Article

Supporting the food and drink sector through a challenging time: the role of trade credit

The COVID-19 pandemic affected all industry segments to a greater or lesser degree. But few have been more impacted than the food and drink sector.

The COVID-19 pandemic affected all industry segments to a greater or lesser degree. But few have been more impacted — in both positive and negative ways — than the food and drink sector. The sector is also facing inflationary pressures, increasing commodity prices, labour shortages, and challenges associated with Brexit. During these complex economic times, trade credit insurance can provide companies in the food and drink sector with some peace of mind.

State of the UK food and drink sector

The food and drink sector plays a huge role in the UK economy. It’s the UK’s largest manufacturing sector, contributing more than £29 billion to the economy every year and employing more than 444,000 people, according to the Food & Drink Federation. The UK food and drink sector’s output is predicted to grow by more than 3% in 2022, following growth of more than 4% in 2021. While currently on an upswing, the sector faces a number of challenges, as well as opportunities, to its success.

The food and drink sector relied heavily on governmental support during the worst of the pandemic. Initiatives such as the “Eat Out to Help Out’ scheme were intended to help the hospitality and catering sector survive the extreme impacts of COVID-19. Now that government support has been withdrawn, many hospitality and catering businesses are facing financial challenges. Some, unfortunately, have fallen or will fall into insolvency, and this in turn poses risks for suppliers to those businesses.

The food and drink sector is vulnerable to several other macroeconomic and microeconomic trends. It’s dealing with increased transport costs, caused in large part by hikes in fuel prices — and even fuel shortages. A lack of available heavy goods vehicle (HGV) drivers is also hitting the sector hard. The Road Haulage Association estimates that in 2021 there was a shortage of about 60,000 HGV drivers in the UK due to the impact of the pandemic and Brexit on the workforce, among other factors. As well as facing increased transport costs, food and drink companies have needed to pay ever greater attention to the pinch points in their supply chains and frailties heightened by this transportation crunch.

The combination of Britain’s withdrawal from the European Union and the pandemic has affected the food and drink sector in other ways too. The labour pool has shrunk dramatically. A large proportion of workers in food processing and other parts of the sector were from the EU and thousands of skilled workers have returned to their countries of origin.

The food and drink sector’s very narrow operating margins are being squeezed still further by an increase in commodity prices.

World food commodity prices reached a 10-year peak last autumn and have soared an additional 13% since the onset of the Russia-Ukraine crisis.

Grain prices have been on this rise due to several poor harvests and now reduced supplies from Ukraine and Russia. Strong demand for vegetable oil, milk products, and poultry has also increased prices.

The macroeconomic inflationary trends affecting all sectors — rising energy costs and prices for packaging and other items necessary for storing and selling goods — are also impacting the food and drinks sector’s narrow operating margins.

In 2022, don’t just survive, thrive

The series of challenges confronting the food and drink sector are not going to go away any time soon. But trade credit insurance is one form of support that the industry can rely on at this critical moment.

Customer intelligence

A trade credit insurance policy provides an insured with real-time information on its customers to support credit management, corporate governance, and sales. Because of the sheer amount of information now available 24/7 and digitally, time and time again we see insured clients are able to react quickly to developing situations, without having to rely on dated financial information or analog processes.

Trade credit coverage can protect you against the default of your customers. With the number of insolvencies in the sector expected to increase this year, many food and drink companies are looking to trade credit coverage to enable them to grow safely, both in the UK and in export markets.

Portfolio enhancement

Trade credit insurance also can provide food and drink companies with improved access to receivables financing.

With businesses’ strategic objectives focused on growth following the pandemic, and with inflation increasing almost daily, a trade credit insurance policy could help you gain access to better financing rates and additional capacity.

Understanding the dynamics of the supply chain and the various elements at play here is key to managing and transferring this risk. Food and drink companies need to assess where their specific challenges may lie and work with their risk advisors to understand how trade credit coverage could benefit them.

The coming months will present constantly changing economic dynamics for food and drink sector companies. Preparing for what comes next through supply chain risk assessments and consideration of trade credit insurance coverages can help companies not just survive, but thrive, in this new normal.

To find out more about trade credit solutions for food and drink sector businesses, contact Rebecca Liddle, Development Manager, Credit Specialties, Marsh Specialty UK.