7 measures to tackle rising costs in the UK food & drink industry
Profit levels continue to fall despite rising orders
The final CBI Quarterly Trends Report of 2017 highlighted that - in spite of the strongest manufacturing order book in nearly 30 years - the food and drink industry is still recording a decline in profit levels.
Food and drink providers, who contribute £28.8 billion to the UK economy and represent the largest manufacturing sector overall in this country, continue to face significant pressure on margins. An annual review of the leading 150 food and drink manufacturers in the UK showed average margins are running at their lowest level in almost 50 years at 5.3%, down from a long-term average of 6.3%.
Three principle challenges are cited as causing this ongoing squeeze:
- The volatility of raw material prices
- Foreign exchange impacts, particularly for organisations buying goods and services in US Dollars and Euros
- Pricing pressure from customers
Add to this, rising energy costs, labour market supply challenges and ongoing Brexit uncertainty and many food and drink businesses are faced with an almost perfect financial storm.
Taking corrective action
As reported by the CBI, order books for many are looking very rosy with sales in the final 3 months of 2017 picking up pace. In addition to increased revenue, growth can of course create enhanced opportunities to leverage reduced unit prices with suppliers. But with a fundamental part of the issue being linked to sterling’s depreciation, higher import prices are likely to remain a constant challenge.
Some organisations, hit with lower margins and sliding sales, have been forced to downsize. With employment costs making up a large part of the overall bill (typically around 30-50% of total annual revenue) redundancy is also a course of action, if a reluctant one.
At the other end of the spectrum, some organisations have actually been reporting labour market supply challenges with rising agency costs for temporary hires.
Consequently, procurement cost control – focusing on non-pay spend – is increasingly in focus.
But where to start and what measures are proving the most effective?
Measure 1 - Creating complete transparency of spend
Complete visibility of an organisation’s spend is the bed-rock of procurement excellence. The quality of spend analytics is directly proportional to the profit impact procurement can bring.
Organisations are regularly identifying significant six and seven figure cost savings using this approach. A leading UK food manufacturing business recently identified £2.2 million of procurement cost savings (over and above in-scope activity) by completing such an assessment.
Of course, while scoping the opportunity is important, implementing these savings to generate a swift and significant impact on margins requires some skillful maneuvering.
Measure 2 - Offsetting rising material costs by reviewing 'indirect' spend
While raw materials may be rising in price, there are always opportunities to identify and deliver cost reduction across the smaller, usually less targeted, but still significant indirect spend areas.
Most food and drink businesses have dedicated buyers and procurement teams focusing on core direct ingredients. But indirect categories such as IT, facilities management, utilities, fleet, agency, marketing and professional services often fall under the remit of a more overstretched resource (if at all).
Bringing additional focus to indirect spend, whether through extended internal resourcing or by utilising the services of an external specialist can deliver impressive results. A UK based sandwich manufacturer made a seven-figure saving by doing just that.
Measure 3 - Challenging cost increases through sound procurement practices
There are always opportunities to deploy good procurement practices and negotiate savings.
A global contract catering business achieved over £4.5 million of procurement savings (across a 3 year period) by implementing these practices across eight categories.
Agency spend (where prices have been rising) is a good example of a category where consolidation measures can deliver excellent savings. Looking back through previous contracts with a fine tooth comb to recover any overpayments that may have slipped through the net can bring an additional – and often immediate – financial pay back.
Measure 4 - Avoiding higher prices by sourcing from other places of origin
Identifying alternative supply markets through Global Sourcing activity can also be highly effective – where appropriate resources can be found for the time required to do this justice.
Investing in additional internal resource or partnering with a specialist external provider to identify, shortlist and engage with new suppliers in different geographies has delivered game changing results for some organisations.
Measure 5 - Mitigating by working collaboratively with suppliers
Although many costs have been rising, working collaboratively with suppliers to explore opportunities for mutual ‘win-win’ savings is another highly effective strategy.
Mature procurement teams have been shifting their focus away from supplier prices towards costs as is demonstrated in the diagram below.
Conducting a ‘deep dive’ analysis of fleet costs for example, by looking into the cost of individual vehicle components and services (e.g. body build or maintenance and repair costs) can yield savings, prolong usage and delay replacement costs.
Measure 6 - Delaying price increases by playing the commodity market
The Pound was trading at $1.41 at the end of January 2018. Whilst still significantly below it’s pre-Brexit vote position of $1.50, it is up from $1.22 in November 2016.
Anticipating the market is not an easy thing to do and fraught with risk. But getting it right can clearly have a big upside; stockpiling ahead of price rises, providing opportunities to hedge and offset against future losses and capitalising on future changes.
Measure 7 - Transforming procurement capability to address a changing world
Once a back-office, transactional department in many firms, procurement must now, increasingly, deliver across a much broader set of strategic objectives.
Consequently, organisations throughout the world are regarding Procurement Transformation as an increasingly crucial component of strategic change.
Identifying the current ‘starting point’ (in terms of the existing level of maturity) is an important first step in any transformation process. Building in cost saving targets to ground transformation in hard numbers and upskilling people through real experience can also be hugely effective.
Points to consider
- Despite strong order books, margins continue to be squeezed in the food and drink industry
- There are excellent opportunities to use good procurement practices to address these challenges
- Complete visibility of external expenditure is a crucial starting point
- Deploying tactics which offset, challenge, avoid, mitigate and delay price increasers can reap significant dividends
- Transforming procurement capability is an increasingly attractive strategic option