Concerns are growing over recruitment and ingredient prices as food and drink companies begin to feel the reverberations of Brexit. Victoria Fitzgerald gets a flavour of the year ahead.
The food and drink sector is a true British success story, and when people tell me the UK doesn’t manufacture anything anymore, I always refer to it as an example of how the UK is flourishing in exports and productivity, as well as its gross value added to the economy.
The industry is an incredibly diverse area of UK business that accounts for £81.8bn, or 16% of the total turnover of the manufacturing sector. Employing roughly 400,000 individuals up and down the UK across 6,620 businesses, the sector has bucked a trend of decline in exports, having doubled them since 2004, to reach £12.8bn in 2014.
Its gross value added to the UK economy is £21.9bn, which, perhaps surprisingly, is nearly automotive and aerospace’s combined contribution. And while the rest of the manufacturing sector has tried to solve the ‘productivity puzzle’, food and drink, according to the Food and Drink Federation (FDF), has, in the past five years, bolstered productivity by 11%, compared to an overall increase across manufacturing as a whole of just 0.5%. Not to mention that the sector has self-funded £325m-worth of R&D, which accounts for three quarters of the sector’s entire spend.
These statistics are worth shouting about – but, as elsewhere, Brexit has left a bad taste in the sector’s mouth. According to a survey conducted by the FDF, the majority of food and drink respondents reported “increased ingredient prices, a drop in product margins, and concerns for the future raised by their EU workforce… More than two thirds (69.5%) of respondents are less confident about the UK business environment, with only around one in ten (11.2%) more confident.”
One area where a struggle is abundantly clear is hikes in ingredient prices. The public’s first taste of this came in October when news broke of a standoff between Tesco and Unilever over household favourite, Marmite. The consumer brands firm froze deliveries to Tesco after the supermarket giant refused to accept comprehensive price rises of roughly 10% for its range of brands. Unilever attributed the increase to the fallen pound, but soon reached a compromise with the supermarket, which saw Marmite and other Unilever brands safely back on the shelves.
Tim Rycroft, corporate affairs director at FDF, explained that larger firms can navigate these obstacles; he said, “Some producers have avoided cost pressure because of long-term arrangements to secure their ingredients, until the end of the year in many cases. However, some, especially small producers, are not in a position to negotiate fixed costs on high volumes, and therefore face these pressures with immediate effect.”
According to Nimisha Raja, founder of Nim’s Fruit Crisps, the fall in sterling nearly scuppered a contract with a large high-street retailer. Raja said, “Just before the pound dropped, I was in negotiations with a high street retailer, and I had already submitted my prices for its three requested lines, two of which were for fresh produce that I would purchase from Europe.
“Suddenly, pineapple rose from 55p a kilo to 75p a kilo for roughly 10 tonnes every month. It made a huge difference and I had to return to the retailer and explain that while I would not pass on the whole price increase, I needed to increase my wholesale price a little to cover myself.
Although Raja hasn’t signed on ‘the dotted line’ for this contract, she is confident it will happen soon, and her buoyancy extends throughout every area of the business. “With issues like these, I think you just have to ride out the storm, what else can you do? I do think it’s a storm, and something that will pass. We will go back to a normal exchange rate, but there’s a lot more uncertainty still to go ,” she explained.
Rosie Ginday, founder of Miss Macaroon, a social enterprise that uses manufacturing macaroons to give the long-term unemployed, ex-offenders and care leavers valuable skills and employment opportunities, has also felt the pinch of rising ingredients prices. However, she views this as an opportunity for her and the team to innovate. She said, “It is a massive challenge for us. We have already seen ingredient prices rise and our biggest clients are not prepared to pay, so we are having to absorb them and look at ways of increasing our efficiency to minimise the impact.
“This means investment in new equipment and improving the way we do things. It does not mean automating the process, our macaroons rely on people having the skills to beautifully craft them. If we sell out on that, we might as well give up on the business,” Ginday said.
A taste of the sector
As well as product margins, FDF’s Tim Rycroft cited the future status of the EU workforce as a potential problem; he said, “Our ability to maintain continued access to affordable and high-quality food and drink is reliant on workers from outside the UK, some of whom are already leaving in the wake of the referendum result and the devaluation of sterling.”
“These pressures are likely to be compounded by additional costs from the apprenticeship levy and introduction of the national living wage on the horizon, with the latter due to be increased following the Autumn Statement.”
Raja agreed that skills remained a barrier to the growth of the sector, specifically taking on temporary workers and getting young people interested in the business. She said, “We’ll process 10 to 15 tonnes of fruit and veg production over a 10-day period and then we won’t have any processing for a few days. That means we bring in a lot of temp agency workers during that time, and finding good temp workers from a temp agency is difficult, let alone skilled and semi-skilled labour.
“I don’t know how you go about it because it’s one of the professions that many people do not want to go into. In a few weeks, we’ve got a group of young people coming into the factory as part of a skills programme, where six young people will do a work placement for a day. It will be interesting to see what their attitude is to manual labour in a production line.”
Additionally, according to the FDF, the challenge of an ageing workforce means that the sector will need 130,000 new recruits by 2024, and it struggles to be regarded as a career destination of first choice. The FDF pledged earlier this year to do its part in meeting the skills challenge in the industry.
FDF apprenticeship pledge
FDF has pledged to treble the apprenticeship workforce in the food and drink industry by 2020. The new pledge will see the total apprenticeship workforce in the sector increase from one per cent to three per cent, building on an existing pledge of a 20% increase in the number of higher-level apprenticeships by 2020, and other sector-wide initiatives to address a looming skills shortage.
FDF’s ‘Taste Success’ campaign is bringing to life careers in food and drink so that young people consider the industry as a first choice career.
MEng and BEng food engineering degree
These degrees are a first for the UK, and will create a pool of specialist engineers to meet the specific needs of the sector through industry-backed curricula, work placements and guest lectures.
FDF is working with Sheffield Hallam University to develop a National Centre of Excellence for Food Engineering to deliver industry-relevant research, development and innovation solutions; skills and workforce development; and help to expose the food-engineering students to state of the art facilities.
Unsurprisingly, funding remains a barrier for the sector, in particular the SME community. Nimisha Raja remarked that access to funding and business rates were a challenge for Nim’s Fruit Crisps; she said, “I think funding is one of the biggest ones, and business rates are an extra special issue sometimes, but on the whole it’s funding.
“I understand banks are heavily regulated and any lending has to be meticulously scrutinised, but in today’s climate it’s near impossible to get the traditional type of funding we used to get from banks a few years ago.”
Although Raja admits that Nim’s Fruit Crisps received support from the Manufacturing Advisory Service (MAS) and Innovate UK, the difficulty for businesses just starting out lies in finding out what support exists for the sector.
“What helped us were grants and small business boosts, in particular, a MAS grant and Innovate UK, and we’ve made use of a lot of them. But it is about having access to them and the knowledge of them. There’s also R&D tax credits, so I was really interested to hear the government’s plans for them in the Autumn Statement,” she said.
In November, the Chancellor remarked that the government would review the tax environment for R&D, to look at ways to build on the introduction of the ‘above the line’ R&D tax credit to make the UK an even more competitive place to do R&D.
The government also recommitted to the business tax road map, which sets out plans for major business taxes to 2020 and beyond, including cutting the rate of corporation tax to 17% by 2020 and reducing the burden of business rates by £6.7bn over the next five years – we’ll believe this when we see it.
The Autumn Statement
With the sector facing a dip in confidence, manufacturers waited with baited breath for the Autumn Statement to reveal support for industry, and on the whole they weren’t disappointed.
Following the Chancellor’s Autumn Statement, FDF director general Ian Wright CBE issued a comment which welcomed support for productivity and innovation; he said, “For food and drink, the Chancellor’s support for the productivity agenda and extra funding for innovation more broadly means better skilled jobs, more sustainable manufacturing processes, and greater capacity for R&D.”
Wright urged for “an effective partnership between industry and government”, and an effective “new relationship with the EU and the rest of the world”, as well as “a new industrial strategy, informed by the particular needs of food and drink manufacturers” to sustain the needs of the workforce, provide access to “essential raw ingredients and maintain consumer confidence” in the industry.
And Miss Macaroon’s Rosie Ginday also welcomed elements of the Statement, she said, “It was pleasing that the Midlands Engine again featured in the Autumn Statement, and I hope that more investment in infrastructure and high-profile projects is set to take place in our region.
“As a small business, it was great to hear about a possible reduction in corporation tax. This would be very useful and allow us to re-invest more profits back into our company.”
However, she went on to highlight social enterprises as an area that was not referred to, Ginday commented, “One thing it didn’t address was the social impact of all this investment and we need to see how more could be done to unlock the potential of social enterprises so they can grow and become a sustainable source of new employment opportunities.”
The overall feeling from the manufacturers interviewed was not doom and gloom. Ginday was positive for the future, “We have had a really good year, with sales up 33% on 2015. Growth has come from corporate clients, our customised macaroons and then some white-label production we do for a multi-site luxury department based all over the UK.
And Nimisha Raja felt that the UK was “on the whole”, a great sector, which is “moving really fast and “doing really well at keeping on top of trends”.
As well as this confidence shining through the pessimism, exports of branded food and non-alcoholic drinks shot up by 13.7% in the Q3 of 2016, according to FDF figures. In addition, sales to non-EU markets grew at twice the rate of the EU; however, the EU still remains the top destination for branded exports, buying two thirds of the total. This represents the biggest quarterly export sales ever seen, and builds on Q2, which was, in turn, the largest up to that point.
Results from the sector reveal that while times are tough, the food and drink industry remains a force to be reckoned with. Food Minister George Eustice MP, said, “Whether it’s Scottish salmon or Wensleydale cheese, the global appetite for the British brand is showing no sign of slowing. These latest figures are welcome news for our food and drink businesses and for an industry that’s at the heart of our economy.
“We will build on this success through our new action plan, which will boost food and drink exports and help even more exporters grasp the opportunities our worldwide reputation brings.”
Hopefully, the sector gets the support it needs to continue to grow and act as a beacon for everything great happening in UK manufacturing.