SMEs bear brunt of “Golden Quarter” gloom as costs rise

Industry confidence remains in negative territory despite post-Budget relief, leaving small and mid-sized producers struggling to absorb a 4.4% surge in production costs.

The UK food and drink manufacturing sector is facing a stark “confidence gap” as it enters 2026. According to the Food and Drink Federation’s (FDF) latest State of Industry report, business sentiment during the crucial Q4 trading period sat at a downcast -31%.

While this marks an improvement from the -60% trough seen in Q3 — following the lifting of uncertainty surrounding the Autumn Budget — the “Golden Quarter” failed to live up to its name. For smaller players, the situation is even more precarious: 50% of SMEs reported that business conditions actually worsened in the final months of 2025.

The cost of doing business

Manufacturers are currently caught between a rock and a hard place. Production costs — driven by energy, labour, and the new Extended Producer Responsibility (EPR) packaging tax — rose by an average of 4.4% across the board in 2025.

Smaller businesses have been hit the hardest, weathering an average cost increase of 5.3%. This financial pressure is directly stifling the ability of these firms to invest in much-needed productivity gains.

Ambition versus reality

Despite the gloomy sentiment, the report highlights a resilient “appetite for growth” among the UK’s 11,000+ food and drink SMEs:

• 41% plan to increase investment in machinery and automation in 2026.
• 40% are targeting sales growth in foreign markets.

However, realising these ambitions is hampered by fragile consumer demand. With 39% of shoppers cutting back on essential spending due to price hikes, manufacturers have little room to pass on rising costs without losing volume.

A call for targeted support

FDF chief executive Karen Betts is urging the government to move beyond rhetoric and provide concrete backing for the UK’s largest manufacturing sector.

“Government shouldn’t underestimate the potential of SMEs to drive jobs and growth,” Betts stated. “We’ve set out a blueprint of practical measures to unlock £50bn worth of growth, but are yet to see any of these actioned.”

The FDF is calling for a three-pronged support strategy:

1. Fair funding: ensuring the sector receives its share of R&D and energy-intensive industry support.
2. Export assistance: a £2.6 million investment to replicate successful Scottish and Welsh SME export schemes at a UK-wide level.
3. The ‘Inflation Gateway’: a commitment to vet new policies — such as proposed changes to the Nutrient Profile Model (NPM) — to ensure they don’t inadvertently drive up shelf prices or stifle reformulation.

Summary of key findings