Analysis of drivers of food and drink inflation
10 August 2023
The turbulence experienced in recent years in agrifood supply chains is without precedent, with three structural shocks that took place in quick succession continuing to impact our sector: Brexit, the COVID pandemic and the war in Ukraine. While all other UK economic sectors experienced adverse impacts, food and drink manufacturing was disproportionately impacted compared to nearly all other industries.
- Economic insights
- Business insights & economics
Food and drink manufacturing is the UK’s largest manufacturing sector, with a footprint in every parliamentary constituency. Our industry has a turnover of more than £128bn, accounting for 20% of total UK manufacturing, contributing over £33bn a year to the UK economy, and directly employing over 450,000 people across every region and nation of the UK. We’re an industry that powers entrepreneurs, with 97% of our industry made-up of small and medium-sized businesses.
The sector operates in a highly competitive market. It has faced significant cost pressures over the last three years due to a series of shocks. The industry has tried to absorb a proportion of these cost increases but is having to pass a share to retailers and consumers. There is a lag of seven to twelve months for these costs changes to materialise in retail prices due to the nature of contracts across the supply chain. Regardless of current inflationary pressures, the UK still has some of the lowest grocery prices in Europe.
The turbulence experienced in recent years in agrifood supply chains is without precedent, with three structural shocks that took place in quick succession continuing to impact our sector: Brexit, the COVID pandemic and the war in Ukraine. While all other UK economic sectors experienced adverse impacts, food and drink manufacturing was disproportionately impacted compared to nearly all other industries:
- Brexit increased the red tape involved in trading with the EU, effectively raising the costs for trading with the continental bloc. The UK-EU Trade and Cooperation Agreement (TCA) which shapes trade with our biggest and nearest trade partners, accounting for around 60% of our sector’s total trade was not agreed until 24 December 2020. The terms of the deal were not made public until 26 December 2020 and this deal entered into force before guidance was available, on 1 January 2021. Businesses were literally given no warning or time to prepare and the trade data clearly shows the impacts, with UK-EU trade in food and drink dropping off substantially in Q1 2021 and taking nearly two years to recover. Brexit also contributed to a challenging labour market for agrifood and drink businesses.
- The pandemic shock meant that manufacturers had to adjust quickly to supplying supermarkets and shift away from the hospitality industry, and then to reverse this in the span of two years. To feed our nation, manufacturers focused on volumes and simplified product ranges, and in doing so more valuable product lines were dropped. Global shipping was significantly affected, goods and the paperwork to release them from ports couldn’t be moved around the world and the cost of shipping soared. Moreover, the global change in consumption from services to goods wreaked havoc in global logistics and supply chains, against a backdrop of rising prices of agricultural commodities due to increased Chinese demand and adverse weather patterns. In the UK, the pandemic also added to existing disruption in the labour market, with severe labour shortages posing a serious challenge to businesses.
- The war in Ukraine severely disrupted global food supplies, as Ukraine and Russia were both significant global suppliers of wheat, other grains and vegetable oils. Overnight, many manufacturers were unable to access essential functional ingredients from these markets and it took time for UK Government to deliver additional flexibility for businesses to switch to alternative sources. The impacts on global commodity markets were significant and competition for alternative supplies increased rapidly. As Russia cut its gas supply to Europe, energy prices also skyrocketed, along with fertiliser prices (many fertilisers are a by-product of gas production) and other functional inputs produced as by-products including CO2 which has a wide range of practical uses in food and drink, from its use in abattoirs to brewing and the packing of meats, salad leaves and carbonation of soft drinks.
Food and drink manufacturers have experienced almost three years of substantial upward pressures on all cost elements facing their businesses, from ingredients and packaging to labour, transportation and logistics. Producer prices (input costs) started rising in October 2020 and by April 2023 they were 35% higher than in September 2020.