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Key challenges and opportunities for the food and drink industry

October 26, 2017

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Type: Corporate Finance, Latest Blogs, Trending

The food and drink sector is one of the largest elements of the UK manufacturing and retail sectors. It currently faces a number of challenges and opportunities, some of the key challenges are summarised below.

 

Healthy and clean label vs diet friendly

Low fat diets are increasingly being challenged by food nutritionists, with greater awareness of the benefits of healthy fats. Following this there is evidence that consumers looking to follow a healthy diet are not as focused on cutting fat and calories as they once were.

 

Consumers are now more motivated to purchase products they deem to be more closely aligned with health and long-term wellbeing, with less processed, natural foods free from artificial flavourings, GMO’s, and pesticides being increasingly favoured.

 

This has created challenges for established brands. An example being Kellogg’s and its special K cereal and snack brand, previously aligned as a short-term diet aid product. This is being remarketed as a health and wellness offering.

 

Adapting to E-Commerce

Industries such as consumer electronics, appliances, books and games and other household products are already firmly established in the e commerce space, but food and drink manufacturers have tended to more cautiously.

 

However, there is now a very significant level of activity as bricks and mortar retailers, along with existing online retailers such as Amazon have been investing in grocery e-commerce. Indeed there have been examples of high street retailers using Amazon as their online channel.

 

The trend for healthy and clean label products is to some extent helping to driver this trend with consumers increasingly sourcing niche products online from a range of providers (often through Amazon).

 

As more consumers shift to a preference for online shopping, it is vital that food manufacturers and retailers continue to respond to this trend. This will present big challenges but also opportunities for more nimble (sometimes smaller operators) to take advantage of these trends. A strong website and e-commerce strategy will be key.

 

Sugar tax

Whilst to some extent the food manufacturing industry has for many years been gradually reducing the sugar (and salt) content of products (often unnoticed by consumers with interesting evidence that tastes have evolved gradually to adapt to this).  A comparison of the sugar content of many cereals now v the 1990’s demonstrates this, however recent government pressure and legislation now requires a significant step change in sugar reduction.

 

This presents a big challenge because consumers still want sweet products, but without sugar on the label, and as noted above they don’t want to see artificial sweeteners.

 

This is currently driving significant innovation in the food industry with alternatives to sugar/sweeteners being trialled, and new patents filed for innovative recipes.

 

Food businesses need to ensure they take advantage of R&D tax credits to fund this innovation.

 

Greater scrutiny of supply chains and food fraud

Numerous recent food scandals have highlighted the importance of food businesses having a clear and detailed understanding of their supply chain.

 

With news spreading faster and faster it is vital that food companies stay ahead of the game by having up to date information on the sourcing of their products.

 

It is vital for food business know their supply chain, and understand the areas of greatest vulnerability, they also need to be aware that legislation increasingly requires businesses to look beyond their immediate suppliers.

 

Brexit

Brexit presents significant challenges for the food sector. Concerns have been raised the impact restrictions on immigration will have on the industry, and the impact of tariffs on exports to the EU. Government has so far been able to offer little reassurance to the concerns raised by the food industry.

 

Higher import prices are already putting pressure on food manufacturers with margins increasingly under threat. Process improvements has mitigated the impact to some extent, but it remains to be seen how far this can continue.

 

Brexit also creates a significant opportunity for those businesses able to export to new markets outside the EU. Trade deals will take time to implement and businesses may face import tariffs at least initially. Establishing and maintaining strong brands, coupled with investment in marketing will be key to enabling businesses to implement pricing strategies which mitigate the impact of tariffs.

 

If you would like to discuss challenges and opportunities for the food and drink industry, or you would like to speak with a member of our team, please contact Ian Waddingham or call 01772 821021 to be put in contact with a member of our Corporate Finance team.