Sunnier times ahead for resilient food and drink producers

Supply chain disruptions, volatile weather, rising input costs and staff shortages: the UK's food production industry had a rough time of it last year.

But in recent months, there have been signs of sunnier times ahead for the industry. 

High interest rates continue to have a negative impact on highly leveraged food producers - not to mention the companies and consumers they rely on for their sales. Meanwhile, labour costs remain elevated and the prices of some raw materials, such as cocoa, have hit historic highs.
But in recent months, there have been some reasons for more optimism. According to Georgios Panzaris, food sector expert at Atradius, a recent drop in overall material and utility costs coupled with persistently high sale prices has translated to improved profits for most food companies. “Food is a resilient sector and less affected by discretionary spending,” George says.

He says that demand has remained relatively strong for UK food and drink producers despite the cost-of-living crisis: “This is the main message we have been getting from most companies we have spoken with, and not something we have seen before.”

This is reflected in new data from Atradius: the number of claims for late or failed payments in the food and drink sector fell by 59% between May 2023 and May 2024.

Looking forward to a brighter summer

Food producers’ fortunes are likely to continue improving into this summer. Inflation has fallen to its lowest level in two-and-a-half years, driven largely by slowing food price rises. Although Bank of England policymakers held steady at their June meeting, they are expected to cut interest rates later in the season. This would be a relief to highly leveraged companies.

There are several other reasons for food and drink companies to look forward to some summer brightness, including a packed summer of sport. We have already seen this come into play with the men’s Euro 2024 tournament which was predicted to encourage 13% of people to spend more on groceries, beer, wine & spirits, and takeaways, according to the British Retail Consortium.

George says: “Companies in the food sector that supply the catering and hospitality industry stand to win from this windfall demand whether this is drinks, processed food, ready meals or raw material.”

The warm weather will provide a boost too: many people are planning to spend more on food and drink as the weather improves, dusting off their picnic blankets and spending out on some al fresco treats. However, just how much the sun will shine in the UK this summer is, as ever, a mystery.

Food exports remain depressed - with some bright spots 

Meanwhile, UK food export volumes remain in the doldrums. In the first quarter of 2024, year-on-year exports dropped by 5% to £5.7 billion, with products measured in kilograms down by 20% compared to last year, according to data from the Food and Drink Federation (FDF).

George says: “There has been a drop in food and drink exports, particularly to Europe, which is attributed to lower demand from the continent, the fact that the UK is not an affordable exporter, and also the Brexit red tape that has introduced additional regulations, labelling and paperwork.”

The FDF expects a combination of the effects of ‘Not for EU’ labelling and inflationary cost pressures to continue to strain growth in some key export markets for UK food and drink.
There are some bright spots, however, with growth in exports of products such as whisky. Scotch Whisky exports were valued at £5.6bn in 2023, with 1.35bn bottles exported, equating to 43 bottles per second. Although this was lower than 2022’s bumper sales, it was still up 14% on pre-pandemic levels.
“In whisky, the UK has a very strong offering which tends to be more resilient with a wider addressable market as there is great potential to export to Asia where demand is more robust,” George says.

Looking on a country level for overall food and drink exports, there are some bright spots too. Among them, exports to Turkey have surged over the past few years reaching a record high £60 million in the first quarter of 2024; increased market access through an improved free trade agreement could aid this further, the FDF expects. Meanwhile, UK exports to Australia also rose by 15.6% and could continue to creep higher, benefiting from a new free trade agreement.

Export protection with insurance and retention of title 

Given the ongoing challenges in the UK, many companies may be looking overseas for future growth; with some of them taking their first steps outside of the UK. Trading internationally can bring huge opportunities, but taking on new overseas customers is not without its risks. For instance, dealing with late payments can be particularly challenging when there are significant cultural and language differences.

It’s crucial to ensure that expectations are transparent from the start, with clear contracts and terms - an essential whether firms are working with new partners down the road or on the other side of the world.

Exporters might consider a retention of title clause. These are designed to protect their rights, showing a business continues to own goods they have supplied until they are paid. That is in addition to an export credit insurance policy. This insures a firm’s accounts receivable and protects the business from unpaid invoices caused by reasons including political risks or customer bankruptcy.

After all, the food and drink industry is truly worth protecting, employing 3.7 million people in 2022, of which nearly half a million work solely in manufacturing.

At Atradius UK, we’re proud to play a role in supporting the industry. We protect our food and drink customers against the commercial and political risks that are inherent in domestic and global trade. As an international firm, with offices and expertise in more than 50 countries worldwide, we are well-placed to understand companies’ exporting needs and mitigate associated risks.