Food price inflation in the UK remains stubbornly high. A combination of low unemployment, wage demands, high energy costs and increased raw material prices mean this is likely to remain the case for some time.
Despite the UK Chancellor's push for supermarket leaders to lower prices for customers, there are still cost challenges throughout the entire supply chain. This is in turn leading to increased exposure to risks for all those in the chain. Examples include:
Single or preferred supplier arrangements
If you have any single or preferred supplier arrangements, what if these changed suddenly? What if a key ingredient ceased to be available, and an adequate substitute was not? What if a key supplier went bust? What alternative sources of supply are there, and if so, how quickly could they be positioned?
Bigger bank of key ingredients
Do you need to hold a bigger bank of key ingredients to give you security against supply fluctuations? If so, you probably also need a bigger bank facility as more working capital will be tied up. There may also be issues for storage and logistics. If in order to hedge against supply disruption you need to hold more stocks then early discussions with lenders may be necessary; lenders in turn should be alert to increasing working capital needs.
Higher supplier costs
Your suppliers are facing higher costs too. Do you have visibility of their pricing pressures and how would you react to cost increases which you cannot pass on? Bear in mind that you may be tied into fixed pricing, but your inward supplies may be on “spot” pricing or shorter-term fixes.
Origin of ingredients
How confident are you about the origin and safety of ingredients that you use? When costs rise and margins suffer, there is scope for unscrupulous intermediaries to substitute inferior or (worse) unsafe products. These might simply cause an adverse consumer reaction if the taste or quality suffers. There could be reputational damage. However there could also be food safety issues if inferior-grade product is included within a multi-ingredient product. How robust are your quality control checks if substitute ingredients are proposed? Traceability remains key.
Supermarkets are encouraging “stretching” of shelf lives to reduce food waste. Be sure that you know how elastic these are and if relying on supplier testing, check what evidence your suppliers can provide to you that longer life food remains safe. The relevant Food Standards Agencies in the UK put food safety front and centre of their focus, and rightly so. There is no hiding place for suppliers if food is or could with the passage of time be unsafe.
In all of this, endeavour to have your inward and outward supply contracts back-to-back so far as possible: make sure you know if you may be exposed to liability to your purchaser without the ability to pass that liability back to your supplier. If in doubt, take advice and be vigilant.
How can we help?
Our food and drink team can offer commercial solutions to issues encountered across this growing sector. Should you require any further advice please get in touch with George Frier, Head of food and drink