Food and beverage margin pressure: rising costs and how businesses can respond

Understanding cost pressures and how businesses can respond

The food and beverage sector has long operated on tight margins, but for many businesses those margins are under increasing pressure. Insolvencies in the food manufacturing sector are now four times what they were in 2019,¹ highlighting the growing strain on the industry. According to UK industry body the Food & Drink Federation (FDF), 2026 is likely to be defined “by weak consumer demand and sustained structural cost pressures.”² It came to that conclusion even before the war in Iran closed the strait of Hormuz.

FDF figures show that total production costs in the sector rose by 4.4% in the year to December 2025, squeezing profits further.³ Inflation, global warming, trade tariffs and supply chains that have been made more complex by geopolitical tensions are all helping to push up input costs. Currency fluctuations complicate the situation further for importers and exporters. An energy crisis arising from conflict in the Middle East could trigger a crisis in the sector.

Against all this, small and medium sized food and beverage businesses can start to feel helpless. That needn’t be the case. In this article, we’ll discuss the challenges facing the sector and highlight some of the ways SMEs can mitigate their impacts.

Rising input costs in the food and beverage sector

Input costs have been rising for food and beverage producers for some time.

• Energy costs. Producing food is an energy intensive operation. When energy costs rise, the cost of producing food rises too. Price hikes are then passed on to food importers and manufacturers in higher ingredient prices. Manufacturers face a double whammy because cooking, cooling and machinery costs also increase.

• Climate change. Global warming makes harvests less predictable. Shifts in rainfall patterns, rising temperatures and more frequent extreme weather events are affecting crop yields across the food and beverage sector. Global olive production fell by 26% between 2022-23 and 2023-24,⁴ illustrating how these changes can increase costs as yields decline.

• Geopolitical tension. President Trump’s trade tariffs have directly impacted food and drink products. For example, the Scotch Whisky Association said that exports to the US fell by 15% after Trump imposed tariffs on the UK.⁵ Conflict in the Middle East and Russia’s invasion of Ukraine have also made food industry supply chains more complex. European food producers are heavily dependent on imported fertilizer and feed, making them vulnerable to trade disruption.

• Labour shortages. From dairy farms to food manufacturers, the food and beverage sector is facing a shortage of workers. A new analysis by industry body the Institute of Grocery Distribution (IGD) concludes that, “the sector is now facing a labour and skills crunch that will not correct itself, even with economic recovery.”⁶ An ageing population, anti-immigration policies and inadequate education and training is leading to a shortage of skilled workers in the sector. When labour is in short supply, employment costs rise.

• Exchange rate fluctuations. The volatile nature of currency markets has made financial planning increasingly difficult for UK food and drink importers and exporters. Over the past 12 months, the pound has weakened against the dollar, increasing the cost of imports, while at the same time it has strengthened against the euro, affecting the competitiveness of exports to the EU. Recent market uncertainty, including tensions in the Middle East, has caused further swings,⁷ with the pound sliding against both major currencies at different points.⁸ Exchange rate volatility looks set to continue, meaning food businesses risk paying more for imports or earning less on foreign sales.

Rising energy costs and their impact on food production

Energy prices remain one of the most significant cost pressures across the food and beverage supply chain. Volatility in oil and gas markets continues to drive up expenses at multiple stages of production, from farming and processing to packaging and distribution.

Energy is a core input throughout the supply chain. It powers machinery, heats greenhouses, and plays a critical role in the production of fertilisers and pesticides. It is also embedded in transport, storage, and packaging, making it a universal cost driver across nearly all food and drink products.

Recent market movements highlight the scale of this volatility. In just one week in March, wholesale gas prices increased by 93%,⁹ underlining how quickly input costs can shift.

These rising costs are not absorbed in isolation. They filter through the entire supply chain, ultimately impacting consumer prices. At the same time, higher household energy and fuel costs reduce disposable income, putting additional pressure on demand for non-essential food and drink products.

Alongside these cost pressures, currency movements can further amplify volatility, adding another layer of risk for businesses operating across borders.

The impact on food and drink SMEs

The pressure on small and medium sized food and beverage businesses is already high. Prices of key ingredients are soaring, including sugar (up by 56% between 2020 and 2025) and whole milk (46%).¹⁰ Between 2023 and 2025, the price of wholesale cocoa tripled.¹¹

Food inflation is predicted to rise about 8% in June, with the supply chain further hit by increases in the costs of fertilisers, production and transport.¹² 

Navigating cost pressures: balancing prices and profits

What can SMEs in the sector do about a situation that seems largely out of their control? With margins shrinking, one obvious mitigation is to put up prices. Businesses in the food and drink supply chain may be able to absorb some of the impact of rising input costs, but they can’t absorb them all.

As we’ve seen, to some extent that is already happening. But pricing decisions are notoriously difficult. What competitors are doing and what customers and consumers will accept have to be taken into account, along with maintaining profitability. The nature of the product itself – necessity, luxury or somewhere in-between – is also a key consideration. 

Ultimately, shops and supermarkets will decide the final price consumers pay. But that, again, is fraught with uncertainty. Nobody in the supply chain wins if consumers are priced out of a purchase or decide to try a cheaper alternative. With that in mind, the food and drink supply chain will continue to absorb as much of the extra cost as it can.

How food and beverage businesses can protect margins

Pricing has a part to play, but food and drink SMEs need to use every tool in their armoury to keep costs down and sales up.

While it depends to some extent on your place in the supply chain, for most food and beverage businesses costs can be controlled through strict inventory management and smart demand forecasting to avoid over-ordering. Standardising recipes and careful storage can reduce waste.

Automation in everything from production lines and stock control to compliance and reporting can cut staffing costs and create efficiency. According to a white paper by the US-based Association for Packaging and Processing Technologies, AI-driven automation technologies can increase conveyor belt throughput by 33%, improve workforce productivity by 18% and prevent hundreds of hours of machinery downtime.¹³

It may also be possible to renegotiate terms with suppliers. The promise of longer-term bulk purchasing deals can lead to discounts. Your supplier management strategy should also include sourcing suppliers from regions that aren’t likely to be affected by trade wars or cut off by conflicts. If you export foodstuffs, the same is true for customers.

Additionally, a structured hedging strategy can enable businesses to manage and mitigate their currency risk more effectively and help cushion margins amidst volatility. Tools such as forward contracts, can be tailored to a business’s specific needs and requirements, and allow you to  lock in an exchange rate for future transactions. 

By reducing exposure to short-term currency fluctuations, a tailored hedging strategy, can provide more certainty for international cash flows, helps stabilise margins, improve the accuracy of pricing decisions and support more reliable financial planning. In an environment where both costs and demand are unpredictable, this added certainty can be a critical component of a broader currency risk management strategy.

Building resilience against rising costs in food businesses

These are tough times for the food and beverage supply chain. Input costs are rising across the board and another jump in the cost of living is likely to see consumers tightening their belts.

The only viable response for SMEs in the sector is to further streamline their operations. Increase efficiency, cut waste and make sure you squeeze full value from every pound you spend. That means renegotiating with suppliers if possible and making sustainable pricing decisions. It could also mean instigating an exchange rate hedging strategy to guard against currency market volatility. Taken together, measures like these can help businesses maintain margins despite growing pressure.

For more insights into how FX is impacting margins, cashflow and growth in the food & drink sector, download Lumon’s FX Factor report.

Sources:

1. Food & Drink Federation – State of the Industry Report Q4 2025
2. Food & Drink Federation – State of the Industry Report Q4 2025
3. Food & Drink Federation – State of the Industry Report Q4 2025
4. Springer Nature – Sustainability Science
5. Financial Times – Scotch Whisky Report
6. Institute of Grocery Distribution – Workforce Crisis
7. Trading Economics – Currency Fluctuations as of 27/03/26
8. Trading Economics – Currency Fluctuations as of 27/03/26
9. City AM – UK Gas Prices
10. Food & Drink Federation – Press Release (September 2025)
11. The Manufacturer – Cocoa Price Inflation.
12. Grocery Gazette – UK Food Inflation
13. The Association for Packaging and Processing Technologies – Automation Whitepaper

Sources last checked on 02/04/2026