Overview

What will be the big challenges in the food and drink sector for 2016?

Corporate activity

A GC of a well-known UK food manufacturer said to me just a few days before Christmas that within his business it was felt that the downward spiral of decline had finally eased, flattened out and for him 2016 will hopefully be the year that growth restarts. “It would be nice if we started buying things rather than only ever selling them” was his optimistic hope on the M&A front.

His optimism is borne out elsewhere with up to two thirds of global food suppliers and retailers telling the EY Consumer Products and Retail Confidence Barometer that in 2016 they expected to be involved in at least one acquisition. The focus is broadly international over domestic. 2015 will certainly be memorable for the huge deals involving Heinz/Kraft and AB InBev/SABMiller.

Socio-economic factors

In food and beverage there has never been a shortage of regulation, driven during the past 25 years mainly through the European Union. In a sector where demand never really drops, so fluctuations tend to be upwards, the political and social challenges are considerable. Regulation is not necessarily the whole of the answer but the globalisation of the sector, issues regarding sufficiency of supply, of health issues and the increasing attraction of the supply chain to organised criminals, makes regulation a part of the solution. We are now seeing the impact of the new rules on allergens, food provenance and information; 2016 is expected to bring additional regulation around restricting food waste – a Bill on this is expected to progress in the early part of the year. Similarly a separate Bill on sugar reduction is proceeding through the UK Parliament which would require manufacturers to cut sugar content by up to 50% and enable the Government to set sugar targets. The major supermarkets are backing the scheme as sugar is now thought to be a far greater lifestyle threat than salt was a few years ago when a similar reduction plan was introduced.

People issues

It is not limited to the food and beverage sector, of course, but the advent of the National Living Wage is, and will be, hugely impactful. While the associated costs will have to be met by the industry (the employers) the opportunity to pass those costs to consumers will be extremely limited and whilst manufacturing may be regarded as a place where consolidation is the order of the day, in leisure and hospitality expansion continues apace (over 1,800 new pubs, bars and restaurants opened in the UK in 2014). The competition for consumers is greater than ever so increasing prices to meet the additional costs of employment is barely an option.

Cross-border legislation has featured strongly in 2015, with one of the most significant pieces coming in the form of the Modern Slavery Act (MSA). From March 2016 all retailers who conduct business in the UK and have a turnover of at least £36m, will need to provide an annual statement detailing how they are preventing slavery and human trafficking in their supply chains. The MSA is a major piece of legislation aimed at safeguarding human rights and encouraging ethical business practices on an international level. Retailers will have to introduce a greater level of rigour around their existing auditing and due diligence processes, with some having to re-examine their approach to subcontracting, resourcing and operating.

What else will influence the sector?

The digital age, of course. At one end of the spectrum is crowd-enforcement where there is rapid growth in claims and class actions (or their equivalent) – not huge litigation but online and visible multiple claims or willingness to claim even for quite low levels of compensation – still a drain on food businesses often carrying a fair level of deductible and keen to control publicity in order to preserve reputation. At the other is probably the ability to transact online so much more readily. One retailer this week confessed that it was pinning its hopes on online sales since if those numbers were not very good the figures for Q4 2015 would be “awful”.

A new enforcement landscape

From 1st February in the UK at least the teeth of the law will be sharper. For the first time the Sentencing Council has published Guidelines on the sentencing of food safety and hygiene cases that will apply a ‘matrix’ of culpability and harm (including risk of harm). Those principles in a sense already form part of sentencing practice but to this combination will be added the turnover of the offending company. This will generate a likely range of possible fines together with an entry point for the Court.

The largest companies (turnover of £50m or more) are the most likely to notice the impact – and the Guidelines are silent on the range for truly large companies (we suggest those with a turnover exceeding £250m though this is not published anywhere) with the Courts left to make any upward adjustment thought appropriate to ensure fines are felt by shareholders.

As an example, a large company found guilty of serving unsafe food which made a number of people ill (and put vulnerable individuals at particular risk) and where the errors amounted to significantly negligent behaviour would be looking at a range of fine from £200,000 to £1,400,000 with an entry point of £500,000.

At the same time funding for regulators is still diminished; the Food Standards Agency is exploring how better to work with the sector to remain effective, and engaged, as it surely must do. Government could help here too by facilitating effective regulation where it is necessary – for example the Agency could lead a better industry relationship with the Competition and Markets Authority where concerns still mean that the sharing of intelligence (a part of better regulation) remains a bridge too far for the moment, well over 12 months post-Elliott.