1. The Rising Cost of Energy and Raw Materials

One of the most immediate and pressing concerns for UK food producers is the steep rise in energy and raw material costs. According to recent industry reports, food production costs surged by an average of 9.2% in the year leading up to March 2024, driven primarily the growing cost of raw materials in the wake of the energy crisis. The reliance on gas and electricity, especially in energy-intensive food production processes such as refrigeration, processing, and packaging, has pushed costs higher. As energy prices fluctuate, manufacturers are struggling to absorb these increases, particularly those with limited bargaining power. A number of our SME clients were feeling these pressures most, as well as a need to source stronger buying power in buying groups or through the potential of M&A when also considering raw material costs.

Similarly, these raw material costs have surged due to disruptions in global supply chains and climate-related impacts on agricultural yields. These costs are expected to rise by a further 2.1% over the next year, placing further strain on producers who are already operating on slim margins.

2. The Political Climate and Its Implications

The UK’s political environment has gone through, and will continue to go through more, significant change with a new Labour government having taken office this year. Labour’s focus on worker rights, sustainability, and regulatory reform could lead to increased pressures on businesses in terms of compliance and operational costs. Proposed increases in a number of tax areas (including the potential changes to Capital Gains and business asset disposal relief) was a hot topic especially amongst our privately held and private equity backed client group. In addition, a heightened focus on environmental standards and changes to labour laws could reshape the landscape for UK food manufacturers.

Internationally, the differences between either a Trump or Harris administration in the U.S. also poses different potential challenges. Under Trump, the U.S. might revert to a more isolationist trade policy, complicating UK exports to its second-largest non-EU trading partner. Conversely, a Harris-led administration has talked about the potential of stricter environmental standards on trade partners, forcing UK food manufacturers to adapt to these new expectations if they want to maintain access to the U.S. market in the same ways.

Navigating this increasingly fragmented political landscape will be critical for businesses that want to remain competitive in a post-Brexit, post-COVID world.

3. Sustainability and Packaging Pressures

We caught up with a number of manufacturing and sustainability leaders and the sentiment was unanimous regarding both the importance and pressures here. Political, consumer, and intense media demand for more sustainable and ethical production practices is clearly growing, and the UK food industry is under increasing pressure to reduce its environmental footprint. Packaging waste, carbon emissions, and food miles have become central issues for producers, who must now balance sustainability initiatives with cost pressures.

The UK government’s introduction of new regulatory frameworks, such as the Extended Producer Responsibility (EPR) scheme, which places more responsibility on manufacturers for the end-of-life disposal of packaging, adds another layer of complexity. The cost of compliance with EPR is a c£1.7 billion figure that has left many food producers uncertain about how to incorporate this into their margins.

In addition, the rising demand for traceable food production is forcing companies to adopt new technologies to ensure transparency throughout their supply chains. Consumers want to know where their food comes from, how it is produced, and whether it aligns with their values, particularly regarding sustainability. This has led to the adoption of digital traceability solutions, which, while providing long-term benefits, represent another upfront cost for manufacturers.

We discussed whether there was genuinely a ‘green premium’ available to improve margins and off-set these costs and this varied industry to industry and depending on the level of existing ‘premium’ in the product category as cost of living pressures causing disparity between how a consumer says they want to shop and how they are actually shopping.

4. Global Supply Chain Disruptions and Export Tariffs

With the global challenges in supply chain and the amount of investment in this area, FWB has seen the highest volume of Procurement, Supply Chain and Logistics Leadership and Transformation searches in a number of years. Speaking with a number of these appointments across both food and drink production we saw that the effects of the COVID-19 pandemic and subsequent geopolitical conflicts are continuing to have an effect with the significantly disrupted global supply chains affecting the availability and price of key ingredients and materials, not just relating to energy. The UK’s reliance on imports for certain raw materials has left the food industry vulnerable to delays, rising transport costs, and shortages. The “just-in-time” model, which many manufacturers have relied on, is now under strain, with businesses seeking alternative supply chain models to improve resilience.

Post-Brexit trade deals have further complicated the export landscape, with new tariffs and customs checks adding to the cost of doing business with EU countries. In 2024, the UK introduced the Border Target Operating Model (BTOM), which applies stricter import and export regulations, however the feeling was that his has disproportionately impacted SMEs, and these additional costs, combined with the ongoing changing regulatory, export challenges and negotiations to trade agreements with major markets, have left UK food manufacturers grappling with how to maintain competitiveness abroad.

Having led a number of Supply Chain transformation projects for our clients we are seeing a huge investment in technology, automation and data driven supply chain improvement works, giving much more real time decision making and cost savings to offset the challenges and costs spoken about above.

5. Labour Shortages and Rising Costs in the Post-Brexit Landscape

Labour, whilst always a key challenge, and the one we are always closest to ourselves,  has become a described by many of our clients as a bottleneck in the UK food manufacturing industry. Post-Brexit immigration policies have exacerbated pre-existing labour shortages, particularly in entry level and more labour intensive food processing, warehouse and logistics type roles. In fact, with nearly 70,000 vacancies across UK manufacturing, the food sector is feeling the pinch. Many EU nationals that previously filled these positions have left, and new restrictions make it difficult to attract talent from abroad. Additionally, with a rise in demand again within Oil & Gas, a lot of engineering, maintenance and general operative talent is being attracted either back to, or to, the Energy Industry that is paying more for similar level roles.

To compound the situation, labour costs have risen sharply, with wages in the food production sector increasing by an averages of 6-10% in the year, outpacing earlier predictions . The increase in wages and salaries, necessary to attract and retain staff, has further squeezed profit margins for manufacturers already dealing with rising input costs and fixed sale prices dictated by the retailers. This has forced many businesses to seek either expensive debt funding, consider external investment (with the highest number of family and privately owned businesses either sold or up for sale within the last 3 years than we have seen for a long time in this industry) or at least reassess their operations, with a significant number opting to restructure or automate to mitigate the impact of rising labour costs.

6. The Need for Robotics and Automation Investment

As these labour shortages and rising costs continue to challenge the industry, the case for automation in food manufacturing has never been stronger. In 2023, 81% of UK manufacturing businesses cited automation as their biggest challenge. Automation presents an opportunity for manufacturers to improve efficiency, reduce reliance on an unpredictable labour market, and remain competitive. The use of collaborative robots (cobots) and automated guided vehicles (AGVs) is growing in the food sector, with machines now capable of handling tasks from raw material handling to packaging.

Smart maintenance, predictive maintenance, and the integration of artificial intelligence (AI) and the Internet of Things (IoT) into factory operations are also gaining traction. These technologies enable manufacturers to predict equipment failures, optimise maintenance schedules, and reduce downtime, ultimately lowering operational costs. The rise of predictive and prescriptive maintenance promises to shift maintenance strategies from reactive to proactive, further boosting productivity.

This all said, and whilst there has been a 79% increase in automation adoption across the industry, our SME client base cited significant barriers to entry, particularly around cost and the availability of skilled workers to manage and maintain these systems relevant to the size of business and margin available to fund this investment. Within our global and larger private and plc client base we have been involved in a number of warehouse and production line automation projects, seeking to attract both interim and permanent talent to consult, design and deliver on robotics, data led human capital and workforce planning software, and smarter supply chain and warehousing operations.