Recent insolvencies in the UK’s food manufacturing sector reveal the complexities of the supply chain that ends with tough-minded supermarket chains and stricken hospitality groups.
Scotch Frost of Glasgow, an importer and distributor of high-quality produce and ingredients to restaurants and retailers across the UK, entered administration this week after 57 years of trading. Ice cream supplier Joe Delucci’s is in voluntary liquidation – its second liquidation in three years after an earlier rescue from administration. Roberts Bakery, employing more than 400 staff and supplying to large supermarkets, was luckier, saved from impending administration from a family office investor.
The latest State of Industry survey from the Food and Drink Federation (FDF) says that confidence among food and drink manufacturers remains concerningly low, with negative confidence for a fifth consecutive quarter at a balance of -40%. The potential impact of the forthcoming Budget and other recent policy decisions are a huge worry. More than eight in ten FDF members (84%) said that the ongoing financial impact of recent government policies – such as National Insurance changes and the Extended Producer Responsibility (EPR) packaging levy – was one of their biggest headaches for the year ahead, while nearly two thirds (63%) said it was a decline in consumer confidence.
The cost of ingredients and commodities (50%), a shortage of skilled workers (37%), the cost of energy (32%), and government prioritising other sectors for support (21%), were all also major causes for concern for the UK’s food and drink manufacturers. These factors have left average production costs up 6.3% over 12 months, and are expected to rise a further 3.6% in the year ahead. An inevitable outcome is that two fifths of businesses (41%) are expecting to decrease their employee headcount over the next year.
The food industry is the largest manufacturer in the UK, employing more than four million people. Workforce processes are expected to come under review, with greater use of automation; many businesses close to the edge – from growers to processers and even some retailers – will throw in the towel this year, while the decision is still theirs. Those remaining in the game may well struggle to keep employee wage demands under control, risking strikes along the way.
Greater regulation in respect of ‘unhealthy’ food, including restrictions on advertising products high in fat, sugar and salt (HFSS), will kick in later this year, possibly forcing manufacturers to reformulate products or develop new ones, all incurring additional cost. Regulators are only accelerating what is already underway: one of the “ongoing” effects of Covid, as referenced by this month’s stricken butchers, is the growing desire generally of UK consumers to eat more healthily. The pandemic spooked many people about their vulnerability resulting from dietary habits, and the wider health risks of being overweight.
Insurance broking giant Marsh says the UK food and beverage industry operates within a uniquely complex risk environment. In a sector where profit margins are often tight and cash flow challenges are frequent, trade credit insurance can protect companies by securing revenue streams and supporting growth ambitions. In response to economic pressures, food and beverage companies often give substantial credit lines to clients beyond their comfort levels to maintain healthy cash flow. A Marsh survey reveals that 46% of finance directors in food and beverage companies admit granting customers larger credit lines than their credit management teams prefer “all the time,” while 52% said “sometimes.”
It’s a risky approach. Extending credit in large, concentrated contracts can create substantial cash flow vulnerabilities. The risk of late payment or default from customer insolvency or financial distress can disrupt working capital and strain liquidity.
Small and Medium Enterprises with a point of difference may be best placed to buck the trend in UK food: independent brands based on sustainably farmed products, non-ultra-processed foods and wellness are already finding favour with supermarket chains while they remain early in their life cycles. Established businesses, however, will find life much tougher, and pivoting to new operating models and product ranges will be hard without costly new investment.
If you are a food manufacturing business in need of help reviewing options for long term survival, please don’t hesitate to get in touch for a free initial consultation.
Written by the analysts’ team at Buchler Phillips, an independent boutique firm, with an impeccable Mayfair London heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.