Understanding demographics vital for success in the food sector

• Middle-income households are key driver of the UK economy
• Consumer preferences are an important consideration
• Regulation has not been as damaging as expected
• Food sector’s defensive attributes continue to attract investors
• Sustainability practices can add economic value

Despite the major economic shocks the UK has experienced in recent years, the food and drinks sector remains resilient and continues to offer opportunities.

“We conducted a survey of the top 150 UK food and drinks businesses. What is remarkable is that over a 30-year period, the top 150 has on average continually delivered the same profitability levels. That’s a testament to the strength and resilience of the industry,” according to Anthony Gent, a partner at OC&C Strategy Consultants.

Anthony highlighted how middle-income households are one of the key drivers of the UK economy. “We are seeing some real wealth change here, so it’s an opportunity to convince people to spend more on food,” he said.

Sandra Horsfield, an economist at Investec provided further insight. “The proportion of spending on food has in the past reduced as consumers became richer and chose to spend more of their extra income on other things. But slower GDP growth means this decline has stopped and the ‘wallet share’ for food has stabilised or even increased over the past decade, which is quite a big change.”

Pressures on consumer budgets have not fallen evenly, and it is important for food producers to understand their customers’ income segment. “While at the height of the cost-of-living crisis, inflation pressure was most pronounced for lower-income households, partly because their spending share on food was higher, the tables have turned somewhat as inflation has declined: the impact of high interest rates via mortgages has meant that inflation as experienced by higher-income families has recently been more elevated than for lower-income households,” she added.

However, consumer preferences are also an important consideration, according to Colm O’Sullivan, a partner at private equity firm PAI Partners. Consumers continue to look for small luxuries and there is a willingness in some segments to pay higher prices for quality.

“There is an interesting trend toward premiumisation, with people happy to pay more for a really good product. But consumers aren’t stupid, they won’t pay a premium price for inferior products.”

Hurdles into the UK market

Interestingly, UK regulations, notably those governing the levels of saturated fats, sugar and salt in products, did not have as much of a negative effect as was anticipated by some. “It has not been any kind of death knell,” Anthony noted. “In fact, businesses on both sides of the line have grown strongly – [in] ‘better for you’ products as well as indulgence products. It shows that you can navigate the challenges with a bit of smart thinking.”

One of the consequences of economic pressures, such as inflation and trade tariffs, is that UK supermarkets are focusing on simplifying their supply chains, said Oliver Cardigan, managing director, consumer and leisure at Investec, which will be a potential challenge for some food processing operators – and a potential driver of consolidation through M&A.

However, he pointed out that many food processing companies are “ahead of the curve” when it comes to another potential hurdle, increased labour costs. “Food companies that are adjusting and investing more in automation and food technology should be able to gain market share and maintain their margins where others will suffer,” Cardigan explained.

For Anthony, future growth is a question of taking a ‘glass half-full’ attitude on factors such as lower consumer spending with fragmented demand, health regulations, increasing competition and underinvestment in manufacturing.

“We don’t necessarily see these as negative: they can all be opportunities. Consumers are thirsting for something different, interesting and exciting – the ‘moments of joy’ including entertaining at home rather than going out,” he said.

Attracting private equity

Now is an attractive time to invest in the food processing sector, believes Anthony. “The food industry is a very attractive place to deploy capital where there has been previous underinvestment,” he said.

One of the key advantages of the food sector for investors is its defensive nature. “People have got to eat,” said Colm. “Food processing companies are usually cash-generative and profitable.”

Food processing businesses need to maximise their value to investors by consistently growing volume and sales. “Bigger companies aren’t always good at this, so they are more likely snap up smaller businesses who can show rapid growth,” Colm added.

“It’s about smaller businesses taking an entrepreneurial approach,” he continued. “The bigger players will come to you if you are good enough, so they can grow through M&A activity.”

Anthony countered the sometimes-negative perception of private equity (PE) houses being solely interested in stripping out costs and selling businesses on for a profit. “A longer-term approach by PE firms and their investors requires a sustainable business model. Yes, take out sensible costs – the fat, but not the muscle and bone. Then reinvest in the top line for growth and to increase equity value,” he said.

Colm concurred that interest from PE firms is high in food processing companies. “There is a lot of capital out there looking for a home to go to work. Businesses should look for a PE partner that offers more than just money, particularly knowing the best contacts in your sector who can help you to grow.”

Sustainability focus

PE investment decisions inevitably include an assessment of business sustainability credentials. “Companies can create lasting economic value through sustainable practices, for example in securing a price premium for their products. If you can secure access to alternative, more sustainable, sources then you can lock in a competitive advantage,” said Anthony.

But Colm also urged businesses to look beyond the E in ESG (environmental, social and governance) factors. “Businesses can do a lot on S and G. For example, you can train and employ veterans or run apprenticeships. E is the ‘glamour’ part but also probably the hardest part to make a difference,” he said.

Benefiting from Brexit?

No discussion about business with the UK would be complete without considering the impact of Brexit. “Supply from mainland Europe to the UK has dropped due to factors like the hassle of extra paperwork, but Ireland was better prepared for Brexit,” said Colm.

However, he noted: “Brexit still isn’t yet fully implemented between continental Europe and the UK. Perhaps it has been pushed back because everyone knows Brexit won’t be good for business.”

However, Sandra highlighted one potential positive side effect for the food industry of unrelated policy moves by Donald Trump’s US administration. “The US is taking an unexpectedly confrontational stance with Europe that is bringing the UK and EU much closer together. The defence industry is a starting point, but we might see trade discussions in other areas happen more quickly now between the EU and UK.” 

These views were shared at Investec’s Food for thought: Key recipes for success in the UK food sector conference, held in Dublin in March 2025, with an audience of leaders from Irish food processing companies.