What does the 2021 Budget do for the Food and Drink Sector?

Richard Welbourne, our lead broker for the Food and Drink sector shares his reflective views on how the recent budget and recently announced business rates relief support for Wholesalers is set to shape credit risk in the months ahead.

In an extraordinary year, the food and drink sector has continued to serve the nation. The key question is the extent to which the Chancellor repaid the hard work of the UK’s largest manufacturing sector and its 4 million workers.

The next question is how a trade credit insurance policy brokered by Avenue Insurance Partners can continue to provide certainty as the world begins to reopen and support your business in ways the Chancellor cannot.

The budget provides relief to significant elements of the food and drink supply chain, namely as a result of the VAT reduction extension, business rates holiday, furlough scheme and restart grants. However, this will not be the silver bullet the industry requires to recover; consumer confidence will also need to increase to drive long-term profitability and this should be aided by the freeze of Alcohol Duty announced by the Chancellor.

In the meantime, these various measures do little in the short term to help downstream business in the wholesale and processing sectors who rely heavily on orders from the hospitality sectors.

Support for wholesalers and food processors who have had to remain open to service those customers who have continued to trade throughout COVID has been lacking, meaning many have suffered materially reduced revenue and levels of profitability over the last 12 months.  The recent post budget announcement of £1.5bn of Government support in the form of business rate relief is at long last a lifeline for this part of the supply chain.

While the stretching of payment terms is to be expected in these situations, if you are concerned about the ability of a customer to pay then comfort can be taken from a trade credit insurance policy. With the heightened risk profile of businesses across the sector, Avenue can ensure you get the most from your insurance policy and assist you in reviewing those businesses you trade with uninsured when the credit insurers do not cover them sufficiently for your needs.

In the medium term, any attempts to restrict the promotional sale of high sugar or fat products is likely to reduce sales both in the multiples but poses a bigger problem for the wholesalers for whom the use of promotional deals are even more critical for driving sales.

Notwithstanding the positive steps taken to protect businesses, the proposed increases in corporation tax will be a body blow for businesses as they try to bolster their finances post-pandemic. Given over 90% of Food and Drink businesses are SME’s, the governments freeze of the VAT registration threshold will mean that more businesses will be required to register for VAT as inflation continues to push up prices. This will add a further time and cost burden to small businesses recovering from the impact of COVID.

The heavily reported ‘super deduction’ will help businesses who have delayed capital investment due to Brexit and/or COVID. This will be of particular comfort to processors who require substantial levels of capital expenditure to maintain their production lines.

Industry commentators have almost universally welcomed the Chancellors ‘rabbit from the hat’ but as ever, it will not benefit all businesses and it remains to be seen whether this will encourage long-term investment or just speed up already planned investment- something the OBR raised as a potential concern.