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Quarterly Trends Report

Q3 2021: cost pressures reverberate across UK meat and poultry

  • Public Equity
  • Consumer
  • Europe

Despite strong consumer demand, a confluence of factors are weighing heavy on the UK meat and poultry industry, as discussed across several Third Bridge Forum Interviews in Q3 2021.

Volumes soared by “anything up to 100%” during COVID-19 lockdowns and the overall market is still up by 10-15%, we heard in an Interview with a former divisional leader at Sainsbury’s Supermarkets Ltd. In fact, demand for red meat is at levels seen five years ago and “there’s nothing to indicate at the moment that this will change in the short term”. Sustained levels of home working have prompted a structural shift towards meals made from scratch, which, as we were told, “supports the meat category across the board”. 

However, the industry is one of many facing heavy cost pressures thanks to a combination of rising commodity prices (the price of wheat has risen by EUR 40-50 a tonne over the past year), supply shortages, labour inflation and the lingering effects of COVID-19. While many commentators expect such issues to be temporary, Forum Interviews suggest tensions have been building across supply chains — some of which pre-date COVID-19 and could persist as long-term risks to companies.

Labour issues, which have dominated the headlines in recent weeks, are one element of this story. Brexit and COVID-19 have largely been blamed, but as noted by the British Meat Processors Association in July, they have merely exacerbated an “already critical” wider shortage, posing a structural risk, it said.1https://britishmeatindustry.org/press-releases/meat-industry-workforce-talent-pool-is-turning-into-a-talent-puddle/ As reported by The Grocer, over 55,000 domestic drivers have left the industry during the past 18 months, with retirement, a lack of driving tests during COVID-19 and tax changes cited as reasons. This exodus, plus the loss of EU drivers, has caused the estimated shortage of 100,000 HGV drivers in the UK alone, hampering businesses of all shapes and sizes, and at times leaving food shelves empty.2https://www.thegrocer.co.uk/supply-chain/the-real-causes-of-the-hgv-driver-shortage-and-why-we-cant-blame-it-all-on-brexit/659841.article According to the former Sainsbury’s executive we spoke to, the current shortage will last for “at least the next 6-12 months”.

Although many hope that the end of furlough will help to ease the situation, a former executive at 2 Sisters Food Group Ltd, one of the UK’s largest poultry players, isn’t optimistic. “Personally, after 40 years being in this industry, I’m not hopeful,” they said. “It’s very difficult to get UK labour to work in some of these factories. The agricultural industry over many, many years has always relied on imported labour, whether it’s at peak seasonal periods for fruit picking or for turkey processing for Christmas.” As has been widely reported, there are fears that product diversity will suffer as a consequence, with many “nice-to-have” ranges taken offline. “Potentially, it’s your lower-volume, higher-margin products that may suffer,” the specialist said. 

Labour challenges were also discussed in a Forum Interview with an executive at Lidl Great Britain Ltd who noted that paying higher wages is, at present, one of the few solutions. But this, they warned, will have ramifications. “That will have an impact on the whole supply chain, so transport costs will be more expensive, food will become more expensive, running a store will become more expensive and that will, at some stage, certainly have an impact on sales prices,” they told us. Inflationary pressures on the buy side will inevitably squeeze margins, which is particularly problematic for retailers whose USP is to maintain low prices. 

According to the former Sainsbury’s executive, cost pressure from meat manufacturers and processors to retailers “is linked to the raw materials, but I would say anywhere between 5% and 15%, so a significant amount across the board.”

Businesses are being disrupted in other ways, too. Chief among these is the impact of Brexit on the sale of less popular “third-quarter” cuts of meat, such as chicken wings and pork cheeks, which are typically exported. “I would suggest they [industry players] are having to spend more time investigating new markets”, the former 2 Sisters Food Group Ltd executive said. “Every business is having to spend more time looking at export documentation and how you export, and the vagaries around that.” Compounding this, China’s need for imported meat is decreasing as its domestic supplies grow and the tastes of its population, constituting a growing middle class, shift. However, opportunities to export these cuts remain strong across Eastern Europe and South Africa, we’ve heard. The pet food industry could also serve as an alternative channel. The specialist reinforced that getting the best return possible on low-margin elements is crucial. “I know over the years, I’ve seen lots of businesses who don’t focus on that and struggle at times. They’re not nimble enough, they’re not quick enough.”

The CO2 shortage is another well-documented pain point. Using CO2 is regarded as the most humane way to stun pigs, and it is also used in packaging (in many food products) to enhance shelf lives. According to the former executive at 2 Sisters Food Group Ltd, the shortage could be critical for the meat and poultry industry. “You won’t get the volume through without CO2 stunning in pigs. No chance.” The expert expects further supply shortages to “trickle through”, with price increases inevitable. “How much do I see it? Certainly double digits. I can’t see it not being a double-digit cost increase and I would expect that would have to be recovered from the consumer.”

There is no doubt that the industry is under a lot of pressure. “People will survive, but it’s how they survive, and how quick they are and how nimble,” the former 2 Sisters Food Group Ltd executive told us. Some of the issues facing this and many other industries also highlight the fact that “there’s still a massive amount of scope for automation”, particularly at end-of-production, they added. “What has happened is everyone’s increased the front end of their business, the slaughter end of their business… but no one has really looked at, ‘How am I going to handle everything at the bottom end?’’ With no sign yet of labour issues easing, “that’s got to be the next stage for all of these businesses, I believe, if they want to survive.” While the industry is strong and resilient overall, the current crisis may be triggering warning lights in certain areas. How companies react to spiralling costs through innovation, savings and price increases will not only influence margins and pricing elasticity but, ultimately, tomorrow’s competitive landscape. 

Related Transcripts

The information used in compiling this document has been obtained by Third Bridge from experts participating in Forum Interviews. Third Bridge does not warrant the accuracy of the information and has not independently verified it. It should not be regarded as a trade recommendation or form the basis of any investment decision.

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