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Lockton Food & Beverage Report Lockton Food & Beverage Report The tipping point: cost cutting pressure piles recall risk onto UK food & drink manufacturers. Broking done differently Methodology 200 respondents were surveyed in August and September 2017. Target respondents were Heads of New Product Development, Heads of Quality, Heads of Ops, Finance Directors, Heads of Logistics, Company Secretaries within UK based Food & Drink manufacturers and suppliers. Fieldwork completed by Coleman Parkes. Executive Summary Lockton’s inaugural food and beverage industry report has revealed that manufacturers are feeling the pinch as the British consumer, and in turn retailers, demand lower prices in the face of rising inflation. Three quarters (76%) of manufacturers surveyed claim they are under pressure to reduce their prices to meet retailer demands, including almost a third (31%) who strongly agree that this is the case. This pressure is increasing. Recent research expect the need for increased liability to price from analyst Nielson shows more than half them out of future contracts. All of this adds up (53%) of Britons are taking cost-cutting to greater risk for manufacturers; compromising measures, and switching to cheaper groceries is product quality in favour of cheaper ingredients the most popular tactic for saving money.1 leaves the door open for reduced sales and more product recalls, while neglecting health Almost all (98%) UK manufacturers surveyed and safety improvements runs the risk of more agree that continued price pressures will staff accidents. have an effect on the end product we find on the shelf. Many manufacturers have already Manufacturers must now strike a difficult resorted to ‘shrinkflation’ – reducing the size or balance between keeping costs low and amount of a product while keeping the cost the ensuring they are not increasing their same – with only 1% completely ruling this out vulnerability to liability claims, all while for the future. negotiating acceptable liability limits with major retailers with potentially inferior As quantity is reduced to make ends meet, products. the report has found that the quality of food and drink and also efforts to improve safety We all want to pay less for our trip to the standards are next in line if low prices keep supermarket, but we’re reaching a tipping point pushing manufacturers. where increased price pressure could adversely affect the quality of our favourite food and At the same time, manufacturers are finding drink. But worryingly for an already embattled they have to shoulder greater responsibility for industry, the safety of food production and the larger liability obligations. Over half (56%) of hard-fought relationships with retailers are also manufacturers surveyed are having to spend at risk as manufacturers and retailers alike are more on insurance, while nearly half (40%) pushed closer to the edge. 1Talking Retail, Brits buying cheaper grocery brands to cut costs, 17th August 2017 3 Lockton Food & Beverage Report Part One: ‘Shrinkflation’ nation: manufacturers resort to smaller products, with quality next in line to be cut With food and beverage manufacturers Nearly three in four (72%) manufacturers surveyed feeling pressure from retailers to surveyed would use cheaper raw ingredients cut costs, many admit they are resorting in their products to ‘shrinkflation’ – scaling down the size of As a result of demand for reduced costs from products but keeping the price the same. retailers, one in ten (10%) food and beverage More than two in five (43%) have already manufacturers have already changed their done this, with an additional 56% open to product by using cheaper raw materials or doing this in future. Only 1% of manufacturers ingredients. Worryingly, as many as 72% would completely rule this out. would consider doing this in the future, Almost half (48%) of manufacturers surveyed suggesting quality is next in line to be cut agree they are having to change portion sizes after product size. or recipes to meet cost cutting. This is reinforced by the fact more than a Official data from the ONS shows more than third (36%) of manufacturers cite lower 2,500 consumer products have shrunk in size quality food and beverage products on over the past five years despite being sold for shelves as the most significant effect if downward pricing pressure from retailers the same price.2 continues. 2ONS, The Impact of Shrinkflation on CPHI, UK: January 2012 to June 2017 – 24th July 2017 4 We have now reached a stage where “the quality of ingredients used in food and drink products is at risk of being compromised. Ian Harrison Head of Product Recall, Lockton 5 Lockton Food & Beverage Report What will be the biggest effect of continued downward pricing pressure from retailers? Lower quality food & beverage products on shelves 36% Fewer local manufacturers 32% Smaller products on shelves 21% Almost three in five (58%) manufacturers associated with poorer quality and lower surveyed say they are continuously having safety standards. to find cheaper raw materials or ingredients, while 40% agree ingredient transparency Turning a blind eye to unsafe practices and traceability are becoming harder to which damage food quality can have severe determine. This move towards cheaper consequences. This is evidenced by the raw ingredients could not only impact the recent 2sisters scandal where one of the taste of products for consumers, but put supplier’s main processing plants was found manufacturers at risk of product recall or food to have poor hygiene standards and altered scandal, as inexpensive ingredients are often food safety records, resulting in suspended production in the future.3 3The Guardian, Scandal-hit 2 Sisters suspends chicken production at West Midlands plant 6 Need to drive down costs set to impact UK supply chain With manufacturers being forced to find new ways of cutting costs, manufacturing jobs and the wider food and beverage supply chain in the UK could also be affected. Manufacturers must be careful to A fifth (21%) of manufacturers surveyed ensure appropriate safety standards have already outsourced some or all of their “are being met by their suppliers. A manufacturing process, with an additional product recall can be an expensive 54% willing to consider this. Almost logistical problem to solve, particularly two in five (38%) have added additional when dealing with retailers who often automation to the manufacturing process, insert fines or penalties into their which could result in some jobs becoming contracts to cover instances of food redundant. contamination (which insurance won’t Nearly a third (31%) have changed provider always cover). Using less reputable of raw materials within the UK, but a similar suppliers with cheaper raw materials proportion have looked to international in response to pressure from retailers sources for cheaper raw materials (32%), to cut costs is a false economy if it with an additional 53% open to doing this in increases the risk of recall. future – driving business out of the UK. Ian Harrison Head of Product Recall, Lockton 7 7 Lockton Food & Beverage Report Two in five (38%) manufacturers claim safety “standards are being eroded as a direct result of cost cutting, while a further 32% agree production facilities are far less safe than in the past due to pressure to cut costs. Ian Harrison Head of Product Recall, Lockton 8 Part Two: Safety standards at risk We are not only approaching a tipping point where manufacturers may be forced to compromise the quality of food and beverage products, but efforts to improve health and safety are also at stake. Lockton’s research reveals two in five Manufacturers under cost pressure (38%) manufacturers surveyed claim safety are less likely to maintain and update standards are being eroded as a direct result “machinery or spend time on improving of cost cutting, while a further 32% agree health and safety training. This puts production facilities are less safe than in the manufacturers at risk of liability if a past due to pressure to cut costs. member of staff has an accident and decides to take legal action and is Worryingly, over half (55%) of manufacturers another example of how pressure to have reduced or would reduce their focus on improving safety standards in order to meet cut costs results in increased risks for contractual demands. manufacturers. Human versus financial costs As many as three quarters (74%) of manufacturers surveyed are concerned Ian Harrison about on-site accidents, while others worry Head of Product Recall, Lockton about the increased need for automation (68%) when there is a lack of operator skills to work such machinery (66%). Three in five (61%) believe there is a lack of focus among staff on health and safety issues. Ian Harrison Head of Product Recall, Lockton 9 Lockton Food & Beverage Report Top five on-site issues manufacturers are concerned about On-site accidents 74% The need for increased automation 68% Lack of operator skills to work machinery 66% Lack of focus by staff on health and safety issues 61% Lack of investment in the production infrastructure 58% This is reflected in data from the Health and Riling up the regulator Safety Executive (HSE) – while there was a Nearly half (44%) of manufacturers surveyed long-term downward trend in the rate of fatal by Lockton are worried about meeting injury in workplaces, worryingly in recent compliance and regulation audits, and rightly years this has shown signs of plateauing.4 so. In 2015/17, Health and Safety Executive These cases impose human costs – in terms (HSE) and Crown Office and Procurator Fiscal of the impact on the individual’s quality of life Service (COPFS) prosecutions led to fines and for fatal injuries, loss of life – as well as the totalling £38.3 million compared with £18.1 financial costs, such as loss of production due million in fines from 2014/15.6 Almost seven in to absence from work, and healthcare costs.
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