New data suggests that food and drink manufacturers have been compelled to scale back or cancel investments in long-term growth, as they struggle with mounting economic pressures and a raft of new taxes and regulations.
The Food and Drink Federation’s (FDF) latest ‘State of Industry’ report reveals that confidence amongst food and drink businesses remains persistently low, at -43% in the first quarter of 2025. A third of businesses (33%), including nearly half (47%) of small and medium-sized enterprises (SMEs), said they expect conditions to further deteriorate, as they grapple with volatile global economic conditions and increased costs as a result of new government policies. These include rises to National Minimum Wage and employer National Insurance Contributions, as well as a £1.4bn Extended Producer Responsibility (EPR) packaging tax.
Production costs increased by an average of 4.5% over a year to March 2025, with over a fifth (22%) of food and drink manufacturers having seen costs increase by 10% or more. With energy, ingredients and labour prices continuing to climb, manufacturers expect their costs to rise by a further 4.8% in the next 12 months amid falling consumer confidence.
In this high-pressure environment, the FDF stated that the business case for investment has never been higher. Food and drink manufacturers are already looking to take advantage of the productivity opportunity presented by digital technology, with over half (54%) saying that investment in automation will be a top priority in the coming year. This will play a key role in helping the industry overcome the high cost of labour and its persistently high unfilled vacancy rate, which is double that of UK manufacturing as a whole. Meanwhile, 13% say they will focus on R&D projects, such as developing healthier products.
However, whilst the data show that companies want to invest, recent government decisions and geopolitical uncertainty are having an impact. 41% of businesses are planning to cancel or scale back their planned investment for the year ahead in areas that would drive growth.
To enable businesses to act on their intentions to invest in long-term productivity drivers, FDF is calling for the government to send a strong signal that it will support the future health of the industry. The trade organisation said it can achieve this by creating a joined-up and cross-government approach that prioritises sector growth and skills in the upcoming Food and Industrial Strategies.
FDF stated that the government’s recent announcements of trade agreements with the US and India are steps in the right direction to strengthen competitiveness in the sector. However, there remain additional actions the government can take to support national food security, protect consumers from rising prices and enable manufacturers to invest in new healthy products. This includes continuing to push for a reduction in the current 10% tariffs imposed by the US, whilst also strengthening the UK’s relationship with its biggest trading partner, the EU.
“Not only does the food and drink manufacturing sector contribute £37bn and half a million jobs to communities across the UK, but it’s also fundamental to the nation’s food security. So, it’s concerning that businesses are having to scale back investments that would help drive long-term growth and productivity as they ride out a wave of cost rises,” said Balwinder Dhoot, Director of Industry Growth and Sustainability at FDF.
“The Government must reflect the value that food and drink manufacturing has to our country by ensuring growth for our industry is a top priority in its upcoming Industrial and Food Strategies. We urge the government to give businesses the support they need to make investments that will support the resilience of the food industry.”
NAM Implications:
- Deep down, the issue is about rebuilding trust…
- …the greatest casualty of Lockdown.
- Meanwhile, businesses have little option but to cut back on anything that does not promise fast returns…
