Health check for the industry

- Last updated on GMT

Related tags: Food manufacture, Industry, Food

Despite some predictions that food manufacture will disappear overseas, others are more hopeful about the future. Rick Pendrous reports

Life in Britain's biggest manufacturing sector continues to be tough, according to Food Manufacture's latest state-of-the-industry survey. Rising raw material costs and increasing pressure on margins -- exacerbated by consolidation among retail customers -- provide a bleak backdrop.

And if that weren't enough the rising burden of legislation and constant attacks over issues of 'unhealthy' foods make it an even more challenging sector in which to work.

This year's findings reinforce a trend identified in previous surveys, with many of the same woes being voiced. Including those mentioned above, there are also problems of recruitment and a feeling by some that insufficient resources are available to train and remunerate staff, which is leading to unacceptably high turnover.

This year however, it is possible to detect a little more hope from some quarters -- a chink of light at the end of a rather gloomy tunnel. It's not a particularly bright light, admittedly, and it may turn out to be a mirage. But despite all the challenges they face, some respondents report the changing world in which they now operate offers potential opportunities as well as posing threats.

But the screw continues to be turned by retailers who some claim show no loyalty to their suppliers and are only interested in ever lower prices. And the industry continues to be battered from all sides over issues of poor diet and health, aided by a hostile media which has convinced the public that food manufacturers are the sons of satan.

So where are the signs of hope manifest?

While a similar percentage (64%) of the 214 respondents this year are more positive about the prospects for their businesses to last year (63%), slightly more (44%) expect profit margins to improve over last year (35%). But it is more than that.

There seems to be a little more confidence pervading the sector as a whole. In particular, there is confidence that the industry can deal with the challenges it faces; such as new traceability legislation coming in next year (75% of respondents felt their companies were adequately prepared) and in dealing with increased competition from an enlarged European Union (65% saw no threat). The introduction of factory gate pricing is also proving to be less of a problem than many had feared.

As reported in Food Manufacture last month (p4), much has to do with the opportunities expected from increasing demand for healthier food and drink products. The vast majority of respondents (91%) see potential in developing new healthier foods. With innovation being at the core of the business, there may be some justification in the industry's optimism here, although to come up with foods low in fat, sugar and salt that consumers actually want to buy, will be no easy task.

Some, however, fear that pressure to reduce fat, sugar and salt is "out of control". They want more co-ordinated direction from government based on expert health advice rather than allowing the agenda to be set by "activists and lobbyists" But an innovation specialist at a leading confectionery producer remarks: "There is a need for better nutritional labelling of products. There is a need to reduce misleading claims on packs such as 'fresh', 'natural', 'wholesome', etc."

Some manufacturers also believe the tide may have changed. They claim consumers are now prepared to pay more for a better quality product, made to higher environmental and animal welfare standards, whose provenance is assured.

"It's time to go full circle and back to small producers/ processors, local food supply and seasonal food," implores one smoked food producer. But a note of caution is injected by the md of a soft drinks manufacturer who says: "The consumer will pay a fair price for an acceptable product. However, the supermarket and group buyers will not."

So, are the optimists deluding themselves and ignoring the warning clouds on the horizon, where the inexorable march to lower and lower prices will drive much UK manufacture offshore?

The pessimists certainly still hold sway. A number have particular worries about small and medium-sized businesses in the UK being further squeezed. They also point to the growing momentum for subsidiaries of multinationals to transfer manufacturing operations to cheaper European locations such as Poland and elsewhere.

"The industry is being driven out of the UK by the cost of manufacturing and the retailers constantly holding a gun to manufacturers' heads for reductions in prices," warns a technologist in biscuit manufacture. Those in the meat and poultry sector also report their vulnerability to cheaper imports from new members of the European Union.

"Supermarkets are increasing their stranglehold on their suppliers, and the only way forward is to form supplier category groups which could offer a form of united front," suggests a planning and demand manager from the dairy sector. Another development manager says companies need to "form links where possible with manufacturers of cheaper raw materials in the Far East and Europe to become competitive and profitable"

However, most respondents (75%) believe that collaborative planning, forecasting and replenishment (CPFR) initiatives with retailers offer the best way ahead. "Working together with the multiples is the only way forward for the food industry," says one operations director. But others are more sceptical. "Any so-called supplier partnerships would only be established if it gave the supermarket a commercial advantage," claims a bakery sector manager.

Clearly, without decent profits, manufacturers will not have the funds to make the essential capital investment needed to make them more efficient, develop new products and train and retain the more highly skilled staff they are increasingly likely to need to succeed.

In this respect it is worrying that slightly fewer companies (61%) plan to invest more in new product development this year compared to last year (67%).

However, a small majority (56%) of respondents report that their companies plan to increase capital spending over the coming year, which is slightly up on last year (51%). But there are worries that persistent low margins make any investment decisions difficult to justify. The finance director of one own-label manufacturer was particularly scathing and predicts an emerging "new stage of turmoil". "Not a sector I would choose for investment," was his view.

But with 90% of respondents claiming environmental management is becoming an increasingly important consideration for them, there may be investment decisions on the horizon about which they have no choice.

Low pay levels are also holding the sector back, claims one quality specialist. He says it leads to a high turnover of staff and a subsequent dependence on temporary agency workers, which has a detrimental affect on quality.

Some 62% of respondents say they expect difficulties in recruiting key staff, but only 34% of respondents plan to recruit more staff over the next 12 months and just 36% plan to make use of more temporary workers.

Another respondent says: "Time and again we see technically proficient and generally reliable managers encounter problems due to an absence of people skills." FM

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