- Report from Lockton highlights an industry on a knife-edge in face of retailer pressure
- 76% of UK food and beverage manufacturers surveyed admit to coming under pressure from retailers to cut costs
- 43% of those surveyed have responded by shrinking their products whilst maintaining the price – 56% say they would consider doing this in future
- Product quality at risk as 72% of those surveyed admit they will use cheaper raw materials if pressure continues, while 32% are already looking abroad for more affordable ingredients
- On-site safety also compromised with 38% of manufacturers surveyed saying standards are being eroded to meet cost cutting
A new report by Lockton, the world’s largest global independent insurance broker, reveals the unpalatable truth behind the growing price pressure felt by more than three quarters (76%) of UK food and beverage manufacturers. The findings reveal 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.
Shrinkflation intensifies with only 1% of manufacturers ruling this out
In ‘The tipping point: cost cutting pressure piles recall risk onto UK food and drink manufacturers’, Lockton reveals that two in five (43%) 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. Only 1% of manufacturers would completely rule this out.
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 price1. 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.
Ian Harrison, Head of Product Recall at Lockton, said: “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. 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 as industry reaches tipping point
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.
Have done this Would do this in future
Reduce the size of product but keep retail price the same 43% 56%
Look to international sources for cheaper raw materials 32% 53%
Change product using cheaper raw materials/ingredients 10% 72%
More than half (58%) 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 (32%) of manufacturers to look abroad rather than source ingredients from the UK.
Harrison added: “We’re fast approaching a tipping point where the quality of what’s on our shelves is at stake. 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 to cut costs felt by three in four UK manufacturers
Manufacturers are feeling the pinch as the British consumer, and in turn retailers, demand lower prices in the face of rising inflation. Three quarters (76%) of manufacturers surveyed agree 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.
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
Lockton’s 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.
Worryingly, over half (55%) 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 on stretched manufacturers
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.
Lockton’s 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.
Harrison said: “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. 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.”