How rising ingredient costs are impacting indies

The rising costs of raw ingredients, caused by climate-change-induced shortages, are heaping pressure on small businesses’ margins. 

“When it comes to commodities and commodity buying, generally speaking, one of the biggest challenges an SME will face is we simply do not have the same buying power as the large-scale producers and manufacturers, as we don’t buy the same volume of ingredients,” explained Scott Dixon, managing director of The Flava People.

“Oil, spices, bread for breadcrumbs – all core ingredients we use in a large number of our products at The Flava People – have all seen incredible cost fluctuations over recent years and months, which we have had to manage internally. In fact, sugar has increased by 15-20%, tomato by 10-15%, salt hit its peak at 10%, and some of our packaging by up to 30%!”

Many ingredients’ prices are being driven up by extreme weather caused by climate change and geopolitical challenges, said Helen Murphy, co-founder and CEO of Opply, an ingredients ordering platform for SMEs. “Climate change is driving up costs for ingredients like cacao and coconut, while geopolitical conflicts are affecting items such as dates. And strict EU regulations are making superfoods like ashwagandha and matcha much more pricey. Even everyday items like teabags are experiencing price pressures due to extreme weather in key growing regions,” she said.

Cocoa up 150% while coffee spikes to 15-year highs

Those who enjoy a chocolate biscuit with a cup of coffee could soon be in for a shock as the prices of cocoa and coffee have also spiked.

In recent months, cocoa prices have soared to historic highs, driven by a global cocoa shortage, after poor harvests were caused by droughts in West Africa, which produces around 80% of the world’s cocoa output. In fact, the global cocoa supply was expected to fall by nearly 11% over the 2023/2024 season, according to the International Cocoa Organisation.

“The recent surge in ingredient prices is a real challenge for food and beverage brands, especially SMEs,” Helen said. “We’ve seen the price of shortage-stricken cocoa skyrocket on our ordering platform, forcing brands to constantly reformulate or switch to alternatives. For example, costly locust bean gum and potato starch are now being replaced with more affordable cassia gum and tapioca dextrin.”

According to Cocoa Runners the ‘spot price’ of commodity cocoa has almost doubled in recent months to around $7,000 per tonne. A boom for hedge funds, which could make a fortune, but to the detriment of shoppers and retailers who will bare the brunt of cost rises. “Consumers are going to face higher prices for mass market confectionery,” Cocoa Runners said, which the chocolate specialist believes will lead to more producers introducing CBRs (cocoa butter replacements) such as palm and vegetable oils into their products in a bid to cut costs, leading potentially to fewer quality bars being available to specialist retail.

Cocoa Runners has made several predictions around how the chocolate market will be impacted by soaring prices. White chocolate (especially craft varieties) they believe may become a rarity, with cocoa butter now costing three times more than it did a few years ago. And cash flow could become a huge problem for small makers, who are being forced to pay new price rises up front for commodity cocoa, before they can direct those increases onto customers.

Katie Cross, founder of Cake or Death, an Exeter-based bakery, said the sharp rise of chocolate’s price is having a “huge impact” on her profit margins, and she’s already feeling the pinch. The bakery found the price of chocolate rose by an alarming 150% since May 2023. Chocolate makes up a third of Cake or Death’s ingredient costs, with its brownies, which contain a high percentage of chocolate for quality flavour and texture, being a core product.

This autumn when supplies run low again, Katie said she will have to fork out an extra £9,000 per tonne, and this may not even be the final price hike of the year.

While the increases in chocolate prices as well as cost pressures across the business are making it “increasingly difficult” for the business to make a profit, Katie, who founded Cake or Death in 2019, said she will not change the recipe to compromise the quality of the product. However, the bakery is being forced to make savings in other areas.

Meanwhile, the price of wholesale coffee has reached record highs. According to Gareth Redmond-King, head of international programme at the Energy and Climate Intelligence Unit (ECIU), the UK imported a billion pounds worth of coffee in 2023 – and the cost of a morning caffeine boost is set to rise because of extreme weather in countries like Vietnam and Brazil.

“97% of all coffee globally is grown in countries vulnerable to climate impacts. More than half the coffee beans we imported last year came from Brazil and Vietnam,” Gareth said. “And coffee, like many UK food imports, cannot simply be grown here instead. If we don’t speed the path to net-zero emissions by mid-century, and support farmers and food producers at home and abroad to adapt to a warming world, then prices will only continue to rise, as supplies are squeezed further.” 

Italian coffee company Lavazza warned that coffee prices are set to continue rising until mid-2025. Vice chairman Guiseppe Lavazza said prices hit a record 15-year high because of supply chain disruption, geopolitical issues and poor harvests. In early July, the price of coffee reached more than £3,300 a tonne. The price rises have caused1kg bags of beans to soar by 15% in a year, but Guiseppe said the rises could reach 20% to 25% over the year as prices continue their upward trend.

How can small businesses cope with rising prices?

“While our costs are going up, we don’t have the same leverage with retailers to be able to change our RRPs as those companies which dominate the world of grocery,” Scott from The Flava People explained. “Of course, every retailer is unique, and those who prioritise working with SMEs and are more sympathetic to the challenges we face do have more collaboration and flexibility built into their models.”

However, there is also the end customer to consider. “We know consumers are also facing cost pressures and rising grocery costs; as a business we want to ensure we empower people to create meals which taste good and are good, which means we must remain at a price which delivers a high-quality product at a value-for-money price. Simply put, SMEs trying to balance the bottom line are undeniably facing a complex situation,” he said.

One thing The Flava People has done to combat this is to change how they find and award contracts to suppliers. “For the last 50 years, we have had a very traditional, family-business led approach to finding our suppliers, building personal relationships over decades. However, in order to try to mitigate price rises and keep costs as low as possible for our end-consumers, we have started to use the tender-model to source suppliers, much like our larger competitors do,” Scott said.

This has resulted in a few unexpected benefits. “For example, some of our suppliers have been able to give further price reductions by supplying more than one product. We have been able to have a more forwarding-thinking pricing architecture internally by agreeing costs in advance and we now track commodity prices more closely.”

But the change doesn’t mean the collaborative spirit of running a small business is gone. “In order to try and increase our buying power, we have also connected with fellow local business owners to create a collective volume on those ingredients which are used across the board,” Scott said. “We are trying to maintain and still foster personal relationships, and maintain our family values, but there is no doubt that the way we manage the buying processes had to change simply to stay in business.”

Are reformulations worth it?

Another option for a food maker experiencing high costs is to reformulate their product. But reformulating a product isn’t a case of simply swapping out one ingredient for another. “Once you stray into the territory of having to re-test, change packaging and update nutritional information, in some cases it can become more of a cost burden than saving,” Scott said. 

Smaller businesses may find that working with an external consultant and changing packaging is just too costly. Even at The Flava People where there’s an in-house technical team to advise on reformulations, the business tries other things to mitigate costs before turning to reformulation.

And like Katie, Scott said the quality of the product must remain paramount. “For us no cost-cutting exercise can come at the expense of quality,” he said. “Quality doesn’t just mean the ingredients themselves, although this is a crucial element (people might not believe me when I say not every salt or garlic power is made the same!). It means investing in your team and bringing on new people with the right expertise to help drive the business forward. Maintaining quality will always come first – even when as an FMCG brand we have tight margins to operate within.”

But Opply’s Helen said despite global pressures causing a “very real struggle” for small businesses, there are still opportunities to be won, as she has witnessed food inflation “driving creativity and ingenuity to adapt”.