More than four in ten UK food and drink manufacturers have reduced long-term investment plans as they grapple with sustained cost pressures, according to new industry data. The trend has raised concerns that the sector’s capacity to innovate and expand could be undermined at a time when resilience is most needed.

A survey by the Food and Drink Federation (FDF) found that 41% of member companies have delayed or cancelled capital projects this year, citing escalating production costs and tax burdens. Among the most frequently mentioned factors is the impact of the Extended Producer Responsibility (EPR) scheme—a packaging levy that many in the industry say operates like an additional VAT.

EPR Costs Bite
The EPR, which shifts the full cost of collecting, sorting, and recycling packaging waste onto producers, has been billed by government as a step towards a circular economy. Under the scheme, businesses are required to pay fees based on the type and amount of packaging they place on the market.

For food and drink manufacturers—whose products often require extensive packaging to maintain freshness and safety—the financial impact has been particularly acute. “The EPR is effectively a tax on packaging that’s unavoidable for most of us,” said Caroline Hughes, operations director at a Midlands-based ready-meals producer. “We’ve invested in recyclable materials, but the fees still add up to hundreds of thousands of pounds a year. That’s money we can’t put into new machinery or product development.”

Margins Under Pressure
The EPR comes on top of already challenging cost conditions. Energy prices, while down from last year’s peaks, remain well above pre-pandemic norms. Labour shortages have driven wages higher, and global commodity markets have kept the prices of key ingredients volatile.

According to the FDF, input costs for the sector have risen by more than 30% over the past three years, eroding margins and limiting the scope for strategic investment. Many firms have responded by postponing plant upgrades, halting automation projects, or shelving expansion into new product categories.

“This is not about a lack of ambition—our members want to invest,” said FDF chief executive Karen Betts. “But when your operating costs are unpredictable and regulatory burdens keep growing, you have to focus on keeping the lights on first.”

Risk to Competitiveness
Industry analysts warn that prolonged underinvestment could weaken the UK’s food and drink manufacturing base in the long term. Without sustained spending on efficiency improvements, digital technology, and sustainable practices, the sector may struggle to keep pace with competitors in Europe and beyond.

“There’s a danger of entering a cycle where cost pressures lead to lower investment, which in turn leaves businesses less competitive and more vulnerable to future shocks,” said Dr. James Kettle, an economist specialising in manufacturing supply chains. “Once investment pipelines dry up, it’s very hard to restart them.”

Calls for Policy Clarity
While manufacturers broadly support environmental measures like EPR in principle, trade bodies have urged the government to provide clearer guidance on costs and implementation timelines. There is also growing pressure to delay or phase in certain elements of the scheme to give firms time to adapt.

Some executives argue that without changes, the combination of EPR costs and other regulatory requirements could drive production offshore. “It’s ironic—we’re trying to reduce our environmental footprint, but the current approach risks making it cheaper to import from countries with weaker environmental standards,” said one senior figure at a major snacks manufacturer.

A Delicate Balance
With inflation still running above the Bank of England’s target and consumer budgets tight, passing costs directly to shoppers is seen as risky. That leaves many manufacturers caught between the need to maintain affordability and the imperative to cover rising operational expenses.

For now, the sector appears to be battening down the hatches—cutting discretionary spending and scaling back ambitions. But industry leaders warn that without a shift in policy or a reprieve from cost pressures, the UK could see its food and drink manufacturing capacity erode over the coming decade.

“Investment is the lifeblood of innovation and growth,” Betts said. “If we let it dry up, we’ll feel the consequences for years to come.”