Profit margins tumble for food suppliers amidst currency volatility

Small food and drink producers are being urged to enhance their risk mitigation processes in a sector report by trade credit insurer Atradius.

The Food Market Monitor by Atradius reports that with more than 45% of food consumed in the UK imported, exchange rate volatility and its impact on the cost of commodities and food items remains a key issue facing many British food producers and processors who are reliant on imports.

Being predominantly SME, both the meat and fruit and vegetable subsectors are particularly susceptible to currency fluctuation. In the report, available for free download at www.atradius.co.uk, Atradius warns that the added risk for many SMEs is often a lack the resource to effectively manage risk mitigation with forward contracts and currency hedging. While sterling has seen a recent rebound, any positive affect is likely to be limited as many businesses are bound by contracted prices agreed at lower sterling exchange rates.

Looking at a wider picture, the Market Monitor highlights value added growth in the British food and beverages sector is forecast to have grown 2.5% in 2019, with a further 1.6% expansion in 2020. However, input costs for food businesses remain high with any opportunity to pass on price increases to retailers limited. Consolidation in the retail segment and the increasing market success of discounters, which puts traditional retailers and pricing under pressure, weigh heavily all along the supply chain.

The Market Monitor goes on to warn that profit margins of British food businesses deteriorated in 2019, and the trend is expected to continue in 2020. Despite an increase in real incomes, UK consumers remain price sensitive. In 2019, food producers and processors have continued to pursue mergers and acquisitions in order to increase leverage in price negotiations with major retailers as well as to diversify the offering.

Looking at payment behaviours, Atradius reports payments in the British food sector take between 45 to 60 days with some larger players pushing the supply chain on even longer terms, adding cash-flow challenges for many smaller food businesses. Due to an inability to absorb higher input costs and increased pressure on margins, the number of payment delays and level of insolvencies increased in 2019 and Atradius economists expect this negative trend to continue this year with an 8% rise in failures.

Darren Power, Regional Manager at Atradius’ Northern Hub, said: “While exchange rate fluctuation has always been a risk in international trade, the last three years have seen more volatility in Sterling with an increasing impact on British importers and exporters. To trade successfully, access to reliable information alongside forward planning are key to effective risk mitigation. Therefore, all businesses must ensure equip themselves with the insights, tools and resources to stand them in good stead and ensure they trade with protection from risk. Atradius supports customers to mitigate risk from the outset, developing robust trade relationships to maximise the opportunities for growth.”