Supply chain disruption threatens brands in 2023 – AIM

Global supply chain disruption is having a significant impact on firms with many shedding staff in an effort to stay afloat.

Persistent upheaval in the global economy has had a significant impact on the European consumer goods industry, a survey of manufacturers in the food/beverages, homecare and personal care consumer goods sectors by AIM (Association des Industries de Marque), the European Brands Association, had found.

The results have prompted a warning from the organisation that the year ahead will see businesses squeezed by higher costs and a tightening of consumer spending leaving many companies on the brink of closure.

Supply chain disruptions and cost inflation are among the main factors putting pressure on manufacturers, particularly small and medium-sized enterprises (SMEs). The survey of 664 manufacturers found that cost inflation has been driven by higher energy costs, as more than half of the surveyed companies (56%) said that their energy costs rose by at least 30%. Over a quarter of the companies (27%) said that they had to absorb energy cost increases of 60%. However, other costs have also multiplied, with over one third (36%) of companies experiencing over 30% cost inflation in packaging. Transport and logistics have soared by over 30% for some in the industry.

“Whilst the focus of cost inflation is on energy, the survey shows it is beyond energy, with cost inflation on raw materials, packaging, transport and logistics also a challenge”, said Michelle Gibbons, director general of AIM. “It shows that 96% of consumer goods manufacturers have had to absorb unplanned costs in 2022, which has inevitably had an impact on production, as well as planned investments for this year.”

AIM added the succession of crises over the past two years, with the global pandemic, the war in Ukraine, and the current energy and cost inflation crises, has led to increased challenges in ensuring that the necessary raw materials and ingredients reach production sites to be transformed and ultimately delivered to European consumers. No less than three quarters of the companies surveyed (75%) have experienced challenges to source commodities and raw materials.

Consumer goods manufacturers have been particularly hit by supply chain disruptions and cost inflation because they are at the centre of the value chain, working upstream with suppliers to source raw materials, components, and packaging, as well as downstream with retailers and distributors to ultimately ensure supply for consumers. Confronted with increased and unexpected costs, manufacturers have been negotiating with retail customers to responsibly reflect part of these increased costs into their pricing. Only 4% of companies surveyed have been able to pass on the full cost of inflation, leaving 96% absorbing unplanned costs in 2022.

“Distributors’ outright refusal to help absorb some of the additional costs has led to difficulties, particularly because retail markets are concentrated, and manufacturers often rely on just a few main retailers,” the study stated. “In this context, some manufacturers who fail to agree on passing on cost inflation are reducing production to avoid insolvency.” The survey also revealed that some international retailers are increasing consumer prices beyond what is negotiated at a wholesale level with manufacturers.

“All of us are concerned for consumers’ purchasing power, but we are also worried about the impact of cost inflation on operations within the supply chain itself. The reality of supply chain disruption has forced an increasing number of manufacturers to make tough economic decisions, including lowering production, reducing investments, and cutting workforce, with some doing so to avoid insolvency”, said Gibbons. “As Europe’s leaders meet to discuss the EU’s competitiveness, we look for strong leadership to ensure that supply chains are fair and effective for all, and that all are working towards constructive solutions in Europe’s recovery.”

AIM added the supply chain disruptions and increased costs have significantly changed the landscape for producing consumer goods, as companies have had to reduce investment and employment. In 2022, 32% of the companies surveyed have reduced their planned investment, while 23% of them have reduced their workforce. The lowering of resources will have a lasting impact on the sector: around three quarters of manufacturers (76%) plan further reductions of production if they cannot find some way of sharing the cost burden.