Brokers serving clients in the UK food and beverage industry need to get to grips with a fast-changing risk profile, according to global broker Lockton.
The industry is on a knife-edge as ‘shrinkflation’ intensifies amid growing retailer price pressure, a new report released by the firm this week found.
More than three-quarters of food and beverage manufacturers in the country said that they have come under pressure from retailers to cut costs. As a result, many are shrinking their products while maintaining price, and product quality looks to be at risk too.
But the impact of ‘shrinkflation’ goes beyond consumers getting less for their money, and could have wider insurance and risk implications which brokers should be aware of, according to Lockton.
“Those working with clients in the food and beverage industry need to be aware that pressure to cut costs could be leading them to take actions that increase their risk profile,” Ian Harrison, head of product recall at the broker, told Insurance Business.
“For example, UK manufacturers who use cheaper, poorer quality ingredients in response to retailer price pressure could be more vulnerable to the risk of product recall,” he said following the release of the report.
“It should be made clear that reducing standards of business to cut production costs is a false economy and increases manufacturers’ level of risk. However, if these actions are unavoidable, manufacturers must have an adequate level of liability and recall/contamination cover as a product recall can be an expensive issue to solve,” Harrison went on to say.
As well as compromising the quality of food and beverage products, efforts to improve health and safety are also at stake, the report concluded.
More than a third of manufacturers claimed that safety standards are being eroded as a direct result of cost-cutting, and a further 32% agree that production facilities are less safe than in the past due to pressure to cut costs. Worryingly, more than half of manufacturers said that they have reduced or would reduce their focus on improving safety standards in order to meet contractual demands from retailers.
The gravity of the consequences of a potential food scandal mean that retailers are feeling the pressure, and are beginning to demand more from manufacturers when it comes to their liability coverage, Harrison said.
“We’re increasingly seeing retailers pass on costs by ensuring food and beverage manufacturers are contractually obliged to have high levels of liability and recall cover to do business with them,” he explained.
“Retailers naturally do not want to bear the brunt of costs if a contaminated or unsafe product reaches their shelves. However, insurers will only cover costs that are justifiable and reasonable, so we’ll always encourage any client to push back on demands for greater liability or recall cover from other parties if they are excessive.”
