UK food production costs rise by 9.2% as investment plummets

By Bethan Grylls

- Last updated on GMT

UK food and drink investment was limited by changing business environment (47%), demand uncertainty (43%) and the cost of finance (26%). Credit: Getty/JuSun
UK food and drink investment was limited by changing business environment (47%), demand uncertainty (43%) and the cost of finance (26%). Credit: Getty/JuSun

Related tags Food security Food inflation Investment labour shortage

While food price inflation fell to 4% in March 2024, its lowest rate since November 2021, total production costs have increased by 9.2% on average, over the year to March 2024.

Although selling prices rose on average by 4.3%, smaller to medium sized food and drink manufacturers reported very marginal gains, according to the latest FDF State of the Industry Report.

This is likely to be an indicator of their ‘limited bargaining power’ with retailers, with own-label not benefitting from brand loyalty.  

For the year to March 2025, many food and drink manufacturers believe their costs will rise further – by an anticipated 2.1%; with their selling prices expected to increase by 1.1%.

Over the last four years, costs have been rising for producers at a faster pace than retail prices, meaning that manufacturers have had to absorb a share of the cost hikes, resulting in dwindling investment as businesses divert those funds to day-to-day operations.

Other pressures, including regulatory burdens, geo-political conflict and extreme weather conditions have contributed to the big dip in UK food and drink investment.

Compared with other areas of manufacturing, which saw investment grow by 5%, food and drink manufacturing investment has fallen by 30% since 2019.

Labour shortages haven’t helped, as they’ve had a knock-on effect on efficiency and wages. The FDF estimates that the average pay rise in the industry was 6% over the year to March. This was above the expectation held a year ago, when manufacturers were anticipating average rises of 5.4% for this period.

A total of 42% of businesses offered pay rises in the range of 4.1 to 6%, and 23% in the 2.1 to 4% range. Over the coming year, industry expects pay to increase by another 4.7%.

Poorly implemented regulation may undo gains

Moreover, although the report found that more than half of manufacturers have seen higher output (63%) over the last year and three quarters (72%) expect this to rise over the next one, the FDF is warning that ‘poorly designed and/or implemented regulation’ has the ability to undo these gains.  

It specifically cites GB-wide not for EU labelling as a major challenge, estimating this to cost industry as much as £250m per annum.

It also referenced the Border Target Operating Model (BTOM) which came into effect on 30 April 2024 as a costly hurdle. Crucial details on fees were announced just weeks before its roll out, and the FDF says SMEs are likely to be ‘disproportionately impacted’ by the government’s U-turn to charge per item.

Manufacturers have also expressed concerns on delays, the lack of clear government communication and the effectiveness of the phytosanitary inspection service.

Similar concerns over Extended Producer Responsibility have also been raised – predicted to cost £1.7bn. But with no fees set by government yet, businesses have been left with another ‘black hole in their budgets’ for 2025.

Businesses left with no option but to restructure

The report found that the mounting pressures are requiring businesses to restructure, with 43% of SMEs and 60% of large businesses in food and drink planning to reorganise operations.

At least 40% of respondents intend to keep their investment expenditure on R&D, plant and machinery, skills and training, and buildings unchanged and more than 40% aim to increase it.

Although these figures may seem encouraging, the FDF has warned that against the backdrop of persistent declines in industry’s investment for the past four years, intentions for investment are subdued and unlikely to return to pre-pandemic levels anytime soon.

Private sector needs to step up

The FDF is calling on government to help unlock higher levels of private sector investment to safeguard the UK’s long-term food security.

“Investment in our sector is down by a third compared with 2019, and our State of Industry Report has revealed that around half of food manufacturers have no intention of increasing their investment levels this year,”​ said Bal Dhoot, FDF’s director for sustainability and growth.

“If we are to build a sustainable and resilient food supply chain which supports the economy and feeds the nation, we need government to work with us to help foster a climate which encourages greater capital expenditure and investment in innovation.

“Our members, particularly the mid-sized businesses, continue to face some market uncertainty caused by labour shortages, and the impact of poorly designed and implemented regulations. This is having dire unintended consequences for businesses by adding costly and unnecessary burdens to supply chains.”

In other news, Food Manufacture hears from an psychology expert on the biggest mistake business leaders are making when it comes to communication. 

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