Undoubtedly the most pleasing aspect of our dialogue with companies and clients in the Food & Drink (F&D) sector has been the transformation that has taken place over the last two quarters.

In general, despite the travails of the previous 18 months we finally appear to be moving from the uncertain times of emergency funding to cautiously optimistic plans for future growth. There are three main areas where we are being asked to help provide funding which also highlight the very real challenges the sector is nevertheless still facing as it re-emerges from the pandemic.

Some of these trends are new, others were well entrenched pre-Covid. Here we take a closer look at those three types of funding requests and what they are being driven by:

1) Short-Term Working Capital Requirements

Having survived a global crisis, many F&D clients are now busy raising additional working capital facilities to defend against a ‘perfect storm’ of rapid food price inflation and widespread supply chain and logistics interruptions, not to mention acute staff shortages.

Talk from central banks of ‘transitory’ inflation pressures is of limited comfort when the UN Food and Agriculture World Food Price Index is up by an extraordinary 34% year-on-year, with the upward trend also holding month-on-month and quarter-on-quarter. Causes are numerous and, at least for a time, this input price volatility is being mirrored in many other sectors.  For example, manufacturers saw steel and copper up by 66% within the year, with iron ore alone up by over 80%. Even in the TMT (Technology, Media and Telecom) sector, crippling silicon chip shortages drove prices up with complete unavailability an all too frequent problem.

Encouragingly however, industrial metals are normalising with prices coming off sharply by between 20% and a third from May’s peak. Whether similar normalisation comes through in F&D depends on how long the impacts of various climate and weather-related shocks take to diminish in food markets.

Nevertheless, the trends initially causing food price inflation are persisting and are not limited to the near-term supply chain and pandemic related interruptions. There are also signs that the price rises seen to date are starting to affect future expectations, which typically tends to entrench inflationary pressure for longer.

Of course, for food processors, distributors and retailers, any significant rise in prices from suppliers could be passed on to the consumer where there is already increased appetite for spending post-lockdown. For food producers and farmers, meanwhile, current higher prices could also be an opportunity to direct incremental profits into more efficient and sustainable production technology, although it’s worth noting that the rapid adoption of agricultural technology has been a common trend for many years.

However further working capital will certainly be required to bridge the gaps in the sales cycles created by supply chain and logistics interruptions, particularly internationally. Furthermore, as we know, the pandemic is still having a significant impact on a UK labour market that was already beginning to experience supply issues post-Brexit with employees now being regularly ‘pinged’ and with international travel restrictions still in place.

Thankfully, the supply of working capital for those relatively unaffected by the pandemic is generally healthy. However, for those businesses that have already taken on extra liabilities through the Coronavirus Business Interruption Loan Scheme (CBILS) - which lenders facilitated last year – further working capital for other costs such as looming tax and rent demands may prove tricky and could benefit from a more expert and contextualised approach to securing additional funding facilities.

2) Long-Term Growth Capital

While our latest F&D report suggests plentiful capacity for borrowing across F&D sub-sectors, on the back of lockdown, F&D businesses have accumulated Covid-related liabilities (CBILS, tax, rent), and would benefit from extending the maturities of their borrowing. This presents an opportunity for alternative lenders to extend the timescale of SME lending as traditional lenders remain reticent to lend beyond a three-year term. Unfortunately, however, there still appears to be a general lack of awareness among SMEs of the myriad of viable alternative funding options.

Requirements for growth funding in the sector are also being driven by the adoption of technology such as innovative greenhouse technology in agriculture. In particular, we are also seeing packaging and labelling issues driving capital investment in response to customer demand for better information on ingredient sourcing, sustainability and dietary suitability. The sector also has some rapid catching up to do on clear allergen labelling with the stringent ‘Natasha’s Law’ coming into force in the UK this autumn.

That the lockdowns sped up digital transformation of business models and increased product innovation in response to evolving customer nutrition choices was hugely positive. We certainly expect the demand for growth capital in this area to remain strong.

Notable acquisitions in 2020, such as Mindful Chef by Unilever and Eat Natural by Ferrero, speak as much to the trend in evolving consumer nutrition choices as they do about unwavering overseas buyer demand for quality UK F&D businesses. Only last quarter, Bute Island Foods, with its range of vegan cheese, was snapped up by the Canadian giant Saputo. We see a continuous funding and M&A appetite for innovative UK F&D businesses, regardless of scale or geography.

3) Funding for Capital Expenditure

Admirably for the sector that generates some 30% of global greenhouse emissions, the F&D sector’s strides towards sustainability and the stemming of climate change continues to drive a lot of capital project demand.  For producers, waste-to-energy projects in particular allow for the use of available waste resource previously seen as a disposal cost item to now be converted into affordable sources of energy, heat, or both. The commercial rational for waste to energy projects tends to be sound with the initial capital outlay normally proving the biggest barrier – precisely the type of problem funding can help overcome.

For processors, capital expenditure is being driven by a desire to automate production and product innovation, while for distributors and the rest of the sector digital transformation remains a strong trend that requires investment.

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Click this link to view or download a free copy of The Shaw Report - Food & Drink September 2021.