Very high

Food & Drink

The legacy impacts of COVID-19 and inflationary pressure mean that Food & Drink Manufacturers (FDM) are now facing considerable trading challenges.

Sector trends & challenges

  • Supply chain issues

    COVID-19 emphasised the need for a resilient supply chain, from farm to fork.

  • Inflationary cost pressure

    Significant inflationary pressure has built up across the sector during the past few months. Although some of this may be passed on to consumers by way of rising food retail prices, the pressure on FDM margins is increasing.

  • Changing consumer landscape

    An increasing focus on ethical, social, and environmental considerations is leading to lasting shifts in consumer behaviour adding more cost into the production base and emphasising the need for innovation and strict cost control.

Sector rating profile

FDM were already under mounting pressure to adapt to Brexit-driven supply chain complexity which was further exacerbated by the COVID-19 pandemic. Despite the sector showing an impressive level of resilience since March 2020, the backdrop is becoming even more challenging as a range of P&L pressures align. Input cost pressures, increased overheads and the introduction of new legislation are expected intensify issues around sector profitability over the coming months.

Food & Drink

COVID-19 created operational and financial pressures across the sector which are likely to take several years to unwind fully. Together with the changes resulting from Brexit it highlighted weaknesses in the supply chain of many FDM and we anticipate that supplier risk management will remain near the top of the operational risk agenda for the foreseeable future.

Whilst many FDM have shown an impressive level of resilience over the past 18 months, the sector is now vulnerable to significant near-term gross margin pressure from ingredients inflation, especially in relation to commodities many of which have experienced double digit price rises in recent months.

Operating costs are also under extreme pressure. New regulatory initiatives, higher distribution costs and ongoing COVID-19 health and safety measures have increased operating costs across the sector. In particular, the challenges facing FDM due to staff shortages and a lack of HGV drivers are well publicised and a sustainable short-term fix is considered unlikely.

Brexit aside, the sector is facing a multitude of regulatory initiatives which will require longer term modifications to the business models of many FDM. Many relate to changing consumer attitudes and range from a plastic packaging tax to be introduced in April 2022, to a proposed Deposit Return Scheme for drinks containers two years later. HFSS legislation targeted at healthy eating is likely to have a substantial impact on certain FDM when it is introduced in October 2022.

For retail sector facing FDM, supply chain resilience and strict cost control are the order of the day. However, the outlook for food service sector FDM remains uncertain with some market segments likely to experience permanent change. The move toward hybrid office working, for example, is likely to impact ‘food-to-go’ outlets in city centres, with knock-on impacts for manufacturers selling into that space.

With the transactions somewhat depressed during 2020, we are expecting an uptick in deal volumes over the next few months with larger FDM looking to either acquire or divest elements of their business in order to improve operational resilience, provide adjacent growth opportunities or simply to refocus on core competencies. Meanwhile, a lack of scale and the balance sheet strength is likely to result in financial distress in the SME segment of the market which may also lead to further M&A activity.

Find Your Expert

Dom Carter is Interpath Lead for Consumer Markets, which includes Food & Drink as one of three core segments. Steve Elsigood leads our approach to Food & Drink nationally. For a full list of our senior people with experience in the sector use the button below.

Our senior team