Macro trends don’t fit neatly into calendar years but January is the ideal time to see how they, and potential headwinds and tailwinds, are likely to impact food manufacturers in the months ahead.
As far as the outlook for the UK packaged food industry is concerned, there are ongoing issues that need to be weighed up when making decisions on investment, pricing or M&A.
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The prevailing economic climate is always the big one. The rampant inflation seen in the supply chain in early 2023 – food inflation reached 19.2% as the impact of Russia’s invasion of Ukraine on commodity and ingredient prices was realised – may thankfully be a distant memory but further increases this year can’t be ruled out.
Changes to consumer attitudes in terms of what they buy can also be linked to the economy but may also be influenced by attitudes to health and wellness and the increased use of weight loss drugs.
Also linked to health are new regulations from the Labour government, elected last year, which is keen to use legislation against products seen as unhealthy to help fight childhood obesity.
UK food manufacturers may also have overseas trade on their minds as border controls with former EU partners continue to bite and a new administration in the US threatens higher tariffs on imported goods.
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By GlobalDataPlenty to think about then for UK food manufacturing bosses and industry analysts.
Inflationary fears
Data showed annual grocery price inflation in the UK at 2.6% in the four weeks to 1 December, up from 2.3% in the previous four-week period but still pretty low compared to the dark days of 2023.
However, some are suggesting that 2.6% figure could rise markedly in 2025.
UK investment bank Peel Hunt suggests food inflation could near 4% by the end of 2025 as supermarkets react to cost pressures arising from Labour’s budget in October.
This is a point taken up by Clive Black, vice chairman and head of consumer research at investment group Shore Capital. In a note issued on 6 January, the veteran food industry analyst said: “We normally think about UK food inflation against a backdrop of commodity prices, competition, crude oil, and currencies. However, for 2025, following on from recent political developments, it is UK government policy that is now the prime source of grocery price appreciation.”
Shore Capital has raised its 2025 food inflation forecast from around 1.5% to circa 3%.
UK government action
The government action to which Black alludes was discussed by UK industry body the Food and Drink Federation (FDF) in its latest State of Industry report, published in December, which tracks business confidence and trends.
The FDF found more than half (53%) of manufacturers said they were likely to limit investment over the next 12 months and pointed to contributory factors such as recent National Insurance employer contribution (NIC) changes and minimum wage increases.
In the October budget, UK Chancellor Rachel Reeves announced employers will pay a 15% National Insurance rate on staff salaries above £5,000 ($6,142), rather than the current 13.8% levy on wages exceeding £9,100.
“Government creating a more supportive and stable business environment can provide businesses with the confidence they need to unlock this investment in the UK,” the FDF report noted pointedly.
Balwinder Dhoot, director of industry growth and sustainability at the FDF, said in commentary around the report: “Investment is vital to the long-term health and resilience of our industry, as well as to countering inflation. While it’s positive to see businesses planning to boost their investment in UK production, this will have been impacted by raised costs in the budget.”
“Only five months into the Labour regime, UK business confidence has materially fallen, that of the consumer too, which does not bode well as an entry point for 2025,” Black tells Just Food.
We have the bizarre situation of a Labour government doing more to put good people out of work than anyone could have imagined
Clive Black, Shore Capital
“The food system is the largest [manufacturer] in the UK, employing some 4.3 million people, and the holy trinity of the high rise in the National Living Wage, on a 9.9% 2024-25 increase, the surprise elevation of National Insurance costs and the impact of the forthcoming Employment Bill, mean that every firm is reassessing its labour processes.
“For the food system, capital replacement of labour will accelerate, hiring is likely to decline and firms on the edge from farm to fork may capitulate either through financial distress or simple disheartenedness. In aggregate, we have the bizarre situation of a Labour government doing more to put good people out of work than anyone could have imagined.”
Staffing costs
The UK’s minimum wage for over 21s, known officially as the National Living Wage, will rise by 6.7%, from £11.44 to £12.21 an hour from April.
There is a fear that increased costs could see manufacturers seeking to keep employee wage demands dampened down more generally which could see an increase in labour disputes.
Earlier this month, it was revealed that strikes are to take place at five Princes factories in the UK as a dispute over pay deepens.
According to union officials, the action followed a move by canned fish and fruit manufacturer Princes’ new owner, Italy’s Newlat, to rescind a pay offer for staff..
Tellingly, a Princes spokesperson cited the impacts of Covid-19, Brexit and inflation as reasons for the lower offer.
Could more regulation be in offing?
Above and beyond financial measures introduced by the government, regulations linked to unhealthy food will have an impact on some manufacturers with reformulation of products, or a switch to healthier lines, possibly becoming a consideration.
In September, the Labour government made good on a pre-election pledge to ban TV advertising of so-called junk food in the UK before the 9pm watershed.
And online advertising of such products will be banned completely.
The restrictions on advertising products high in fat, sugar and salt (HFSS) will take effect on 1 October.
Food manufacturers will be wondering if other measures that could impact the products they make might follow.
In December, Professor Sir Chris Whitty, England’s chief medical officer, recommended a levy on unhealthy food to address childhood obesity.
In the Chief Medical Officer’s Annual Report 2024, titled ‘Health in Cities’, he called on the government to address the underlying causes of unhealthy eating in the country’s cities, particularly the widespread availability of HFSS products.
Consumer sentiment
What is also likely to have an impact on food product design is a growing desire by UK consumers to eat more healthily.
This can be traced back to the Covid-19 pandemic, which triggered a heightened awareness around health more generally but consumer habits continue to evolve, not least in the rising interest in GLP-1 weight-loss drugs such as Ozempic and Wegovy.
While GLP-1 drugs are much more widely available as a fat-fighting measure in the US, they are gaining popularity in western Europe for their appetite-suppressing properties and uptake is likely to increase this year.
Worrying for food manufacturers at the less healthy end of the spectrum is that the study found that a nearly 6% decline in grocery spending equates to a household on average spending $416 less on groceries. For households earning over $125,000, the annual decrease is $690.
However, there are two ways of looking at such trends. Shaun Browne, managing director and co-head of corporate finance at investment bank Houlihan Lokey points to less talk of a cost-of-living crisis in recent months and suggests it could be argued that “greater awareness of health and wellness may cause some consumers to enhance their total food spend”.
Trade troubles
UK food companies that export will be concerned that US President-elect Trump – who takes office on 20 January – has threatened to hike tariffs on imports.
At the end of December, the FDF revealed UK food and drink exports slid 10.2% to £16.3bn in the first nine months of 2024.
The US is the UK’s third largest export market and, by value, exports to the US were down 7.9% to £1.6bn.
While Trump’s main targets are America’s immediate neighbours – he has indicated plans to implement 25% tariffs on all imports from Canada and Mexico – UK exporters will be fearful of what is to come.
Border delays linked to increased administration following Brexit remain an issue, too, with no sign of things easing despite the Labour government stressing it would like a closer working relationship with the EU. “The sector also faces into wider processes, for example, ongoing UK-EU relations, where friction could be more, not less,” Black says.
Challenger brands
Some of the headwinds – not least retailers looking to cut costs and consumers seeking healthier alternatives – could create opportunities for small-and medium-sized enterprises (SMEs) in the UK food industry, some industry watchers suggest.
Theadora Alexander, CEO of London-based YF, a consultancy that helps up-and-coming FMCG businesses grow, said: “We expect 2025 to be the year of the challenger brand.
“With almost every major retailer in the UK now having an incubator scheme of sorts, the highest potential propositions will have unprecedented slipstreams to growth. It’s never been more exciting and it’s only just starting to heat up.
“We expect to see a sharper focus on non-UPF [ultra-processed foods] this year, with increasing consumer and media talk about processing. And of course, continued growth in health and wellness trends like gut health, better farming practices and more environmentally friendly alternatives.
“We also expect to see deeper relationships between retailers and challenger brands, including potentially some investment and M&A activity.”
