Brexit worries dominate this year’s Food Manufacture ‘State-of-the-industry’ survey, conducted over the month of May, before the surprise outcome of the UK general election of June 8, which resulted in a hung parliament.
Given the uncertainty about the UK’s Brexit negotiations, exacerbated by the government’s now weakened status, it’s clear that most respondents to our survey fear that we’re in for a rocky ride over the next two years.
The Tories are relying on the support of Democratic Unionist Party (DUP) MPs from Northern Ireland to prop up their minority government in what promises to be some pretty tough Brexit negotiations.
But, with the DUP holding the balance of power, the consensus of commentators is that a ‘soft’ Brexit is more likely. And that means fears of a return to hard border crossings in Ireland and all the problems that would ensue from a ‘hard’ Brexit – including the risk to continued peace in the province – are less.
In last year’s survey, conducted in advance of the Brexit vote on June 23 2016, 60% of respondents said a vote to leave the EU would be bad for their businesses.
This year, we phrased the question slightly differently and just 28% said they felt optimistic that Brexit would deliver a boost to their businesses, compared with 49% that disagreed.
It may not be complete doom and despondency but neither is it a vote of total confidence in the future.
What those in the industry are mainly worried about is the damage that the Brexit vote has already done in terms of the falling value of sterling, which has driven up the costs of raw ingredients sourced from abroad.
They also fear for future trade with the EU and – perhaps even more worryingly – restricted access to non-UK EU labour, upon which the sector critically depends.
‘Uncertainty for several years to come’ (back to top)
“Given the uncertainty for several years to come of what exactly the government’s strategy is with Brexit – political sound bites and party politics are not helpful,” warned one packaging materials supplier. “This also includes the residency policy for EU workers in our business, the trade agreement with EU as our main export market, tariffs, etc, and the volatility of the pound against the euro.”
The sales manager for a dairy processor said: “Currency fluctuations and the relationship with Europe during negotiations on Britain’s exit from the EU and post completion are the paramount factors that will shape my business’s success – or lack of – for the next five years.”
“I do not believe that government has yet realised the enormity of the Brexit negotiation. We continue to get contradictory statements from the key players,” said the sales manager for an ingredients supplier.
“The Irish border situation does not seem to be being addressed seriously and the idea that the general election will strengthen the government’s negotiating hand is a complete red herring.”
“The uncertainty surrounding Brexit and the significant exchange rate change, which has cost me a job this year with [a large poultry processor], is frustrating as we leave the closest, biggest market to these shores,” said the business development manager for a convenience foods supplier.
“I remain hopeful rather than confident that the posturing and sniping between UK government and the EU will stop and we reach a mutually beneficial agreement.”
The quality manager for a frozen foods company said: “Staffing may be a problem as many of our staff are from the EU. If staff cannot remain after Brexit we will struggle. Trading with the EU is also a concern. Many products we use come from Europe and costs could be an issue.”
While most respondents expressed worries about Brexit, some gave it their support. The manager at meat and fish processing company remarked: “We need to get on with breaking away from the European burdens and deal with our own objectives.”
Despite the Brexit uncertainty, confidence about the long-term future for the UK food manufacturing sector remains high among 85% of respondents, compared with 89% who were asked the same question last year.
Trading relationships (back to top)
Views on trading relationships (see chart below) were quite mixed. Short-term worries remain about the squeeze on consumer pay rises and rising ingredients and packaging costs – which some respondents reported their supermarket customers were reluctant to allow them to pass on.
Despite this, the proportion of respondents claiming supermarket price wars were preventing them passing on cost increases fell from 60% last year to 53% this year.
Only 49% of respondents (see Market Conditions chart below) expected consumer spending to go up over the coming year, compared with 67% last year.
Meanwhile, 66% were more positive about the future of their companies than a year ago (73% last year), while 62% (67%) expected their company’s profit margins to improve over the coming year.
In another finding, the positive impact of the growing market share of the limited assortment discounters appears to have peaked, with just 36% (40%) supporting this view.
Initiatives by the leading supermarkets to improve their supplier payment terms, following general criticism about some abuse of power in the sector, appear to be feeding through, with 37% of respondents claiming their customers were taking longer to pay bills this year compared with 44% last year.
A similar number of respondents 68% (69%) agreed that pricing pressure from retailers was hitting new product development. And 36% – slightly changed from 37% last year – expressed concern about the negative effects of retail range reduction, despite anecdotal evidence that supermarkets were continuing to reduce their stock keeping unit numbers this year.
However, it would appear that more food and drink companies are seeking to expand the amount of business they do with the foodservice sector, possibly to compensate for falling business with supermarkets. Around 56% expected to do more business with caterers this year, compared with 41% last year.
Support for exporters (back to top)
The sector appears relatively sceptical about getting more practical and financial export support from the new government as we approach Brexit, despite the exhortations to seek out new markets abroad.
Just 47% of respondents expected more government support. And, in spite of the falling value of the pound since the Brexit vote – which should have helped exporters – only a slightly higher proportion 47% (46%) this year claimed their exports had grown over the past year.
Depending on how the Brexit negotiations progress, there could be growing pressure on the new government to provide more support for small food and drink manufacturing exporters to replace business with the EU.
Let’s hope the new environment secretary Michael Gove is open to such appeals, and doesn’t focus too much on his future political ambitions.
William Reed is organising a conference for food and drink exporters. The event will take place at Ardencote Hotel, Warwick, West Midlands, on Thursday October 5 2017. For more details visit the Food Xport Conference site.