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 in the face of rising . 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 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 .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

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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

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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

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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

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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 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 (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. ten (68%) also agree Food Standards Agency oversight of their business is now more Manufacturers’ profits are directly bearing the rigorous. brunt of safety issues. In 2015/16, an estimated 4.5 million working days were lost due to self- With monetary loss from fines also comes reported workplace injuries, on average 7.2 reputational damage, and as manufacturers days per case.5 feel the heat from pressure to cut costs, it’s vital to avoid the temptation to cut back on health and safety improvements.

4Health and Safety Executive, Rate of self-reported non-fatal injury per 100,000 workers 5Health and Safety Executive 6Health and Safety Executive, Enforcement in Great Britain 10 Over half of manufacturers have reduced or would reduce their focus on improving safety standards

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Part Three: Retailers’ liability demands take a toll on stretched manufacturers

As pressure to cut costs leaves manufacturers fraud: a third (32%) of manufacturers surveyed poised to take on greater risk, another side say they are unable to guarantee the ingredients effect of downward price pressure is the need they use aren’t fraudulent. This means they for manufacturers to increase their liability cover. aren’t able to offer assurance that the raw Lockton’s research found over half (56%) of ingredients used in their products are what they manufacturers surveyed are having to spend are advertised to be, due to complexities or a more on insurance and reducing costs elsewhere lack of information in their wider supply chain. to meet new required premiums. On average, The horsemeat scandal of 2013 continues to manufacturers are having to purchase 13% additional liability. cast a shadow over the industry. Retailers are fearful and anxious of a similar food fraud While increased cover seems a sensible incident occurring and many consider legal decision to make in the face of increased risk, action as a case of ‘when’, not ‘if’.7 Retailers are our research has found that in many cases, the consequently asking manufacturers to shoulder decision to take out increased cover among greater liability. Lockton’s research shows 44% manufacturers is in fact involuntary. of manufacturers surveyed are being forced to Manufacturers obliged to take out greater take out increased liability insurance purely to liability cover to meet contractual demands meet contractual demands from retailers. By pushing responsibility further down the supply There is a sense of trepidation within the food chain, retailers are hoping to shelter themselves and beverage industry. Aside from lower quality from any potential fallout should a recall or legal products and barriers to improving safety action occur. standards, there is also a looming fear of food

7The Guardian, Horsemeat scandal: the essential guide

12 Manufacturers who cannot afford increased liability struggle to compete

The need to take on greater cover is having an impact on some manufacturers’ long-term business plans. Half (50%) of manufacturers surveyed expect retailers’ demands on increased liability insurance to price them out Most major retailers will stipulate that of future contracts. This essentially means suppliers need to have a minimum they have to assess whether the profits of a “level of liability insurance as part of a retailer contract will outweigh the costs of the standard contract. More cover is no bad required cover. thing, but comes with higher premiums: manufacturers must determine what This fear has already become a reality for some costs are realistic for them. They must with two in five (40%) manufacturers failing to also be prepared to push back in the win a contract due to their inability to meet the event of a recall. Retailers are often in liability requirements expected of them. charge of crisis management and, as they are highly sensitive to reputational An insurance broker can help manufacturers damage, will generally spend as much understand their coverage needs, ensuring all as deemed necessary to mitigate this. bases are covered should they need to make However, insurers will only cover costs a claim and arming them with the information that are justifiable and reasonable, so needed to successfully negotiate contractual manufacturers need to push back if they requirements with retailers. are handed an excessive bill.

Ian Harrison Head of Product Recall, Lockton

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On a knife edge: pressure to reduce costs impacts on manufacturers’ level of risk

14 Conclusion

Retailers themselves are under enormous Contractual demands from retailers are forcing pressure – as Deloitte recently noted, the manufacturers to address this increased risk: but retail industry “is facing an environment where some businesses are struggling to keep up with margins are increasingly under pressure liability cover levels and are losing out on new from rising costs, lower pricing power and business with major retailers as a result. the need to invest in digital transformation”. between existing retailers is high, Manufacturers now stand at a crossroad. and new entrants to the pose further Wander too far down the cost-cutting route challenges. Our report shows this pressure is and they risk sacrificing product quality and undoubtedly being passed down the chain, from reputational issues, as well as a costly recall the British consumer onto food and beverage process if their product is found to be unsafe. manufacturers, who are having to reduce costs However, failure to respond to demands to in order to meet retailers’ demands. cut costs could leave them struggling to win new business, particularly with larger retailers. This is leading to product changes – from With inflation on the rise and a renewed focus ‘shrinkflation’ and ingredient alterations – as well on price pressures, the ability to tread the as fewer funds to dedicate to workplace health right balance between cost efficiency and and safety. product quality will be an essential skill for manufacturers to learn. Put simply, the pressure to reduce costs is directly impacting manufacturers’ level of risk when it comes to liability.

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16 17 Our mission

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