How can agrifood companies get through the inflation crisis?


Restructuring Advisory Partners Martyn Pullin and Tony Barrell explore current challenges and opportunities for the food manufacturing sector

Businesses and households are facing the UK’s highest annual cost of living crisis since 1982. Over the past 9 months, fuel, food and energy prices have pushed inflation rates higher, resulting in recent reports registering the inflation rate at an eye-watering 9.4%. This is well above the government’s 2% target and the Bank of England expects inflation to exceed 13% by autumn. Supply chain challenges, hyperinflation of raw material costs, rising energy prices and labor shortages, all aggravated by the war in Ukraine, create an extremely difficult climate in which food producers must operate.

Food manufacturers are seeing the cost of some ingredients far exceed the current rate of inflation, with the cost of flour increasing by 36% between March 2022 and June 2022, and pork belly by 26%, not to mention name just two. Although the Food Supplier Code of Practice (GSCoP) calls for “fair and lawful use”, suppliers in the retail sector are often unable to obtain price increases from customers that fully reflect the increase in their commercial costs, which leads to losses on certain product lines.

What is the impact of the current climate on the food manufacturing sector?

The UK’s withdrawal from the European Union, the global pandemic and the war in Ukraine have all contributed to an unprecedented rise in inflation and record high energy prices.

Some of the pressures on the sector result from the difficulties faced by the agricultural industry. With Russia and Belarus responsible for 40% of the world’s stockpiles of potash (a potassium-rich salt that is an essential ingredient in fertilizers and crucial for crop growth), the sanctions that stemmed from the war in Ukraine led to a shortage and subsequent increase. in prices. The cost of potash has doubled to more than $500 per metric ton since January 2022. This fertilizer shortage means farmers will see less yield per acre, which will impact the amount of crop they have available for feed livestock and produce for food manufacturers.

This situation has been aggravated by recent high temperatures and water shortages. In July, some farmers saw poor fruit and vegetable harvests, with peas, berries and salad lost. If water shortages continue, this could have a ripple effect on next season’s harvest and greater food price volatility.

What does this mean for food manufacturing?

Food manufacturers are feeling pressure from all directions – labor shortages, rising production prices, rising packaging costs and a significant challenge in passing those costs on to retail customers.

Additionally, major supermarkets ASDA and Morrisons have lowered the price of hundreds of items, but does this transfer the problem from consumers to manufacturers, as it is often the supplier who foots the bill for deals?

The purchasing power of large supermarkets and the structure they have put in place make it difficult and often time-consuming for their suppliers to negotiate a price change. Some supermarkets have improved their payment terms to send money to suppliers sooner, which is certainly welcome, but must be accompanied by an awareness that the cost of supply will increase. Cost-absorbing manufacturers can only be a short-term strategy. While focusing on liquidity is essential in times of crisis, maintaining margin is also vital for long-term survival.

Four action points for agribusinesses

To ensure their survival in such a volatile cost environment, companies need to proactively review their operations, costs and prices to ensure they will weather the other side of the current crisis.

1. Examine the costs of the business

It has become essential for companies in the industry to know their underlying cost base and the true cost of their products (relying on old and outdated data results is bad decision making). Maintaining live forecasts and details of product cost information expedites discussions with customers, which now need to take place more regularly if trade cost volatility persists.

2. Reduce unnecessary costs

Look for providers that offer more competitive costs, longer-term contracts, or fixed rates. Benefits, such as collective buying power and supply chain support, can be gained by joining a buying group. Assessing production processes allows companies to identify and remove inefficiencies allowing staffing levels to be reassessed.

3. Calculate budgets versus actual cost

Have a clear understanding of where the business is and isn’t making money and create an appropriate budget using this information. Use a 13-week cash flow forecast so cash inflows and outflows can be continuously monitored and managed effectively. This will allow companies to make more strategic short-term financial decisions and spot cash flow pinch points earlier.

4. Review product portfolio

Maintain open channels with key buyers to enable product weight/size conversations. If staffing issues persist, consider streamlining product portfolios after consulting with customers, as this will improve operational efficiency and allow production to focus on high-margin SKUs.

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