Profit margins at the UK's leading food manufacturing companies have dropped for the first time in a decade as rising costs hit home, we reveal this week.

The OC&C/Grocer 150 index of the biggest suppliers showed margins fell from 8.6% to 8.4% on average in the latest recorded year.

Manufacturers said the squeeze had been caused by rapidly increasing raw material costs combined with ongoing pressure from retailers to keep prices low.

Companies dealing in commodities had been the worst hit, seeing their margins fall from 6.9% to 4.5%.

"After a 10-year high last year the tide may now be turning," said Luke Jensen, head of consumer and retail at OC&C, which carried out the research for The Grocer.

"While right now the problems are concentrated on commodity companies, there's a real risk the increasing input costs will start to have an impact across the industry."

More than half the companies in the top 150 saw profits drop, while the number of suppliers making a loss grew. This indicated the severity of cost pressures, said Jensen, who warned that some companies were in "dangerously precarious situations".

The figures could make interesting reading for the Competition Commission, as it continues its inquiry into the UK groceries market.

One of the issues it is looking into is whether the power of a small number of large supermarket chains is having a detrimental affect on the companies supplying them.

However, Kevin Hawkins, director of the British Retail Consortium, said the margin compression was too small to be considered of any significance.

He pointed to the fact that the index showed manufacturers' margins remained almost double those of the multiples, which now stood at 4.6%.

"A 0.2 base point drop is barely significant. It's very hard for most suppliers to sustain any argument they are being driven out of business by retail pressure.

"Manufacturers have had 10 years of rising margins, while retailers' margins have fallen over that time."

On the flipside the OC&C/Grocer index showed there was impressive growth among the top food companies, with turnover increasing by an average 8.7% and return on capital employed, the profit on the amount of net assets in the business, rising by 0.8% on average.

"Winning companies with strong assets continue to perform well," said Jensen.

"People who build strong brands can create outstanding profit levels, as can companies actively restructuring UK food and drink through mergers and acquisitions."

It was a big year for M&A activity, with the entry of private equity firms into the food sector driving growth, and a series of big money deals taking place.

Premier Foods' £1.92bn acquisition of RHM was the largest deal of the year, bringing brands such as Hovis, Bisto and Sharwoods into its stable.

"There are more opportunities for the creation of new champions because of restructuring, and Premier is a great example of that," said Jensen.

The index also highlights the impact of consumers' changing habits, with companies that have embraced the healthy eating revolution surging up the rankings.

OC&C/Grocer 150 Index p30