The number of UK food and drink manufacturing companies entering insolvency has more than doubled over the past 12 months, according to research from management consultancy group Inverto.
The research found insolvencies in the sector rose by 108% to 287 in the 12 months to the end of June, compared to 138 in the previous period.
Inverto, part of Boston Consulting Group, said the primary driver for this uptick was significant inflation of supply costs, which have eaten into industry profit margins.
It noted the costs of ingredients rose dramatically in the wake of the Ukraine crisis, particularly grains, cereals and products requiring significant fuel outlay to source, such as seafood.
With weakened profits, many businesses struggled to service debts as interest rates rose, creating significant trading pressures.
It found drink manufacturing companies saw a 123% surge in insolvencies, from 39 in the previous year to 87 in the past 12 months.
Food manufacturing companies also saw a 102% increase in insolvencies, from 99 in the previous year to 200 in the year just gone.
“The year has seen a sharp rise in food and drink manufacturers suffering from financial distress caused almost exclusively by their suppliers demanding price rises,” said Mohamad Kaivan, MD at Inverto. “Some of those price rises have been justified but a lot of them haven’t.
“While businesses should look to take advantage of decreasing prices, they also need to be preparing for future risks that could potentially impact their businesses. This often requires a rethink of their strategies and ways of working with their suppliers to ensure they can improve their future resilience to potential supply shocks.”
He noted that as price deflation is now beginning to occur, food and drink manufacturing companies should be renegotiating prices down with suppliers.
Notably, the prices of ingredients for many manufacturers like dairy products and flour have fallen – however, those price reductions will not help food manufacturer margins until they ensure those price reductions are passed on to them.
He added that food manufacturers should ask their suppliers for greater transparency over their costs.
“Understanding the structure of their suppliers’ costs can help procurement teams to negotiate fairer prices and accept pain-sharing if necessary,” he said.
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