What the sugar tax means for food manufacturers

27 April 2016

Food and agri companies face busy times thanks to the sugar tax, price wars, possible mergers and increasing product recalls.

The ‘sugar tax’ on the soft drinks industry – announced in George Osborne’s most recent budget and due to be implemented in 2017 – will affect some manufacturers.

Though many companies (eg, Robinsons) saw this coming and have implemented sugar reductions to their products, some manufacturers will need to make further changes to product ingredients. 

This could impact their customer base, supplies, broader supply chain and capital expenditure on new equipment. Food manufacturers’ capital expenditure on new equipment is often huge, so any extra expenses could place a real strain on margins, as could anticipated drop in demand for certain products. 

Food fight

The retail market in recent years has undergone significant change. The rise in discount retailers such as Aldi and Lidl has accompanied the growth in smaller retail food outlets (eg, Tesco Express) and the relative decline of the large supermarket.

Though UK online retail is proportionally larger than anywhere else in the world, there’s still a lot of growth potential. Amazon’s recently announced tie-up with Morrison’s will add competition to an already margin-thin space. 

Other retailers may well find themselves needing to make further efficiency improvements and investments in their online capabilities – potentially impacting their supply chains, and exacerbating supermarket price wars. 

Large appetites

Meanwhile, acquisitions within the food and agri sector are likely to continue, as investors’ appetite remains high. Private equity remains interested, especially in high-growth branded businesses, such as healthy living and sustainable foods. 

There is also a lot of capital within larger food businesses themselves, who may also look to make acquisitions. 

Food and agri companies should also take note of merger and acquisition (M&A) activity within the insurance industry, such as the £3.47bn takeover of Amlin by Mitsui Sumitomo Insurance (a big player in food risk and insurance) in 2015. 

Insurance industry M&A has yet to materially impact the food and agri sector, but if two or more food-specialist insurers merge, rates could increase.

Future recall

Product recalls have grown in significance and frequency within the sector ever since the 2013 horsemeat scandal. Recalls will continue to occur at a regular rate, with the sweeping recall of Mars, Snickers and Milky Way bars from dozens of countries, including the UK, unlikely to be the last high-profile case.

The increased frequency of recalls is partly due to technological improvements that make it easier to detect contaminations and the ever expanding supply chains. But companies are also more vigilant and cautious since the horsemeat scandal and the resultant media and regulatory scrutiny.

One consequence of the increased number of product recalls is that the product recall insurance market is larger than ever, with more expertise and broader coverage at much more affordable prices.

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For more information, please contact Jon Miller, Head of Regional Food & Agri Practice on +44 (0)121 626 7806 or email jon_miller@jltgroup.com