UK Food Manufacturing – Many challenges with much uncertainty
There is no sector more fundamental to the UK economy than food manufacture and processing, but none is assailed by more challenges right now as the implications of the war in Ukraine and the cost of living crisis engulf our lifestyles and overwhelm the financial prospects for businesses and individuals alike.
Market Characteristics
Government statistics for the pre-pandemic economy in 2019 showed that food manufacture contributes £32bn or 2.43% of our GDP and employs some 420,000 people.
The Food and Drinks Federation puts this into a wider perspective. Food manufacture is the core of the wider food and drinks supply chain, which employs 4.3m people and makes up 9.1% of the economy, creating £120bn of total GDP.
Without food manufacturing and processing, there is no food supply chain and people won’t eat.
Our latest research using analytics provided by financial health monitoring specialists, Company Watch shows the following overall financial characteristics for food manufacture:
- Total Assets Employed – £35bn
- Total Debt – £8bn
- Total Net Worth – £18bn
This is a highly fragmented sector, in which 54% of companies (4,082) have total assets of £100k or less and 40% (2,991) have assets of only £25k or less.
Financial Risk
We have used the Company Watch system to analyse the latest financial statements filed at Companies House by every company registered in the UK and operating in the food manufacturing sector. Our research covered a total of 7,535 companies.
This highlighted some highly worrying statistics. Company Watch uses complex analytics to generate a financial health score (H-Score®) for companies out of a maximum of 100. An H-Score of 25 or less indicates that the company concerned has a one in four risk of going through a formal insolvency process or a significant financial restructuring during the next three years.
Warning Area
Out of our sample of 7,535 companies, 3,039 (40%) are in the Company Watch Warning Area with scores of 25 or less. A further 1,790 (24%) have a below par financial risk rating between 26 and 50. Overall, this means that two thirds of businesses in the sector are financially vulnerable and, using the Company Watch potential failure metric, around 750 could file for insolvency or will need a major restructuring over the next three years.
Zombie Companies
We also identified any ‘zombie’ companies with negative balance sheets (by at least a de minimis figure of £10k). 1,758 (23%) were zombies with a combined excess of liabilities over their assets of £863m.
Negative Working Capital
We looked at companies with negative working capital, where their liabilities falling due within a year were greater than their current assets (again by at least £10k). We found 1,983 (26%) such companies, which had a combined working capital deficit of £1.5bn.
Debt
The government has provided extraordinary amounts of financial support to the economy during the pandemic, totalling close to £400bn, of which £80bn has been lent to 1.67m businesses through the various government backed loan schemes. Over half of the loan support (£46bn) went to smaller entities through the Bounce Back Loan Scheme, very much on a ‘no questions’ asked basis with none of the normal credit underwriting constraints.
Across all food manufacturing sector, borrowings have actually fallen by 7% to £7.7bn, but this statistic masks a far more worrying picture for smaller businesses. In those with assets of £100k less, debt levels have more than doubled from £7.5m a year ago to £18m now.
The ability of these fragile, small enterprises to service and repay such huge debts must be in considerable doubt. The distortion to their balance sheets will also make it difficult, if not impossible for their suppliers to obtain trade insurance, without which many will not continue to trade with them.
Insolvency & Business Failure Issues
Formal insolvencies in this sector have been mercifully rare in the past. In 2019, the last year before the pandemic, only 90 food manufacturers filed for insolvency. In 2020, this number stayed steady at 87, before falling away to only 61 in 2021 as the full force of government measures protected struggling businesses. Never the less, the threat of a post-pandemic surge in failures can be seen from the fact that there were 21 insolvencies in March 2022 alone. This is the largest figure for a single month for many years.
Challenges for Food Manufacturers
Supply Chain disruption
The disturbance of supply chains triggered first by Brexit and then exaggerated by the emergence of Coronavirus in China is now being magnified many times over by the war in Ukraine and China’s zero-Covid debacle.
The Office for National Statistics (ONS) has reported on supply chain transition during Q1 2022. 55% of businesses are using more UK suppliers, 37% are increasing diversity among suppliers more generally and 25% are turning to different forms of freight for receiving goods. The short and medium-term implications for operational efficiency are obvious.
Cost inflation
Inflation is slashing profit margins right across the economy, but ONS revealed that in March 2022, 97% of food manufacturers were being affected by material and service input costs, compared to only 80% of all other businesses. Looking specifically at energy prices, 60% of food businesses were experiencing significant cost increases, as against only 38% for other businesses. Businesses are of course not protected by any energy price cap mechanism. Twice as many food manufacturing businesses complained of rising transport costs than the rest of the economy.
Labour shortages
There were issues with labour supply in the sector before the pandemic struck, but now this is feeding through into labour rate inflation, driven also by the cost of living crisis. According to ONS, a third of companies are having to raise pay for both existing and new employees and over a quarter have major staff shortages. Recruitment is exceptionally difficult, with 60% seeing low numbers of applicants for posts. Long Covid is one factor, as well as the estimated loss of up to one million people from the UK labour force as a result of Brexit and being driven back to other countries by Covid considerations.
Cost of living crisis
Consumer confidence is being badly affected by the cost of living crisis. The headline UK consumer GfK confidence index, a measure of how people view their personal finances and the wider economic outlook, dropped by two percentage points to -40 in May 2022, surpassing the previous record low of -39 set in July 2008 when the global banking system was imploding. This is now the lowest point in confidence since this index was started in 1974 and will inevitably affect spending on food, threatening the profitability and viability of manufacturers.
Conclusion
It is a simple truth that people have to eat. Whether food manufacturers can earn profits, service their debts and stay cash positive supplying consumers under current circumstances is a different matter altogether. Our research suggests that the sector has many financial problems, as well as the operational issues we have highlighted.
The greatest risks and stresses are focused among smaller businesses, but there will be inevitably also be failures among larger companies in the sector. Flexibility, funding, good management and a sound business model are the keys to not just surviving, but thriving.
June 2022
If you would like to discuss any of the points covered or believe you are being affected by issues in this report, you can book a confidential chat without charge or obligation: