Rising energy and raw materials costs drive food and drink insolvencies
Squeezed margins exacerbated by spiralling energy prices have resulted in a rising number of insolvencies in the food and drink manufacturing industry, according to experts in the field.
The latest Department of Trade and Industry figures show that insolvencies rose by 13.2% in 2005 against 1.4% for food, drink and tobacco manufacturing overall. And experts attribute these findings to the widespread use of fixed contracts in the sector, combined with rising energy prices.
Nick Fischl, a partner at legal firm Mills and Reeve, put much of the problem down to manufacturers being tied in to fixed contracts with their raw materials suppliers, while being vulnerable to the loss of sales. “Manufacturers need to have an alternative exit route for products if they lose a customer,” said Fischl. “A lot of businesses need to look carefully at their contractual arrangements.”
Jane Lodge, head of manufacturing at financial services firm Deloitte, added: “UK manufacturers continue to face a threat to their competitiveness from escalating energy costs, which could drive liquidations in the manufacturing sector even higher. UK energy costs are now the highest in Europe. Coupled with increasing raw materials prices and quite strong growth in wage costs, this has pushed manufacturers' total weighted costs up at fairly rapid rates in recent months.”
Fischl suggested that market volatility caused by changing consumer tastes had played a part in rising company failures. “Some big freezer operators have gone bust as frozen food is unpopular with consumers and this has had a big knock-on effect because the sector is heavily intertwined,” he said.
Dominic Wong, reorganisation services partner at Deloitte, claimed insolvencies could be prevented by better energy management. “Identifying alternative fuel strategies and increasing fuel switching flexibility can reduce energy costs in the medium term,” he said. “But inevitably some businesses will struggle to survive.”
