According to Mark Lynch, Partner at Oghma Partners, the corporate finance house, the pressure will mount on consumers as the full impact of increased mortgage costs and record rent rises influence demand while wage growth is expected to be a further challenge. While there have been some signs of easing of interest costs in 2024, these cuts may be relatively modest and back end weighted – therefore unlikely to materially impact the cost of funding in the year.
Lynch believes that a new Labour government could seek to resolve the UK’s export friction issue with the EU by re-joining the EU Phytosanitary regime which would be a relief to the UK and EU food industry. 2024 will likely see the plat based product fall-out continue which will allow the category and sector leaders to re-position themselves for growth going forward.
1) Consumer demand
2023 has seen many food and drink companies report improved earnings on the back of a very tough comparison in 2022; pricing recovery thereafter and an overall positive volume/price mix. There has even been some reduction in costs helping the margin picture. Looking into 2024, we would expect, in the UK at least, the pressure to mount on consumers as the full impact of increased mortgage costs and record rent rises influence demand. This has already been seen in the de-stocking of premium items (like spirits) and reduced volume of consumption across a range of products as well as switching from brand to own-label and away from less cost focused retailers to more value focused offerings and product ranges.
2) Wage/cost growth
Wage growth is expected to be a further challenge in 2024. The minimum wage increases in April by 9.8% – this will put upward pressure across the food sector where a lot of wage costs move in tandem with the minimum wage figure. Currently raw material costs are forecast to be broadly stable or declining with one or two exceptions. Overall however, we expect a relatively neutral commodity input costs environment in 2024. Management attention is therefore likely to be focused on wage costs and combined with issues around labour availability, we may see a renewed focus on capital investment to reduce labour usage across the manufacturing estate which may, in turn, drive productivity gains across the sector.
3) Funding costs remaining high
Whilst bond markets are beginning to think that the battle against inflation has been won, central bankers appear to be taking a more cautious view. While we might see some signs of easing of interest costs in 2024, these cuts may be relatively modest and back end weighted – therefore unlikely to materially impact the cost of funding in the year. High rates feed through to equity market ratings for quoted food companies and exit prices for businesses being sold. We do not therefore expect any significant increase in the multiples paid for businesses being exited in 2024 compared to 2023 or 2022.
4) Continued and increasingly fractious trading with the EU
Export friction with the EU is likely to continue in the year however the government has finally committed to introducing reciprocal checks covering health certification and sanitary and phytosanitary (SPS) checks on all agri-food products from the EU. These checks will be introduced on a phased basis. This introduction has the potential to increase cost and disrupt supply chains. Ultimately, we think a new Labour government will seek to resolve the issue by re-joining the EU Phytosanitary regime which would be a relief to the UK and EU food industry and highly unlikely to affect any pro-Brexit voters.
5) Plant based foods go bust!
2023 has seen significant upheaval in the plant-based food market with reduced ranges, falling consumption and businesses going bust in the sector. 2024 will likely see the fall-out continue which will allow the category and sector leaders to re-position themselves for growth going forward. A more streamlined offer and a focus on marketing, consumer messaging, pricing and product quality should help re-align the sector with consumer expectations and demands. For more visit oghmapartners.com
