41% of food and drink manufacturers scaling back investment, as sector confidence remains low

New data suggests that food and drink manufacturers have been compelled to scale back or cancel investments in long-term growth, as they struggle with mounting economic pressures and a raft of new taxes and regulations.

The Food and Drink Federation’s latest State of Industry report reveals that confidence amongst food and drink businesses remains persistently low, at -43% in the first quarter of 2025. A third of businesses (33%), including nearly half (47%) of small and medium sized enterprises (SMEs), said they expect conditions to further deteriorate, as they grapple with volatile global economic conditions and increased costs as a result of new government policies. These include rises to National Minimum Wage and employer National Insurance Contributions, as well as a £1.4bn Extended Producer Responsibility (EPR) packaging tax.

Production costs increased by an average of 4.5% over a year to March 2025, with over a fifth (22%) of food and drink manufacturers having seen costs increase by 10% or more. With energy, ingredients and labour prices continuing to climb, manufacturers expect their costs to rise by a further 4.8% in the next 12 months. Meanwhile, with consumer confidence in decline, falling to -23 in April 2025, retail sales decreased 6% in the last five years.

In this high-pressure environment, the business case and desire for investment has never been higher. Food and drink manufacturers are already looking to take advantage of the productivity opportunity presented by digital technology, with over half (54%) saying that investment in automation will be a top priority in the coming year. This will play a key role in helping the industry overcome the high cost of labour and its persistently high unfilled vacancy rate, which is double that of UK manufacturing as a whole. Meanwhile 13% say they will focus on R&D projects, such as developing healthier products.

However, whilst the data show that while companies are wanting to invest, recent government decisions and geopolitical uncertainty are having an impact. 41% of businesses are planning to cancel or scale back their planned investment for the year ahead in areas that would drive growth.

To enable businesses to act on their intentions to invest in long-term productivity drivers, FDF is calling for the Government to send a strong signal that that it will support the future health of the industry. It can achieve this by creating a joined-up and cross-government approach that prioritises sector growth and skills in the upcoming Food and Industrial Strategies.

The Government’s recent announcements of trade agreements with the US and India are steps in the right direction to strengthen competitiveness in our sector, and there remain additional actions government can take to support national food security, protect consumers from rising prices and enable manufacturers to invest in new healthy products. This includes continuing to push for a reduction in the current 10% tariffs imposed by the US whilst also strengthening our relationship with our strongest trading partner, the EU.

Balwinder Dhoot, Director of Industry Growth and Sustainability, FDF said: 

“Not only does the food and drink manufacturing sector contribute £37bn and half a million jobs to communities across the UK, but it’s also fundamental to the nation’s food security. So, it’s concerning that businesses are having to scale back investments that would help drive long-term growth and productivity as they ride out a wave of cost rises.

“The Government must reflect the value that food and drink manufacturing has to our country by ensuring growth for our industry is a top priority in its upcoming Industrial and Food Strategies. We urge government to give businesses the support they need to make investments that will support the resilience of the food industry.”

FDF’s Ingredients for Growth sets out 40 drivers for growth, including six key asks:

1. Prioritise a more strategic approach to EU trade relations to revive falling EU exports, which are down more than a third since Brexit. The EU Border Target Operating Model and Single Trade Window are essential to this and to ensuring profitable trade with our largest trading partner.
2. Ringfence the £1.4bn annual cost of Extended Producer Responsibility (EPR) to ensure these fees are only used on improving the UK’s recycling infrastructure and not to fund local authority funding gaps. This money is for yoghurt pots, not potholes.
3. Secure a fair share of the UK’s R&D spend for food and drink manufacturing, to support industry investment in new product development and healthier options for consumers and the transition to net zero. As industry’s ability to invest suffers, it’s critical that food and drink receives its fair share of government funding and support to unlock innovation in the UK’s largest manufacturing sector
4. Co-create a workforce and skills plan with Skills England to support our industry as we transition to a higher-skilled, higher-wage workforce. This would be an investment in communities in every place and region of the UK. With vacancy rates more than double those seen in wider manufacturing, investing in skills is vital to plug this gap and to create new opportunities for both young people and those mid-career, in a key part of the everyday economy.
5. Simplify the R&D tax credits system to help more businesses that are struggling to invest in technology to improve productivity and to innovate in healthier ingredients and products. There’s significant scope to accelerate the adoption of technology across our sector’s 12,500 businesses, with a £14bn growth opportunity for the taking.
6. Simplify regulations and remove unnecessary red tape to help business, in particular our 12,000 SMEs, focus on growth and productivity.