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By Adrian Sidaway, Audit & Accounts Director (RI) and Head of Food & Beverage
There is a version of this year's cost story that food and beverage manufacturers have heard before. Input prices rise. Margins compress. Retailers resist price increases. Eventually the cycle turns, costs settle, and the breathing room returns. That version is comforting. It is also, increasingly, wrong.
What is happening in UK food manufacturing right now is not a repeat of 2022. It is not a single shock working its way through the system. It is a convergence of domestic policy decisions, global disruption and structural market forces that, taken together, have fundamentally changed the economics of making food in this country. The businesses that recognise this early will adapt. The ones still waiting for the cycle to turn may not get the chance.
Where are the costs actually coming from?
The instinct when costs spike is to look for a single culprit, energy, or raw materials, or labour and wait for that one pressure to ease. The difficulty in 2026 is that the pressures are arriving from every direction at once, and several of them are permanent.
Start with employment costs. From April 2025, employer National Insurance contributions rose from 13.8% to 15%, and the threshold at which employers start paying dropped from £9,100 to £5,000 per employee per year. For a labour-intensive sector where shift workers, production line staff and warehouse operatives make up the bulk of the headcount, the effect is substantial. Estimates suggest the changes could add around £870 per employee per year in employer costs. For a mid-sized manufacturer with 150 staff, that equates to more than £130,000 of additional annual cost before any pay rises are considered. Layer on the 6.7% increase in the National Living Wage to £12.21 per hour, and the total employment bill for many food producers has jumped by a figure that would have been unthinkable three years ago.
These are not temporary. They are baked into the cost base permanently. There is no future budget that reverses them.
Then there is energy. The conflict in the Middle East and the significant disruption to shipping through the Strait of Hormuz have sent oil and gas prices spiking again, with immediate consequences for a sector where energy is embedded at every stage of production. The FDF’s Q1 2026 State of Industry report found that for a fifth of food manufacturers, energy accounts for more than 10% of total operating costs. Larger businesses with hedging contracts are bracing for sharp increases as those contracts come up for renewal. Smaller producers, buying on the spot market, are already feeling the pain. FDF has reported that red diesel costs have risen sharply since the start of the conflict, increasing pressure on agricultural input costs and, from there, into what manufacturers pay for their raw materials.
Packaging costs are rising in lockstep, tied as they are to oil prices, and the Extended Producer Responsibility regime is adding a regulatory levy on top. The net effect is a cost environment in which every line on the profit and loss account is moving in the wrong direction at the same time.
Is the gap between costs and prices actually closing?
It is not. This is the detail that matters most, and it is the one that should concern any food business owner looking at their management accounts.
FDF data released in March 2026 showed production costs rising 4.4% across 2025, ahead of CPI at 3.6%, and 5.3% for smaller manufacturers. Selling prices have moved unevenly quarter to quarter, briefly catching up at the end of 2025 before falling behind again in early 2026. The four-year picture, though, is one of sustained under-recovery, with cumulative cost increases running well ahead of the price rises retailers have been willing to accept since 2022. The question is how long that can continue.
The answer, for many businesses, is not much longer. The FDF’s chief economist has been direct about this: the efficiencies that manufacturers typically use to buffer against inflation have been exhausted. The savings have already been found. The processes have already been leaned out. The “fat” in the system, as the FDF put it at its annual economic briefing, is gone.
"When the usual buffers are gone and every line on the cost sheet is moving against you, the question stops being how to manage through a bad year and becomes whether the business model itself still works."
Retail volumes compound the problem. Food retail volumes dropped roughly 7% between 2020 and late 2025 as the cost of living crisis bit into household budgets. Manufacturers are producing less, selling it for less margin, and paying more to make it. That is not a cycle. It is a structural reconfiguration of the sector’s economics.
Why passing costs on has become harder, not easier
In a functioning market, manufacturers would recover at least some of these costs through higher prices to retailers. The mechanics of the UK grocery market make this difficult at the best of times, concentrated as it is among a small number of supermarket groups with enormous buying power. But in 2026, a new factor is making it harder still.
In March, the Chancellor announced a new anti-profiteering framework aimed at strengthening the ability of the Competition and Markets Authority and other regulators to respond to excessive price rises during periods of economic disruption. Further details published in May included enhanced investigatory powers and the possibility of additional targeted enforcement measures where needed. The proposals include the ability for regulators to publicly highlight firms whose margins have changed significantly during an economic shock and to provide greater transparency around pricing behaviour. The government has made clear it will not hesitate to introduce time-limited enforcement powers, including the ability to direct firms to stop what it deems exploitative pricing and to impose penalties.
The political intent is understandable. Nobody wants consumers to be gouged. But for a food manufacturer whose production costs have risen 4.4% while selling prices have risen 2.7%, the framing is difficult. These are businesses that are under-recovering their costs, not profiteering. Yet the rhetoric of the framework, and the threat of public naming, creates an environment in which even justified price increases become harder to negotiate with retailers who are themselves under political pressure to hold shelf prices down.
Many businesses are understandably concerned about this. They know their margins are thinning. They know they need to recover costs. But the public conversation has been framed around profiteering, and that framing does not distinguish between a multinational branded goods company and an owner-managed manufacturer in the Midlands trying to keep the lights on. The chilling effect is real, even if no enforcement action ever follows.
What the insolvency numbers are actually telling us
The consequences of this sustained squeeze are showing up in the data. According to the FDF, food manufacturing insolvency rates in 2025 rose nearly three times faster than those seen across the wider manufacturing industry since 2019. The sector has lost approximately 300 businesses in the last two years alone, and the number of UK food manufacturers has fallen for two consecutive years, the first sustained decline since 2010.
The Insolvency Service’s own figures show that accommodation and food service activities recorded 3,296 insolvencies in the twelve months to May 2026, making it the third most affected sector in the country behind construction and wholesale and retail. Manufacturing as a whole recorded 1,872 insolvencies in the same period.
These are not marginal businesses failing at the edges. The FDF’s data shows that half of all SME food manufacturers reported worsening conditions in their most recent survey, and sector confidence dropped to minus 64% in Q1 2026, the lowest level since the invasion of Ukraine and on a par with the early months of the pandemic.
The pattern is consistent with what wider industry data is showing. Businesses that were viable eighteen months ago are now looking at cash runways that have shortened materially. The warning signs – delayed filings, rising creditor pressure, greater reliance on overdrafts – are present across the sector, and they are not confined to the smallest operators.
What does a structural response actually look like?
If the squeeze is structural rather than cyclical, the response has to be structural too. That means something more fundamental than finding savings or negotiating harder with suppliers.
For some businesses, it means a serious review of the product mix. The margin profile of different product lines can vary enormously within a single manufacturer’s range, and in a low-margin environment, cross-subsidisation between profitable and unprofitable lines becomes unsustainable. Understanding the true cost to produce each line, fully loaded with the new employment costs, energy costs and packaging levies, is the starting point. The answers are not always comfortable, but they are necessary.
For others, the response is about the workforce model. The employer NIC changes have a disproportionate impact on businesses with large numbers of lower-paid employees, which is precisely the profile of most food manufacturing operations. Salary sacrifice arrangements, particularly for pension contributions, offer a genuine route to reducing the NIC bill for both employer and employee. The increased Employment Allowance of £10,500 helps smaller employers, but for any manufacturer of meaningful scale it is a rounding error against the total increase.
Capital investment in automation and process efficiency is part of the longer-term answer, and the FDF’s data shows that 53% of manufacturers intend to increase spending on plant and machinery this year. But investment requires confidence, and confidence requires a cost base that makes sense. The two are connected.
There is also the question of the balance sheet itself. Businesses that entered this period with strong reserves and low gearing have more room to absorb the transition. Those that were already carrying debt or running on thin working capital are in a materially more difficult position. The difference between the two is not luck. It is the product of financial decisions made in the years before the squeeze arrived.
Is the export picture making things better or worse?
Worse. The FDF’s Q1 2026 Trade Snapshot showed UK food and drink export volumes falling to their lowest level in a decade outside the pandemic. Non-EU exports dropped 11.5% year on year. Exports to the United States fell by more than a quarter following the tariffs imposed in April 2025, while US imports into the UK rose 11.5% in the same period. The UK’s food and drink trade surplus with the US collapsed by nearly 70%.
For manufacturers who had been building export revenue as a counterweight to weak domestic demand, this is a serious setback. The cost of producing food in the UK is now higher than in many competitor economies, and that gap is widening. The government’s proposals to remove tariffs on certain imported food products, while aimed at reducing consumer prices, risk further undermining domestic producers who are already competing from a higher cost base.
The FDF has called on the government to suspend tariffs on ingredients rather than manufactured products, which would lower the cost of producing food in the UK without directly undercutting domestic manufacturers. Whether that call is heeded remains to be seen.
What happens next?
The FDF had originally forecast food inflation easing to around 3% by the end of 2026. It has since revised that figure to at least 9%, driven primarily by the energy and logistics consequences of the conflict in the Middle East. Even that revised figure assumes the Strait of Hormuz reopens within weeks and key energy facilities return to normal within a year. If either assumption proves optimistic, the picture will be worse.
For food manufacturers, the question is no longer whether this year will be difficult. It will be. The question is whether the business is structured to sustain difficulty that does not have a clear end date. That means knowing, in detail, where the margin actually sits. It means understanding the true cost impact of the April 2025 employment changes across every part of the workforce. It means stress-testing the cash position against a range of scenarios that include further energy price increases, further volume declines and continued resistance from retailers on pricing.
The businesses that come through this period in good shape will not be the ones that found a way to muddle through. They will be the ones that looked at the numbers honestly, accepted that the old cost base no longer works, and made the changes before they were forced to.
This article has been prepared for information purposes only. Formal professional advice is strongly recommended before making decisions on the topics discussed in this release. No responsibility for any loss to any person acting, or not acting, as a result of this release can be accepted by us, or any person affiliated with us.
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