The Uncomfortable Truth About UK Food Manufacturing Costs

The Numbers Tell a Story

Production costs in food manufacturing rose 4.4% on average in 2025, according to the Food and Drink Federation. For smaller businesses, that figure was even steeper: 5.3%. That matters enormously when margins are already tight. And it's not a one-off: since January 2020, input production costs have risen 39.9% (excluding labour and regulation), outpacing the 38.6% rise in retail prices over the same period. Manufacturers have been absorbing the gap, not passing it on.

What's driving it? Not one thing: everything, at once.

Labour costs have risen sharply. The National Living Wage increased 6.7% to £12.21 per hour in April 2025. The same month, employer National Insurance contributions rose 1.2 percentage points to 15%, with the threshold lowered from £9,100 to £5,000. Together, the FDF estimates these changes cost a typical food producer around £870 per employee per year. In a labour-intensive industry that adds up fast.

Energy remains a persistent pressure. It accounts for 20 to 40% of total production costs in food manufacturing, depending on the operation, and is embedded at every stage of the process from cold storage to high-heat processing. While headline energy prices have eased from their 2022 peaks, smaller producers buying on spot markets are still experiencing cost spikes. The FDF is calling for food and drink manufacturers to be included in the British Industrial Competitiveness Scheme (currently limited to advanced manufacturing sectors like automotive and aerospace), which from 2027 will reduce electricity costs by approximately £35 to £40 per MWh for eligible businesses.

Packaging regulation has added a new layer. The Extended Producer Responsibility scheme, which came into force in April 2025, transfers approximately £1.5 billion in annual waste management costs from local authorities to packaging producers. Base fees include £423 per tonne for plastic and £192 per tonne for glass, and from 2026/27 a new traffic-light recyclability rating will push costs even higher for less recyclable formats.

And ingredient markets remain volatile. Cocoa prices surged from $3.28/kg in 2023 to $7.80/kg in 2025; an increase of more than 120%, driven by a global shortage of over 500,000 tonnes as crop disease and unpredictable weather hit production in West Africa. Prices have since fallen around 62% from their peak, but structural supply issues persist and they're unlikely to return to historical levels soon. Vegetable oils tell a similar story: the FAO Vegetable Oil Price Index hit 183.1 in March 2026, up 13.2% year on year, with palm, soybean, and peanut oils all climbing.

The cumulative effect of all this? The FDF has revised its food inflation forecast to at least 9% by the end of 2026, up from a previous forecast of around 3%. That revision was driven in part by the closure of the Strait of Hormuz and the impact on global energy and fertiliser markets, but the underlying pressures were already there.

The Export Picture Has Changed

Post-Brexit, the export picture has deteriorated significantly. EU export volumes from UK food manufacturing have dropped by 23.4% over five years compared to the five-year period before Brexit, according to the FDF's 2025 Trade Snapshot. In volume terms, this represents a drop from 6.7 billion kilograms to 5.1 billion kilograms.

The country-level breakdowns are striking. Exports to Germany dropped 59.1%, to Poland 51.9%, and to Belgium 39.9% over the same period. These aren't marginal markets; they were major trading partners. The FDF attributes the falls to sanitary and phytosanitary barriers, including "parallel risk assessments" that duplicate effort and slow innovation.

This isn't a story of UK food quality declining. It's a story of friction making smaller export runs uneconomical. For manufacturers who built part of their business model around EU distribution, this represents a fundamental loss of revenue channel.

There is a brighter note: global food export volumes have risen 5.8% since the start of 2025, driven by growth in non-EU markets which have risen 6.2% year on year in value terms. The growth is there; it's just not where it used to be.

The Insolvency Signal

Perhaps the most concerning indicator: the growth in UK food manufacturing insolvency rates since 2019 has been nearly triple that of the wider manufacturing industry. Industry confidence reflects this. The FDF's State of Industry reports showed manufacturer confidence dropping to minus 60% in Q3 2025, with only a partial recovery to minus 31% in Q4. 90% of manufacturers surveyed expressed pessimism or nervousness about government policy direction.

What Does This All Mean?

The macro data translates into something very immediate for the people working in manufacturing today.

Ingredient cost volatility has become incredibly difficult to manage, with large swings between seasons. Procurement teams are often working in a permanent state of hedging against movements they can't predict.

This creates margin compression that's genuinely problematic. You can't always pass costs directly to customers, especially in competitive categories where switching to a competitor is easy. The data confirms this: manufacturing costs have outstripped retail price rises since 2020, meaning manufacturers are absorbing the difference.

And NPD investment, the innovation that should be driving the sector forward, has become hesitant. When margin pressure is this intense, investing in product development feels like a luxury, even though it's actually the route back to growth. R&D budgets are being stretched thinner, timelines to market are being questioned, and reformulation projects are getting deprioritised in favour of keeping core lines running profitably.

Where Do We Go From Here?

Supply chain diversification is becoming less of a nice-to-have and more of a business necessity. Diversification isn't just about finding alternative suppliers; it's about building relationships with partners who understand your business and can help you navigate volatility together rather than simply passing it through. When an ingredient partner understands your margin profile helps you solve reformulation challenges, you're not just buying ingredients; you're buying expertise and partnership.

The Questions We Should Be Asking

As we think about what comes next, there are some genuinely open questions that should shape industry conversation:

How do we support manufacturers caught between rising costs and rigid customer pricing?
With EU exports down almost a quarter, and non-EU markets growing, how can manufacturers rethink their geographic strategy?
What role should ingredient partners play in helping manufacturers navigate cost volatility?
How do we collectively rebuild confidence when short-term margin pressure is so acute?

What's your experience? Are the pressures we've outlined matching what you're seeing, and more importantly, what's working for your business as you adapt?

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