Greggs manufacturing

Food manufacturers have had to face multiple challenges over the past year, from climate change to supply chain disruptions

British food producers have been more affected by inflationary pressures than most other sector counterparts, according to a new report.

UK food manufacturers struggled more to keep their prices low to support cash-strapped households than other manufacturers in the third quarter of 2023, according to the Manufacturing Health Index by inventory software brand Unleashed.

Small and medium-sized businesses scored 30 out of 100 in the index – which analyses companies’ sales, expenditure and overall efficiency metrics – making it the second worst-ranked sector ahead of office equipment and supplies.

A score of 50 points or more indicates a sector is performing well against these metrics.

Food manufacturers have “come under more pressure than most to keep their prices low”, said Unleashed’s head of product Jarrod Adam – including rising borrowing costs as well as skyrocketing energy and production costs.

Food inflation has remained stickier than for other goods, as climate change and shortages have also driven rates up over the past year.

This continued pressure amid shoppers’ expectations for lower food prices has been reflected in food manufacturers’ performance and profitability, with margins heavily shrunk, according to Dan Pope, host of the food and drinks industry podcast Hungry.

“Margins are being squeezed and strangled from every angle for many independent food businesses due to the cost of living crisis, utilities and logistics costs soaring, and staff salaries falling in line with inflation,” he said.

Pope added “the problem is that retailers aren’t accepting cost price increases”, yet “require more trade to capture back their profits” – “so supplier brands have tighter margins but they still need to spend to drive the rate of sale and retain their listings”, he said.

Food manufacturers’ poor performance stands in stark contrast to the beverage category, which scored more than double, with 70 points.

Drinks manufacturers have not had to squeeze margins as much amid the cost of living crisis, Adam noted.

“Beverage producers, on the other hand, perhaps haven’t felt the same pressure.

“The UK is home to a wide variety of artisanal beer, wine, whisky and coffee producers, which are considered luxury items so they haven’t had to lower their prices.”

He added they “may also have been able to spread the risk more successfully by selling products through a mix of restaurants and pubs, retailers and directly to consumers – unlike food producers supplying supermarkets”.

Unleashed expects the challenges facing food manufacturers will start to recede as inflation is forecast to lessen in 2024.

Food inflation slowed for the ninth month in a row from 9.2% to 8% in December, the Office for National Statistics said on Wednesday.

However, the Food & Drink Federation warned supply chain disruptions in the Red Sea and Panama Canal, along with unpredictable weather conditions, remained key threats for manufacturers.

FDF CEO Karen Betts said: “It’s good to see food and drink inflation fall to 8% in December. This reflects continued falls to input costs alongside manufacturers’ ongoing efforts to cut production costs to keep prices as low as possible for shoppers.”

She added: “It remains to be seen what the impact of recent flooding will have on UK crop availability and prices, and whether the rising price of shipping will impact food and drink prices.

“It’s critical as our sector emerges from this inflationary period that businesses attract investment. We need this to ensure our sector’s resilience and growth, and to continue to take the action necessary to play our part in transforming the food system onto a more environmentally sustainable footing.”