By Daniel Hunter

A report by accountancy and business advisory firm BDO LLP describes the food and drink sector as the ‘squeezed middle’ following another challenging year.

BDO’s inaugural Food & Drink Report blames pressures out of the sector’s control for the ‘incredibly tough’ conditions it is facing, such as consumer spending, poor commodity harvests, rising input costs and being stuck in the middle of supermarket price wars.

According to the report, the weight of uncertainty will endure into the future. Retailers, which steer competition around pricing, will continue to exert pressure on suppliers. While at the other end of the supply chain, farmers, food manufacturers and processers come under increasing stress caused by rising input costs and narrowing margins.

But the sector, which accounts for 15 per cent of the UK manufacturing base and employs over 400,000 people, is still a key driving force in the economy’s recovery and has reason to be optimistic, with many companies exploiting opportunities by continuing to invest in innovation and developing new income streams through product development.

The report also identifies that food and drink businesses are expected to take a broader share of transactional activity in the year ahead.

“Innovation and investment are key. There is real momentum building for mergers & acquisitions, as food and drink companies fight to increase efficiencies and market share," Paul Davies, partner and head of the food & drink group at BDO, said.

“With operating margins in the largest 150 food and drink processors having fallen to a 14 year low, it is evident that organic growth is an uphill battle. The market lends itself incredibly well for consolidation and acquisitive growth.”

UK-wide, the sector has contributed heavily to a three-year record in M&A ‘megadeals’ — deals over £1bn in value — and has also recorded the highest level of transactions (of any size) since the financial crisis hit in 2007.

The report identifies food and drink businesses as leaders in delivering sustainability initiatives to lower operating costs and reduce and recycle waste in its many forms. It also encourages companies to pursue opportunities to reduce their exposure to tax and save cash, such as the enhanced Research & Development (R&D) relief and 100 per cent capital allowances.

“The recent scandal of horse meat in burgers highlights the complexity of security in the supply chain," Davies adds.

"The sector can expect to be under the spotlight for some time, with regulatory pressure and supply-chain scrutiny ahead. In addition, the auto-enrolment pension scheme that is currently underway will add additional costs and demands in an already difficult trading environment.”

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