A new report claims to reveal the “unpalatable truth” behind the growing price pressure faced by three quarters of UK food and beverage makers.
The report, from insurance brokers Lockton, found that not only is ‘shrinkflation’ more endemic than previously reported, but manufacturers are having to consider cheaper ingredients to cut costs whilst also compromising on-site safety.
In The tipping point: cost cutting pressure piles recall risk onto UK food and drink manufacturers, Lockton reveals that two in five UK manufacturers surveyed admit they have reduced the size of their products but are selling them at the same price, with an additional 56% open to doing this in future.
This year, official data from the Office of National Statistics (ONS) showed more than 2,500 consumer products have shrunk in size over the past five years despite being sold for the same price.
With more than 6,000 food and drink businesses operating in the UK2, Lockton’s research suggests the scale of ‘shrinkflation’ is far bigger than previously anticipated.
“The real impact of shrinkflation goes way beyond consumers getting less for their money – manufacturers are seemingly willing to significantly alter products to cut costs,” said Lockston’s Head of Product Recall, Ian Harrison.
“If price pressures continue, consumers could be left with a bad taste in their mouths as manufacturers are forced to use inferior ingredients as well as reducing the size of their offerings.”
Product quality set to decline
While one in ten food and drink manufacturers surveyed are already using cheaper raw materials in response to demand for reduced costs, as many as 72% would consider doing this in the future, suggesting quality is next in line to be cut after product size.
More than half of manufacturers admit they are already seeking out cheaper raw materials or ingredients to use in an attempt to cut costs and meet demands of retailers.
The hunt for cheaper raw materials has led a third of manufacturers to look abroad rather than source ingredients from the UK.
“We’re fast approaching a tipping point where the quality of what’s on our shelves is at stake,” said Harrison.
“The move towards cheaper raw ingredients is setting a dangerous precedent that puts manufacturers at risk of product recall or food scandal.
“Inexpensive ingredients are often associated with poorer quality, food fraud and lower safety standards.”
Pressure from retailers
Manufacturers are feeling the pinch as the British consumer, and in turn retailers, demand lower prices in the face of rising inflation.
Three quarters of manufacturers surveyed agree they are under pressure to reduce their prices to meet retailer demands, including almost a third (who strongly agree that this is the case.
Price pressure means manufacturers are not only on the brink of compromising the quality of food and beverage products, but efforts to improve health and safety are also at stake.
Safety standards at risk
The research reveals 38% of manufacturers surveyed claim safety standards are being eroded as a direct result of cost cutting, while a further 32% agree production facilities are less safe than in the past due to pressure to cut costs.
Over half of manufacturers surveyed have reduced or would reduce their focus on improving safety standards in order to meet contractual demands from retailers.
The top on-site issues worrying manufacturers are on-site accidents (74%), the need for increased automation (68%) and lack of operator skills to work such machinery (66%).
Retailers’ liability demands take a toll
As pressure to cut costs leaves manufacturers poised to take on greater risk, another side effect of downward price pressure is the need for manufacturers to increase their liability cover.
The research shows 44% of manufacturers are being forced to take out increased liability insurance purely to meet contractual demands from retailers.
On average, manufacturers are having to purchase 13% additional liability.
“With food scandals having serious consequences for those involved – such as the horsemeat investigation which resulted in two men being jailed – retailers are feeling vulnerable,” said Harrison.
“By pushing responsibility further down the supply chain, retailers are hoping to shelter themselves from any potential fallout should a recall or legal action occur.
“More liability cover is no bad thing, but comes with higher premiums and manufacturers must determine what costs are realistic for them.”