The UK’s food and drink manufacturing industry has become one of the fastest-moving as it reacts to changes in taste, environmental awareness, legislation and culture. An ability to look ahead and pre-empt risk is core to its future success.
Changes in climate have been negotiated, with a rise in average temperature contributing to a booming wine industry in the south of England, whilst concerns about the environment are seeing an increase in the demand for more plant-based products.
The rising number of independent gin producers is fuelling Britain’s desire for a new twist on an old favourite. Sales of UK gin have doubled in the last five years, with exports and domestic sales topping £2.2 billion in one year.
New issues around food labelling and packaging, often driven by the green agenda, are continually emerging and the public is increasingly interested in food provenance.
Legislation is never far behind. A rise in reports of allergy-related deaths is pushing an agenda to force manufacturers to list all ingredients on packaging, and for retailers to take greater ownership around how food products are sold and advertised.
Add to that a complicated political environment in Europe, with Brexit still unresolved in the second half of 2019, and you can see why risk assessment is more complicated than ever in the sector.
However, the key is to identify all potential risks in advance and plan to overcome or offset them, whether they are down to domestic or international influences.
But where to start?
The Food & Drink Federation conducted its latest business survey in April 2019 and published some interesting results which show the main issues facing the sector.
Some of the key points include:
- Net confidence in the sector has decreased by 38% since Q1 2018. The risk of a 'no-deal' Brexit, exchange rate volatility, and border/customs issues were all reported as being amongst the top three barriers to business success.
- In line with 2018 trends, 51% of businesses indicated falling profit margins over the first quarter of 2019. The majority of businesses also reported rising input costs for energy, ingredients and packaging.
- As many as 73% of businesses stated that capital spending, and spending on development and research, had either flat-lined or decreased. But 40 per cent still planned to buy new machinery or launch new products in the second half of the year.
- More than 75% reported increased average wages in the quarter, while almost half had increased spending on staff training.
The top five risks identified by the survey were:
- Political uncertainty
- Increased cost of ingredients
- Exchange rate volatility
- Border/customs issues
- Risk of 'no-deal Brexit'
Analysis of where future risks lie requires more than just economic knowledge or political insight, however. Having a strategic overview of a business and how it could be affected by a wide range of outside influences is vital – and allows companies to put the right insurances in place.
Some key areas some might be:
Supply chain risk management
A volatile marketplace means that manufacturers need to protect their supply chain and to cope with delays which might arise from more complicated customs and excise arrangements in future. Review indemnity periods under business interruption policies to ensure potential delays are accounted for.
Protecting brand reputation
With the rise of social media and online forums, consumers are more brand conscious than ever before. If a manufacturer needs to recall a product or is negatively portrayed in the media or social media then this can have a damaging effect and cost a lot to rectify. Product Recall Insurance and Product Contamination Insurance can help cover the costs of a recall and rebuilding the reputation of the business.
Cyber threats and data breaches
We are all aware of the new laws bought in by GDPR. Any business which holds customer data or uses a computer system within its business model needs to have robust cyber security insurance and a tested contingency plan in place. Howden’s Cyber Liability Insurance covers losses from an attack and offers immediate access to specialist expertise when a cyber event occurs, with a 24/7 incident response line.
Cyber threats and the impact on production
One of the biggest threats to manufacturers is ransomware. This hits firms whose reputation depends on them being able to provide vital services to their clients which are in turn dependent on IT systems and data availability. A cyber security breach can cause digitally-controlled machinery to malfunction or fail, with a knock-on impact on productivity. Only recently, Danish firm Demant revealed that a suspected ransomware attack may end up costing them $95m.
Failure of machinery
It is not only cyber issues which cause the malfunction of factory machinery. Engineering insurance can include losses from the breakdown or failure of machinery.
Talent management and recruitment
There is already a skills shortage within the manufacturing sector, with the Chamber of Commerce revealing last year that the sector is facing its greatest shortage in 30 years. Fears that Brexit will hinder recruitment are causing concern in every industry. Manufacturers with a compelling employee benefits programme will be in the strongest position to seek out the most suitable candidates and retain key people.
Health and safety risk management
The food and drink industry has inherent risks around health and safety and is being challenged to improve its record. The IOSH, the biggest health and safety membership organisation, held a conference for the industry in October 2018. Giles Hyder, operational policy lead for manufacturing at the Health & Safety Executive (HSE), reported that food manufacturers had made very limited progress against a target of a 10 % year-on-year reduction for reportable injuries. He urged greater use of low-dust flour for bakeries. Every business should have a robust risk management strategy and policies in place, a full health and safety management system and regular training and assessments.
A growing interest in the rise of allergic reactions to certain food ingredients has increased the possibility of manufacturers facing litigation if their labelling is incorrect or misleading. Additionally, product recalls not only damage reputation but come with the potential for litigation if something goes wrong or the product is not recalled quickly enough.
Difficult market conditions and economic uncertainty add to the probability of clients or any part of the supply chain going out of business. Credit Insurance can help businesses to become more profitable by protecting against the risk of customer insolvencies.
Having the right insurance in place to deal with all these issues is vital. To sum up, some of the key things to consider include:
- Review Business Interruption Indemnity periods
- Cyber Liability Insurance
- Product Recall
- Credit Insurance
- Engineering Insurance
- Risk Management
Howden is partner to Make UK, the representative body for manufacturers.