Brexit woes faced by food and drink manufacturers as uncertainties bite

11 June 2018 Authored by Consultancy.uk

Confidence in the UK food and drink industry remains high; however, it has fallen somewhat on previous years. Concern around future staffing and input costs, as a result of Brexit uncertainties, are in part affecting confidence.

The production of food and drink is still a key component of the UK’s wider manufacturing base, generating around 16% of the sector's GVA, generating revenues of £97 billion, making it an important part of the wider UK economy as a whole. As is the case with the broader manufacturing industry, however, the sector remains finely poised in a period of major uncertainty relating to Britain’s relationship with the European Union.

Last year, research from Grant Thornton suggested that M&A activity had cooled in the segment at the start of 2017, while Brexit presented the possibility of a strained relationship with suppliers on the continent, inflated import prices thanks to a devalued pound, and tariffs for import and export activity. A year later, as the food and drink sector braces itself for the 2019 deadline for Brexit negotiations, BDO has released its own ‘Food and Drink’ report, covering major trends in the UK’s food and drink industries.

How positive are UK food and drink companies about their future prospects

The report notes in 2016, a study of the same respondents found 79% were optimistic; largely as the result of Brexit related uncertainty, and a crisis on high street as consumers batten down the hatches in the face of slow, and even declining, real wage growth. Now, the rating has fallen by around 27%, hitting 52% with relative positivity about the industry’s future prospects, and 8% of respondents very positive. This may still count as a majority, but the rapid decline in confidence points towards a continued failure by negotiators in Brussels to deliver concrete proposals to businesses about what post-Brexit Britain will be.

Areas of concern and risk

54% of those polled expect growth in sales to continue over the coming period, thanks largely to the development of new products. This has been driven by a shift in consumer tastes toward more natural and organic products, with the drinks market for instance seeing a 6% rise in sales to more than £2.2 billion due to the rise in niche products, such as craft beer and lemonades, drawing increased attention from consumers as a result.

For the food and drink industry, Brexit looms large – with 42% citing it among their top five challenges for the coming year. This is still relatively low, at two fifths of all respondents, however, one area of broader concern is a squeeze on labour, which too stems from Brexit, cited by 32% of respondents. While the absence of ‘skilled labour’ from the EU resulting from Brexit is often lamented, an ageing population in the UK also means significant migration is required to replenish the workforce in manufacturing. With around a third of the food and drink segments 400,000 workers stemming from the EU, populating the workforce remains a key headwind faced by the industry. More than 140,000 new recruits are expected to be needed by the industry to 2024.

Pricing pressure from consumers, whose finances are squeezed, takes second spot on 34% of respondents, while the price volatility of raw materials scores 32%with Brexit and macroeconomic conditions, from the value of the pound to monetary policy, affecting both consumers and companies.

Impact of Brexit

Brexit trading performance in the short-term was noted by 31% of respondents as having a negative impact, while 36% said trading in the medium/long term would be negatively impacted. Access to imported raw materials was noted by 33% as being negatively impacted, while 55% said it would negatively affect their access to labour and skills. Finally, they project the regulatory environment to deteriorate (27%), rather than improve (11%).

Paul Davies, Head of Food and Drink at BDO said, “If there were hopes that many of Brexit’s unanswered questions would be resolved over the last 12 months, the reality is we are only now starting to dispel the unknowns. What we do know is that food and drink, the UK’s biggest manufacturing industry, could be unfairly hit by leaving the European Union (EU). We depend on foreigners for almost a third of our workforce and two of our three largest export markets are in Europe.”

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