

Olive oil saw the highest inflation in March this year, at 38.9%.Products whose costs went up included olive oil (38.9%), cocoa and powdered chocolate (18.5%), sugar (14%), confectionery (9.6%), potatoes (7.6%), tea (6.7%), pork (4.7%) and soft drinks (3.8%) among others.

Meanwhile, butter saw the highest drop in inflation at -11.7%, followed by whole milk (-11.1%), frozen seafood (-8.7%), low-fat milk (-6.5%), jams and marmalades (-4.1%) and cheese and curd (-1.6%)

The costs of imported ingredients decreased by 1.7% for the first time since April 2021, while UK-sourced ingredients were 2.5% cheaper, the steepest decline in the past seven months.

Regulatory hurdles and cost pressures
Retail food sales are hit, too. Sales were 3.6% lower in volume terms in March 2024 compared to January 2020 as households faced the cost of living crisis, highlights the report. 

ONS surveys indicated that 36% of participants were spending less on food and essentials at the beginning of May and 48% were shopping around more. Some 38% of UK consumers bought more own-brand or value-range items in Q1, suggested KPMG’s Consumer Pulse survey. Nearly 37% picked more promotional or discounted items, while 27% shopped at discount grocery retailers.

Meanwhile, the total production costs for F&B formulators increased by 9.2% over the year to March, while selling prices jumped by 4.3%. For the year to March 2025, manufacturers expect their costs to rise by 2.1% and prices by 1.1%.

However, “poorly designed and implemented” regulation can undo some of these gains, hindering growth by rising costs and deterring investment, flags the FDF. 

The FDF considers the "not for EU" label an unnecessary policy which could potentially cost the industry £250 million annually.It calls the GB-wide ‘Not for EU’ labeling an “unnecessary policy which would require manufacturers to run separate production lines for EU and UK markets," potentially costing the industry £250 million (US$317.9 million) annually. It also believes the government could improve its communication strategy.

Secondly, manufacturers face difficulties due to the Border Target Operating Model (BTOM), which will “significantly increase costs for companies bringing in mixed product loads.” Delays, a lack of clear government communication and the effectiveness of the phytosanitary inspection service are some of their grievances.

Uplifting F&B with innovations
The FDF believes the F&B sector can overcome depressed investment and benefit from directing funding toward R&D, innovation and new technologies.

Around 85% of the surveyed companies innovate in-house, with 35% collaborating with retailers and 31% joining forces with research and innovation organizations to propel technological advancements — however, only 2% partner with local governments.

Meanwhile, the report pointed out that nearly 78% of companies are investing in healthier products. SMEs were more likely to invest less than £100,000 in such projects, while large companies exceeded £1 million (US$1.27 million).

The FDF report urges: “Creating a formal innovation partnership between food and drink manufacturers, government, UK Research and Innovation (UKRI), universities and catapults will bring together research expertise and UKRI funding to attract further private sector investment. This will deliver long-term environmental and health goals and strengthen UK food security.”

The FDF recently said that food and drink manufacturers in the UK are “cautiously optimistic” about 2024. However, it also added the optimism could be “fragile” amid a challenging business environment.

By Insha Naureen