Navigating the “impossible trade-offs” of the UK food and drink sector

Recent forecasts for the UK food and drink sector have painted a stark picture of an industry under siege. As reported by Food & Drink Technology, leaders are increasingly being backed into a corner, forced to make “impossible” trade-offs as soaring operational costs collide with the need for long-term resilience.

To dig deeper into the mechanics of this crisis, we spoke with James Watson, UK partner at Argon & Co, whose research reveals that 54% of industry leaders admit rising costs are actively weakening their ability to build a resilient future.

The casualty of the short-term

The most immediate impact of the current cost climate is the suspension of projects designed to protect businesses in the years to come. Watson notes that the projects most likely to be paused are those that build resilience over time but fail to provide immediate “bottom-line” relief.

“This is particularly visible in technology programmes such as advanced planning tools, artificial intelligence, and predictive analytics,” Watson explains. This is often a result of previous digital failures where implementations lacked clear use cases or relied on weak data. Beyond technology, supplier diversification — a key buffer against global shocks — is being sidelined because it adds short-term cost and complexity.

“The risk,” Watson warns, “is that these decisions protect margins in the short term but compound vulnerability over time”. True resilience, he argues, requires consistent investment in data, planning, and supplier optionality — elements that are currently being sacrificed.

Rethinking labour

With the sector reeling from significant increases in the National Living Wage and Employer National Insurance contributions, the traditional impulse is to cut staff. However, Watson argues that simply cutting headcount is neither sustainable nor effective in such a labour-intensive industry.

Instead, Watson suggests a fundamental rethinking of the labour model. After years of economic and operational disruption, the “personal resilience” of the workforce has frayed, and traditional financial incentives no longer carry the same weight.

“The manufacturers making progress are focusing on engagement and capability alongside cost,” says Watson. This involves investing in skills, improving job design, and reconnecting employees to a sense of purpose. In Watson’s view, a motivated workforce is not a luxury, but the very foundation of productivity and long-term resilience.

The “lean” trap

Cash flow is king in 2026, leading 53% of UK leaders to optimise their inventory. But is there a danger that “lean” strategies are making supply chains too fragile to handle geopolitical or climate-related shocks?

Watson admits that if applied crudely, lean strategies can absolutely weaken service levels. “Reducing stock without improving decision-making simply shifts risk rather than removing it,” he notes. The distinction lies in the foundation of the strategy. Inventory optimisation only succeeds when supported by robust forecasting and clear segmentation.

“It is a common misconception that lean inventory is less inventory,” Watson clarifies. “Rather, it is about holding the right stock, in the right place, for the right reasons”.

Digital fatigue and the “what-if” solution

While 38% of leaders cite rapid technological change as their biggest challenge, Watson believes the hurdle isn’t the price tag of AI, but a lack of “digital fluency”. A sense of cynicism has built up from past programmes that promised high impact but failed to deliver.

The pressure is most acute on the factory floor and in traceability, where data remains fragmented and mistrust is common. To avoid “digital fatigue,” Watson advises leaders to fix their operational foundations before layering on intelligence.

One technology that Watson champions is the digital twin. For a sector dealing with perishable goods and complex cold chains, a digital twin provides the ultimate stress test.

“The most valuable ‘what-if’ a digital twin can answer is how much disruption the network can absorb before service, waste, or cost break down,” Watson says. It allows leaders to simulate the loss of a site or a sudden supplier disruption to see where constraints emerge. In a volatile world, the value of a digital twin is not just steady-state optimisation, but “clarity under stress”.

Breaking down silos

Building resilience requires a cultural shift, specifically breaking the silos between the Finance department (focused on cost) and the Operations department (focused on resilience).

Watson advises that businesses stop treating these as competing objectives. Success comes when investment decisions are pulled to the highest level, setting shared priorities that both functions are accountable for. By broadening how value is measured—looking beyond narrow ROI metrics — the conversation shifts from “cost vs. resilience” to “long-term competitiveness”.

Recipe flexibility and the local sourcing debate

With 40% of leaders reporting that raw material costs threaten their supply chains, many are looking at nearshoring or reshoring. However, Watson notes that sourcing shifts are rarely a silver bullet.

Increasingly, manufacturers are turning to recipe flexibility and reformulation. Companies like Pladis have already adjusted recipes to manage availability and cost spikes caused by climate and geopolitical disruption. The most resilient organisations are those that remove “non-value-adding constraints” from their product specifications in advance, allowing them to pivot faster when markets move.

The birth of the “adaptive” factory

As we look toward the end of the decade, the winners will be those who build “adaptive operating models”. Watson identifies three hallmark characteristics of an adaptive food factory:

1. Speed of product development: the ability to pivot faster when market conditions shift.
2. Intelligent automation: investing in flexible automation rather than rigid, single-purpose assets that become future constraints.
3. Lean organisational structure: fewer layers and clearer accountability to allow for quicker course correction.

The sustainability stalemate

Perhaps the most concerning finding in the Argon & Co research is the decline of sustainability as a priority. In 2025, sustainability was the third-highest strategic priority; in 2026, it has plummeted to seventh.

“One of the biggest risks we see is sustainability being deprioritised under short-term cost pressure,” Watson warns. However, he notes that cost-cutting and sustainability are often linked. Waste reduction in manufacturing — addressing rework or avoidable loss — delivers immediate cost savings while supporting net-zero targets.

The key, according to Watson, is governance. If cost-cutting decisions are tested against their impact on emissions and waste, firms can reduce costs today without creating massive regulatory and reputational risks for 2030.

Conclusion

The “impossible trade-offs” of 2026 are real, but they are not unavoidable. By focusing on digital fluency, workforce engagement, and adaptive structures, UK food and drink leaders can bridge the gap between surviving the current quarter and thriving in the next decade.