Written evidence submitted by the Food and Drink Federation (FSC0064)

FDF Response to the House of Commons EFRA Select Committee inquiry into fairness in the food supply chain

Introduction

  1. This submission is made by the Food and Drink Federation, which is the voice of the UK food and drink manufacturing industry, the largest manufacturing sector in the country, with a footprint in every parliamentary constituency. Our industry has a turnover of more than £113 billion, accounting for 20% of total UK manufacturing, and Gross Value Added (GVA) of more than £33 billion. Food and drink manufacturers directly employ over 450,000 people across every region and nation of the UK. 97% of our industry is small and medium-sized businesses. Food manufacturers are the biggest customers of UK farmers and work closely with and invest heavily in their UK supply chain.

Executive summary

  1. Our industry operates in a highly competitive environment and has continued to ensure food in our cupboards during a period of extreme turbulence and volatility. However, these unprecedented pressures have eroded the resilience of the industry. There are levers the government can pull to improve the food security, fairness and affordability of the supply chain. Key priorities that should be addressed as a matter of urgency by UK government include:
    1. Delivering and more coherent and joined-up approach across government to ensure regulation doesn’t add unnecessary complexity to businesses and costs to consumers, undermine UK food security or impede essential investment to boost growth and resilience across food and drink supply chains.
    2. Strengthening the Groceries Supply Code of Practice (GSCOP) to take into account new challenges that have emerged in the nearly 14 years since it was created and boosting the resources and operational flexibility of the Groceries Code Adjudicator (GCA) to ensure that it can effectively oversee GSCOP compliance.
    3. Putting in place a tariff policy that is responsive to industry’s needs, including a predictable, transparent and efficient duty suspension process that can respond effectively to global supply issues and deliver ongoing reform to the UK Global Tariff to ensure it meets the needs of UK producers, shoppers and consumers.
    4. Working with industry to support low-income household and our efforts to shift consumers towards affordable, healthier and more sustainable choices. This would include supporting innovation and R&D in UK food and drink to ensure industry can respond to the challenges of the future.

Structure and operation of the food supply chain

To what extent is the UK’s food supply chain currently operating effectively and efficiently?

  1. Businesses across the food and drink manufacturing sector have to operate effectively and efficiently. However the shocks of COVID, Brexit, extreme weather events and the war in Ukraine have created unprecedented challenges, raising costs of energy, ingredients, transport, while at the same time creating supply chain disruption and worsening labour and skills shortages.
  2. Food and drink manufacturers are adaptive and innovative and have responded to these major challenges to keep the nation fed. This disruption has impacted cost and contributed to an erosion of resilience, particularly among SMEs, which hasn’t been helped by a series of regulatory initiatives from government that have compounded these challenges.
  3. This includes the government’s costly plans to introduce an Extended Producer Responsibility (EPR) scheme that does not meet the needs and ambitions of manufacturers and other stakeholders, the failure of the planned deposit return scheme (DRS) in Scotland, implementation of marketing restrictions to products classified as high in fat, sugar or salt, costly plans to bring in ‘not for EU’ labelling on products sold in Great Britain which will increase costs and reduce choice for consumers, while undermining our exports and investment in food and drink. We are already seeing a drop in investment, which is concerning for the future productivity of the sector and food and drink business insolvencies continue to rise. A recent FDF member survey indicates that around 60% of businesses have paused or cancelled planned investment.

How could structural relationships between farmers and fishers, food producers and manufacturers, handlers and distributors, retailers and consumers be improved for both domestic and foreign foods?

  1. The groceries market landscape has undergone dramatic changes since the Groceries Supply Code of Practice (GSCOP) was created, especially during the COVID pandemic which triggered dramatic shifts in the retail landscape and consumer behaviour. The nature of the groceries market is changing rapidly with new operating models and structural changes among major grocery retailers.
  2. These changes make the landscape facing direct suppliers more complicated and we believe a review of GSCOP and therefore the remit of the GCA would be well-timed to ensure the GCA is equipped to tackle future challenges, not least the rapid growth of online retail, the impacts of the rising market share of discount retailers and the entry into the market of powerful new operators like Amazon. Government and the CMA should ensure the Code remains fit for purpose to protect shoppers and supply chains for the next decade or more.

Market power and regulation

How does the market power of UK supermarkets and manufacturers compare to other participants in the food supply chain, and how does this compare to equivalent relationships in other advanced economies?

  1. The UK has one of the most highly concentrated grocery retail markets in the world. Over 80% of the UK market is controlled by just six companies, whereas the same share of the US market is controlled by more than 20 retailers.
  2. Typically, the balance of power in commercial negotiations rests with UK supermarkets given their role as gatekeepers to the market. Suppliers wishing to get their products on the shelves must agree to retailers’ conditions.
  3. The market for manufactured products is fiercely competitive with brands competing with own label from value to high end available across all channels. All products have substitutes. The growing market share of discount retailers has increased this competition. No single branded product is necessary to attract consumers and branded suppliers are increasingly losing market share to private label products. The scale of range reduction that has taken place by the biggest supermarkets in recent years has further tipped the balance of power away from suppliers.

Is existing regulation appropriate, for example the Groceries Supply Code of Practice and the Groceries Code Adjudicator for supermarkets’ direct suppliers, as well as the Secretary of State’s powers under Part 3 of the Agriculture Act 2020?

  1. The GCA is viewed internationally as the world-leading model of how best to oversee grocery supply chain relations efficiently and effectively. Other countries seek to emulate the UK’s successful cost-effective model, including Canada which is currently seeking to directly replicate the GCA model. Where a different approach was taken in Ireland, we have heard it been less successful and less impactful.
  2. The GCA has had an important and positive impact on relations in the groceries market, giving support to suppliers that have previously had no recourse when faced with unfair practices from powerful grocery retailers. Feedback from our members and the results of the GCA’s latest annual survey both demonstrate that the GCA has driven noticeable behavioural change since its creation, helping to curtail a wide range of unfair and abusive practices that were previously utilised regularly by the major retailers.
  3. For those designated retailers that are doing the right thing by their suppliers, the presence of the GCA to enforce GSCOP acts as an essential tool to deliver a level playing field, ensuring fair practice more broadly by major grocery retailers. The presence of a powerful, independent and proactive GCA has been key to driving positive trends in retailer behaviour during the eight years since its formation.
  4. The GCA has benefited suppliers of all sizes, discouraging unfair treatment of all direct suppliers. SMEs have enjoyed the most noticeable benefits in comparison to larger branded suppliers. SMEs typically have less leverage in negotiations and less able to push back against abusive practices and arbitrary, short notice changes to supply agreements that undermine investment decisions by producers.
  5. We recommend the following actions be taken to ensure GSCOP and the GCA can remain effective in ensuring fair treatment of suppliers by powerful retailers:
  1. The GCA’s funding which is provided by designated retailers should be increased to boost its capacity to respond to the current growth in supply chain challenges and the increase of retailers that are now in scope of the Code, to help increase its essential outreach to and engagement with suppliers and the designated retailers.
  2. The GCA should be allowed to operate more flexible open recruitment from the public and private sectors along similar lines to the Pubs Code Adjudicator. It is currently limited to recruiting via secondments from government. These restrictions reduce the pool of available candidates and create an in-built automatic turnover of staff that means the GCA is unable to retain expertise in the long-term.
  3. The Groceries Market Investigation should be reopened by the CMA to ensure GSCOP remains fit for purpose and that the GCA’s scope is correctly defined to enable it to address the full range of current and future challenges. Consideration should be given to competition impacts across UK regions/nations where local grocery retailers are powerful operators but currently operate out of scope of GSCOP.
  4. Additional major grocery retailers should be brought into scope of GSCOP. In particular, the continuing omission of Boots should be addressed as a major retailer of food and drink, toiletries and household goods that we believe exceeds the threshold for designation.

What is the relationship between food production costs, food prices and retail prices? How have recent movements in commodity prices and food-price inflation been reflected in retail prices?

  1. We estimate there is a lag of seven to twelve months between changes in manufacturers’ costs and changes to prices on shop shelves. Retail prices tend to move slowly relative to underlying raw material costs. The time lag which exists between commodity prices and retail prices is the result of fixed-term contracts with suppliers (forward buying) and the use of futures contracts traded on commodity exchanges (hedging).
  2. Food manufacturers can lock in commodity prices for up to 12 months, long enough to cover a season of bad weather, but short enough for underlying demand changes to feed through. At the same time, this protects suppliers and consumers from price volatility.
  3. Table 1 illustrates how retail inflation lags behind increases in producer costs. In 2021, producers’ costs rose, on average, by 5.7%, while retail prices only increased by 0.3%. In 2022, costs continued to climb by 17.8%, but retail prices went up by 11.0%.

Table 1: Yearly increases in food and drink producer prices and retail prices

Source: ONS

  1. Chart 1 shows the same information in different format. We have rebased the producer prices and consumer prices at 100 in January 2020. It’s clear that retail prices were largely unchanged until August 2021, although costs started rising in August 2020.

 

 

 

 

 

 

 

 

 

Chart 1: Food and drink producer prices and retail prices, Index, Jan-20 = 100

Source: ONS

What are the consequences of current relationships in the supply chain for:

  1. risk-sharing
  2. prices paid and profit margins of farmers, food manufacturers and other suppliers
  3. prices for consumers
  4. quality
  5. healthy food for consumers
  6. animal welfare and the environment
  7. competition between retailers?
  1. The last few years have been incredibly turbulent, with three structural shocks in quick succession: Brexit, the COVID pandemic and the war in Ukraine. This triggered significant changes across all cost elements of food and drink manufacturing businesses, from energy, ingredients and packaging to labour, transportation and logistics. Recent weather events affecting agricultural supplies globally have also placed our food system under some strain.
  2. Raising prices is always a last resort. Faced with a barrage of cost rises, food and drink manufacturers look first to find savings by reducing product ranges, becoming more energy efficient, cutting back on marketing expenses, restructuring workforces and deferring investment. It’s important to highlight that, while manufacturers take their responsibility to keep prices down for consumers very seriously, they also must balance their responsibilities to their suppliers (many of which are British farmers to whom they pay a fair price), their employees and their shareholders.
  3. As recent ONS data shows, a higher proportion of food and drink manufacturers, have absorbed more costs than the average UK business (Chart 2). It’s noteworthy also that more manufacturers seem to have absorbed costs than food retailers or hospitality outlets. On average, over the year to February 2023, 82% of food and drink manufacturers absorbed a share of rising costs, compared with 56% of all UK businesses, 53% of retailers and 64% of restaurants and cafes.

 

 

Chart 2: Percent of businesses that stated they absorbed costs

Source: ONS, Business Insights and Conditions Surveys, March 2022 – February 2023. Percentages are of viable businesses with 10 or more employee

  1. The UK’s competitive grocery market, where the pressure exerted by discounters means that retailers vociferously defend value for money to consumers is why, despite the UK’s high rate of inflation, food and drink prices remain lower compared to most European markets (Chart 3). Consumer loyalty is also not a given – companies can only raise prices within market tolerances or lose custom; another powerful driver for keeping costs down.

Chart 3: Food prices in selected countries (index, 2015 = 100), April 2023

Source: Eurostat and ONS

Does the structure of the UK food supply chain support overall domestic food security (both self-sufficiency and the availability of imported foods)?

  1. A successful UK food manufacturing sector strengthens domestic food security and supports the rest of the supply chain. Food manufacturers are the biggest customers of UK farmers and work closely with and invest heavily in their UK supply chain.
  2. UK food and drink security rests on access to global markets alongside domestic production. A balance across imports and exports adds to the robustness of the UK’s food security and ensures that consumers enjoy a wide range of choice at competitive prices. During periods of crises and shocks it is essential that our supply chain has the ability to flex and source ingredients and products from across the globe. The Russian invasion of Ukraine has highlighted this. Our industry is impacted by seasonality and changes in climatic conditions - so sourcing arrangements will change frequently. To deliver efficiently, business frequently operate via just in time supply chains and this depends on a large share of inputs being produced domestically or in neighbouring markets which can quickly respond to changes in demand.
  3. We welcome free trade agreements such as those with Australia and New Zealand that improve our access to global markets, ability to source ingredients and export finished products. But, given the volume of agri-food trade that comes into the UK from the EU, where policy increases friction at our borders it risks undermining our resilience, weakening UK food security and raising costs for households. It is critically important that the implementation of the Windsor Framework and the new Border Target Operating Model are done in a way that works for businesses and consumers.
  4. The Department for Business and Trade (DBT) operates a temporary duty suspension process which is utilised to allow tariff-free access to imports for use in UK manufacturing where they are not available domestically. This process is critically important for our sector, with seasonality and climate driving unpredictability about the availability of ingredients. DBT recently announced a second window for applications for temporary tariff suspensions since 2021. The process needs to be more transparent, quicker and more agile, particularly in a period of high inflation where the cost of imports is outstripping domestic price rises. There is still no certainty around the timetable to enact any tariff changes, business have no right of reply or transparency when their applications are rejected. Currently the EU approach is more transparent, predictable and effective. They have run four suspension windows in the time the UK has run just one.
  5. We believe that government should urgently streamline this process, so emergency tariff suspensions can quickly help cut the cost of essential imports. We also believe the government should start an audit of our external tariff for food and drink, which remains largely unchanged from the model inherited from the EU, to ensure it meets the UK’s specific needs.

Affordable and healthy food

How successfully are supermarkets promoting affordable and healthy eating in the current high food inflation environment and what steps could they take to increase the take-up and affordability of healthy options? How are promotions, such as multi-buy offers, supporting healthy eating including for those on low incomes, and also affecting levels of food waste?

  1. Food and drink manufacturers are investing and innovating to provide healthier food choices and smaller portion options at all price points[1]. As a result, FDF member products contribute 13% fewer calories, 15% fewer sugars and 24% less salt to the average shopping basket than they did eight years ago[2]. Our members are already leading efforts to reformulate and create healthier options. This creates an opportunity for the UK to position itself as a global leader in reformulation which will create jobs, drive R&D investment and deliver health benefits to consumers. The UK government should:
  1. Review the R&D tax credit system to broaden the eligibility criteria to include reformulation work.
  2. Provide a one stop shop where companies and industry bodies could see proposed and funded UK Research and Innovation (UKRI) projects to help join up academic research with company innovation.
  3. Establish funding for regional or national programmes based on the Scottish Government funded Reformulation for Health Programme. At a cost of £100,000 per annum it has successfully supported smaller companies deliver recipe changes in line with public health goals.
  1. Many food and drink manufacturers are also working with retailers to collaboratively identify and test strategies to help shift consumers towards affordable, healthier and more sustainable choices in line with the Eatwell Guide recommendations. This voluntary and collaborative activity is growing the evidence base on solutions that work commercially and achieve government objectives of supporting healthier diets.
  2. The government recently announced a delay to the implementation of restrictions on volume-based promotions (such as ‘buy one get one free’ deals) of food and drinks high in fat, sugar and salt (HFSS) in England to October 2025. We welcome the UK government’s pragmatism during the cost-of-living crisis. At a time when both families and our manufacturers are struggling with high inflation, it makes sense to delay the restrictions on volume promotions for everyday food and drink products, including breakfast cereals, ready meals and yoghurts, as it risked further stretching already pressed household budgets, as demonstrated by:
  1. Analysis by Public Health England and Kantar Worldpanel found that price promotions delivered an average £72 saving for households per year from 2017 – 2018.
  2. More recent analysis from the Institute for Fiscal Studies found that at the start of lockdown we saw a 2.4% increase in inflation, fuelled by a 15% fall in promotions which accounted for over half of this inflationary spike.
  3. Evidence also shows that during the high inflationary period of 2008 -2010, many households increasingly relied on promotions to help them save money.
  1. We remain unconvinced by the evidence that this Regulation will have a significant impact on obesity.  For example, whilst this policy is intended to drive reformulation, for some products this will not be technically feasible due to the blunt criteria to determine what can or can’t be promoted. The model does not incentivise companies to make gradual changes to products over time, or to provide smaller portion options. These measures may therefore have the opposite effect and impose a barrier to the reformulation progress companies are striving to achieve in line with Government targets.

What challenges do low-income households face, in both urban and rural areas, in terms of accessing affordable and healthy food from a choice of retailers?

  1. In the UK, there are widening inequalities in health, including a strong link between poverty and weight, particularly for children[3]. There is a need for targeted interventions and a whole systems approach to improve health in these communities and decrease social inequalities.
  2. Food and drink manufacturers employ nearly half a million people at all skill levels. Our members have long histories of workplace wellbeing programmes and working with partner organisations to support our communities. In 2021, food and drink manufacturers redistributed more than 42,000 tonnes of surplus food to support those in need – the equivalent of 100 million meals[4], and over 11 million meals were provided to 200,000 children each day in England and Scotland through breakfast clubs. Frontline charities and community groups maximise the social value of surplus, while initiatives like social enterprise Community Shop provide personal development programs and deeply discounted food and drink to those on welfare support.
  3. Food and drink manufacturers have a key role to play and would welcome opportunities to work in partnership with local and national governments to share lessons learned and help build and amplify community programmes.

What measures could be taken by central and local government, and others, to enhance cooking skills to reduce reliance on processed food and improve access to self-grown food, in particular for lower income households? What challenges do such ambitions face given the pressures of modern living?

  1. Food and drink manufacturers support the need for central and local government action to enable people to gain the knowledge and skills to achieve a healthy balanced diet. However, we do not agree that reducing reliance on processed food should be an aim of these measures. All food and drinks can be enjoyed as part of a healthy balanced diet. Both fresh produce and processed foods are integral to achieving a healthy and sustainable food system.
  2. Food processing allows:
  1. increased choice and availability of food and drink throughout the year
  2. increased shelf life and stability of food and drink and reducing waste, helping keep household costs down
  3. more convenience, saving families time and reducing domestic energy use
  4. reformulation to reduce fat, salt and sugar in food and drink
  5. fortification to help the population reach nutritional recommendations
  1. Almost all food and drink is processed, whether in a factory or in the home. Chopping, freezing, cooking and fermenting are all ways of processing food. Processed food and drink is often made in a very similar way to how we cook at home, just on a much larger scale.
  2. A broad variety of processed foods and drinks contribute to a healthy balanced diet in line with the government Eatwell Guide – such as breakfast cereal, bread, vegetable-based pasta sauce and dairy alternative milks. The British Dietetic Association recognises the role of processed foods and drink in supporting populations to meet nutritional requirements.
  3. Processed food and drink supports consumers in a variety of different ways, including providing allergen free and plant-based alternatives to support diet and lifestyle choices, to providing a wide variety of convenient options that saves time compared to always cooking from scratch.
  4. A recent article in The Times also exemplified the cost implications of steering dietary choices based on arbitrary factors, such as the number of ingredients or presence of additives – all of which are independently assessed and approved for use by the Food Standards Agency - in products. The substitutions suggested in the article would lead to an increase of £33.50 (63%) in cost, and for smaller quantities of food that are broadly nutritionally equivalent. Helping families eat healthy diets while watching their budget is more important than ever, and guidance such as this will do nothing to help families put together healthy and affordable meals.

 

July 2023


The UK Food and Drink Manufacturing Industry

The Food and Drink Federation (FDF) is the voice of the UK food and drink manufacturing industry, the largest manufacturing sector in the country. Our industry has a turnover of more than £113 billion, accounting for 20% of total UK manufacturing, and Gross Value Added (GVA) of more than £33 billion. Food and drink manufacturers directly employ over 450,000 people across every region and nation of the UK. Exports of food and drink make an increasingly important contribution to the economy, approaching £25 billion in 2022, and going to over 220 countries worldwide. The UK’s 12,460 food and drink manufacturers sit at the heart of a food and drink supply chain which is worth £116 billion to the economy and employs 4.3 million people.

The following Associations actively work with the Food and Drink Federation:

ABIM              Association of Bakery Ingredient Manufacturers

BCA              British Coffee Association

BOBMA              British Oats and Barley Millers Association

BSIA              British Starch Industry Association

BSNA              British Specialist Nutrition Association

CIMA              Cereal Ingredient Manufacturers’ Association

EMMA              European Malt Product Manufacturers’ Association

FCPPA              Frozen and Chilled Potato Processors Association

FOB              Federation of Bakers

GFIA              Gluten Free Industry Association

PPA              Potato Processors Association

SNACMA              Snack, Nut and Crisp Manufacturers’ Association

SSA              Seasoning and Spice Association

UKAPY              UK Association of Producers of Yeast

UKTIA              United Kingdom Tea & Infusions Association Ltd

FDF also delivers specialist sector groups for members:

Ice Cream Group

Organic Group

Seafood Industry Alliance

CBD Group

Food and Drink Federation              Page 11

[1] For more information see: www.fdf.org.uk/globalassets/resources/publications/reports/celebrating-food-and-nutrition-report.pdf

[2] Kantar Worldpanel Take Home data for FDF members, total nutrient volumes in 2022 vs 2015

[3] National Child Measurement Programme, England 2020/21

[4] WRAP food redistribution data for 2021. Using Company Shop’s calculation “Based on the weight saved and the standard industry metric of 420g as an average full-size meal” 42013 tonnes is 100,030,952 meals.