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A recent report from the Food and Drink Federation (FDF) has revealed a significant contraction in investment among food and drink manufacturers, with 41% of businesses scaling back their growth expenditures. This trend emerges as manufacturers grapple with escalating production costs and new regulatory burdens, leading to a low confidence index of -43% in the first quarter of 2025.

The FDF’s latest 'State of Industry' report paints a stark picture of the current landscape for food and drink manufacturers. On average, production costs have surged by 4.5% over the past year, with 22% of manufacturers reporting cost increases of 10% or more. Key drivers of these rising costs include:

Energy prices: Volatility in global energy markets continues to exert pressure on operational expenses.

Ingredient costs: Fluctuations in raw material prices, exacerbated by supply chain disruptions, have further strained margins.

Labour costs: Recent increases in the National Minimum Wage and employer National Insurance Contributions have compounded the financial burden on manufacturers.

Looking ahead, companies anticipate an additional 4.8% increase in production costs over the next 12 months. This ongoing cost escalation is occurring in a context where consumer confidence has also dipped, falling to -23% in April 2025. Retail sales in predominantly food stores have decreased by 6% over the last five years, indicating a challenging environment for revenue generation.

Despite these challenges, there remains a palpable desire among manufacturers to invest in long-term productivity enhancements. Over 54% of manufacturers surveyed indicated that automation will be a primary focus in the coming year.

This pivot towards automation is seen as essential for several reasons. Firstly, with the current high labour costs and a persistent skills shortage, automation offers a pathway to maintain productivity levels without significantly increasing wage bills. And second, automated processes can streamline operations, reduce waste and improve overall efficiency, which is critical in a high-cost environment.

Additionally, 13% of respondents expressed intentions to invest in research and development, aiming to innovate healthier product offerings in response to shifting consumer preferences.

However, the report highlights a troubling paradox: while there is a strong desire to invest, 41% of companies are either scaling back or cancelling planned investments due to the pressures outlined above. This raises concerns about the sector's ability to drive future growth and innovation.

In light of these challenges, the FDF is urging the government to provide clearer and more robust support for the food and drink manufacturing sector. Balwinder Dhoot, director of industry growth and sustainability at FDF, commented: “Not only does the food and drink manufacturing sector contribute £37 billion and half a million jobs to communities across the UK, but it’s also fundamental to the nation’s food security. So, it’s concerning that businesses are having to scale back investments that would help drive long-term growth and productivity as they ride out a wave of cost rises."

He continued: “The government must reflect the value that food and drink manufacturing has to our country by ensuring growth for our industry is a top priority in its upcoming Industrial and Food Strategies. We urge government to give businesses the support they need to make investments that will support the resilience of the food industry.”

To address these issues, the FDF has outlined several key actions for the government:

Reviving EU trade relations: With exports to the EU down by more than a third since Brexit, a strategic approach to trade relations is vital for restoring competitiveness.

Using EPR fees effectively: Ensuring that the £1.4 billion generated from extended producer responsibility (EPR) is allocated to improving recycling infrastructure rather than filling local authority funding gaps.

Enhancing R&D support: Securing a fair share of the UK’s R&D spending for food and drink manufacturing to foster innovation and product development.

Developing a workforce plan: Collaborating with Skills England to create a targeted skills strategy that addresses the high vacancy rates in the sector, which are more than double those seen in wider manufacturing.

Simplifying R&D tax credits: Streamlining the tax credits system to encourage more businesses to invest in technology and innovation.

Reducing regulatory burdens: Minimising red tape to allow SMEs to focus on growth and productivity.