‘Survival of the fittest’ for region’s food producers

EAST Anglian food and drink producers could see their margins squeezed to critically low levels, a report warns.

Those who are unable to adapt to a changing marketplace of rising input costs and shifting consumer trends will face tough times ahead as household budgets are squeezed further by rising tax, inflation and unemployment, the report, from financial and business advisers Grant Thornton East Anglia, says.

It advises the region’s producers to focus on delivering value if they are to win customers. Businesses should maintain sustainable debt levels and build a flexible, efficient, low cost manufacturing base capable of adapting to a volatile market, it says.

Currently, the top five supermarkets control 83% of the grocery market and with their increasing reluctance to pass on price rises to hard pressed consumers, the region’s producers may also suffer if they are not willing to deliver on supermarkets’ terms.

Paul Naylor, partner at Grant Thornton East Anglia, said: “The major supermarkets are constantly widening their range of own brand products and with the much publicised supermarket ‘price wars’, the rise in heavy consumer discounts such as ‘buy one get two free offers’ will undoubtedly continue.

“This puts immense pressure on manufacturers and producers as the supermarkets will not accept prices that consumers are not willing to pay, squeezing margins to critically low levels.”

The report also suggests that as supermarkets are developing private or own label ranges to cater for every price point, branded producers must invest in new product development to cater for changing consumer needs if they are to viably compete. This includes focusing on value rather than premium goods, healthy, local, green and ethically produced products.

Most Read

“The need to meet consumer demands for healthy, ethical products at low prices is a tough balancing act for producers,” said Mr Naylor.

“This trend is set to continue and businesses with the foresight to prepare for this and differentiate their product offering will prosper. On the other hand, with the constant threat of de-listing from the supermarkets, those producers who currently over rely on a small number of products or customers could face terminal consequences if their lines are withdrawn.”

A forecast rise in input costs adds further gloom to the picture for East Anglian producers, especially if supermarkets refuse to accept the resulting price rises.

Grant Thornton’s report suggests that future success will depend on producers creating a flexible, efficient and low cost manufacturing base to cope with sudden changes in a typically volatile market.

“Looking to the future, it will definitely be a case of survival of the fittest. Producers which have relied heavily on borrowing to stay afloat will be particularly vulnerable to market changes,” said Mr Naylor.

“Those producers relying on volume growth to return back to profit will also be in for a shock as market growth is expected to be restricted until well into 2012. It will also be important for manufacturers to carefully monitor the financial health of their supply chains to ensure there are no unexpected surprises.”

He warned of difficult times ahead for the region’s producers but says if businesses can adapt to a rapidly changing marketplace, they will succeed.

“Expanding plants and investing in technology will help improve efficiency and control costs. Larger organisations may also look to reduce their debts by selling non-core assets. Additionally manufacturers could also consider acquiring smaller producers to achieve greater scale and increase their product offering, protecting them from further pressure from the supermarkets,” he said.

Dr John Strak, managing director of foodeast.com which represents the food and drink industry in the East of England, said: “The world economy is shaky and the report identifies the challenges ahead for food manufacturers. However, the food and drink supply chain can deal with these threats and opportunities and offer jobs and profits for all involved.”

To see a full copy of the report for the food and beverage sector, contact Joanna Chamber at joanna.chambers@uk.gt.com