Confidence among food and drink manufacturers in the three months to September was at its highest since peak Covid, a new report showed – but labour shortages widened and investment shrunk amid cost increases.
The Food & Drink Federation Q3 State of the Industry report found manufacturers’ confidence increased by 18 percentage points on the last quarter to 6%, creeping into positive territory for the first time since the second quarter of 2021 in “a sign that market conditions have stabilised”.
However, the industry is still grappling with “significant challenges”, the FDF said, including labour shortages and a fall in investment.
Labour vacancies across a wide range of roles in the sector have risen in the last quarter to 6.5% from 4.8% in Q2 due to increased production ahead of Christmas, resulting in more job openings that were difficult to fill.
Some of the roles most affected included high-skilled workers such as project engineers, scientists, finance, and software engineers, as well as technical specialists such as field sales support and production operatives, from machine operatives to warehouse.
This comes as the government announced proposals to up the minimum salary threshold for skilled worker visas from £26,200 to £38,700 – which many in the meat industry have already warned will lead to shortages and higher costs.
Overall, nearly two-thirds of manufacturers (65%) reported vacancies of 0%-5%. Some midsize businesses took the biggest hit, with 17% of them reporting a vacancy rate between 16%-20%.
Faced with persistent labour shortages and rising costs, the industry saw average pay rise by 5.2% over the year to September 2023. This is set to increase as the national living wage will rise further next April.
FDF chief Karen Betts said labour shortages in the long term “need to be addressed domestically or through investment in automation and technology”.
“But in the short term we need a flexible immigration system to address gaps in the workforce, which are driving up wages and inflation,” she added.
The State of the Industry report also showed nearly one in five (18%) manufacturers said they expected their investment to fall over the next year.
Industry’s investment has been steadily decreasing since the third quarter of 2021, as cost increases driven by inflation, high energy and fertiliser prices, and rising labour wages have stifled businesses’ ability to plan for growth.
Food and drink manufacturing investment was 36% lower during the first half of 2023 compared to the first half of 2019.
This was mainly an issue for small and medium-sized businesses.
“To rebuild margins and grow, manufacturers need to either be able to raise prices or increase sales – neither likely in today’s environment,” the report highlighted.
On the bright side, some have found themselves in a better position than they were last year, with four in 10 manufacturers planning to increase their investment over the next year.
The FDF said businesses “continue to do all they can to absorb these costs to shield shoppers from the full impact of inflation”.
However, a recent CMA investigation found some branded suppliers pushed up prices during the cost of living crisis by more than their costs increased.
Manufacturers will also prioritise innovation next year, with 81% of them – up from 54% in Q2 – focusing on new product development.
Some cost pressures have also subsided, namely energy and fertiliser, but total production costs were still up 14.2% in the year to September.
A fifth of manufacturers expected total production costs to decrease in 2024 – however many were still worried about pressures linked to upcoming packaging and HFSS regulations, as well as Windsor Framework and other border requirements.
FDF’s director of sustainability and growth, Balwinder Dhoot, said the industry needed government to “prioritise policies that support investment if we are to build a sustainable and resilient food supply chain which supports growth and is vital for a strong economy”.
“We saw some positive signals in the autumn statement and welcomed the announcement on full expensing, but any benefits will be more than undone by planned regulation that will hit our sector in the coming year.”