Economic Influences on Confectionery Businesses (Edexcel A Level Business): Revision Note

Inflation and confectionery businesses

• Inflation is the situation when prices rise over time, reducing the value of money

• Inflation affects confectionery and biscuit firms in two key ways

  • It raises household living costs, which changes demand

  • It increases business costs, which squeezes profit margins

Higher inflation

• UK CPI inflation was 3.2% in the year to November 2025, which helps explain why many households remain price conscious

• During the inflation peak, ONS data shows food inflation was extremely high - more than 19%% in March 2023 - which affected consumers' spending choices on snacks and treats

Food inflation in the UK

Input cost inflation

• Input cost inflation affects the amount confectionery and biscuit businesses pay for ingredients, packaging, energy and transport

Commodity prices

• Confectionery is especially exposed to global commodity prices (cocoa, sugar, dairy)

• UK chocolate prices rose 15.4% in the year to August 2025, with cocoa prices having roughly doubled over two years and cocoa around $7,800 per tonne at the time

• The average price per kg of chocolate rose 27% over two years, while consumption fell 2%, showing firms cannot always pass on all cost rises without losing sales

Fuel prices

• Rising fuel prices have also increased transport and distribution costs

  • Higher diesel and fuel costs raise the cost of moving raw materials to factories and finished products to retailers

• These higher logistics costs further squeeze profit margins, especially for small firms that lack efficient, large-scale distribution systems

How high inflation changes consumer behaviour

• When inflation is high and prices rise quickly, consumers do not usually stop buying confectionery and biscuits altogether

  • Instead, they change how they buy, as these products are seen as small, affordable treats rather than essential items

• Consumers respond by:

  • buying smaller pack sizes to keep the upfront price low

  • switching brands or waiting for promotions

  • reducing how often they buy treats rather than stopping completely

• This change in behaviour encourages businesses to adjust their strategies

  • Selling smaller packs and affordable treat formats at lower price points

  • Making greater use of price-marked packs and short-term promotions to reassure value-conscious shoppers

  • Expanding premium product lines for higher-income consumers who are less affected by rising living costs

Exchange rates and confectionery businesses

• The exchange rate is the value of one currency in terms of another

  • Exchange rates matter because many key inputs (especially cocoa) are traded globally and priced in foreign currencies, often US dollars

  • When sterling depreciates, imported ingredients and packaging become more expensivefor UK-based confectionery and business manufacturers

Sterling depreciation increases costs

• After the 2016 Brexit referendum, sterling experienced a sharp depreciation and increased volatility, which raised the cost base for import-reliant sectors

• For confectionery firms importing cocoa, a weaker pound can increase costs even if global cocoa prices stay the same

Sterling appreciation can ease pressure

• If sterling strengthens, import costs can fall, giving firms more room to avoid price rises or rebuild margins

How businesses respond

• Larger multinationals are more likely to use financial hedging and global sourcing to manage currency risk

• Smaller firms may have fewer options, so they often respond by:

  • changing pack sizes

  • adjusting the product mix towards higher profit margin lines

  • making selective price rises (often easier in gifting/premium than in value market segments)

Interest rates and confectionery businesses

• Interest rates are the percentage charged on money borrowed or earned on savings, set by banks and determined by the base rate

  • Interest rates influence confectionery and biscuit businesses mainly through consumer spending and business finance costs

• The Base Rate was increased sharply to tackle inflation, peaking at 5.25% (August 2023) before falling over 2024–2025 to 3.75% (December 2025)

Impact on demand

• As interest rates rose sharply in 2022–2023, many UK households faced higher mortgage repayments and borrowing costs

• This reduced disposable income and led consumers to become more price-conscious when buying everyday items, including biscuits and confectionery

  • Shoppers increasingly traded down to supermarket own-label biscuits, which are significantly cheaper than branded alternatives

  • Consumers relied more on promotions and price-marked packs for branded products

• Supermarkets such as Tesco and Sainsbury’s expanded and promoted their own-label biscuit ranges during this period

• Branded producers such as pladis (McVitie’s) faced stronger price competition and pressure on sales volumes

Impact on business strategy

• When the Bank of England raised interest rates sharply in 2022–2023, borrowing became significantly more expensive

• For small confectionery and biscuit businesses operating on tight profit margins, this meant that planned investment was often delayed or scaled back

• As a result, some small producers have:

  • postponed investment in new baking machinery that would increase capacity or efficiency

  • delayed new product development, as recipe testing and small production runs require upfront funding

  • reduced spending on marketing and brand awareness, instead relying more on word-of-mouth and social media

Taxation, government spending and confectionery businesses

• Taxation is system where a government collects money from people and businesses

  • Examples include income tax, corporation tax and VAT

• Government spending is money used to fund public services

  • Examples include healthcare, education, and transport or supporting the economy

VAT and pricing

• VAT has a direct impact on prices and profitability in the confectionery and biscuit market

• Most basic foods are zero-rated, but confectionery is standard-rated at 20%, while biscuits are generally zero-rated unless they are chocolate-covered

• This distinction matters because VAT can:

  • increase final retail prices

  • reduce demand for VAT-rated products

  • squeeze profit margins if firms absorb some of the tax

Income tax and consumer demand

• Income tax affects the industry indirectly by influencing disposable income

• Since 2021, income tax thresholds have been frozen, causing fiscal drag and reducing real household incomes during periods of high inflation

  • Consumers have become more price-sensitive

  • Demand has shifted towards own-label products and promotions, reducing demand for branded products

  • Spending on premium confectionery has become more polarised

Corporation tax and investment

• Corporation tax affects profits and reinvestment

• The main UK rate rose from 19% to 25% in April 2023, while the Small Profits Rate of 19% applies to firms earning under £50,000

  • Higher corporation tax reduces retained profit for investment, which limits spending on machinery, product development and marketing

• Large multinationals are better able to absorb these costs, while small confectionery and biscuit businesses face greater financial pressure, which can slow growth

Government spending and support schemes

• Business energy support

  • During the 2023 energy price crisis, the government introduced support schemes such as the Energy Bills Discount Scheme, which helped firms manage rising energy costs

    • This was particularly important for energy intensive confectionery and biscuit manufacturers because production involves baking, cooling, refrigeration, wrapping and storage

• Public spending on health and education

  • Increased funding for public health campaigns can reduce long-term demand for sugary snacks by promoting healthier diets

  • School food standards and public-sector catering rules can limit where confectionery and biscuits are sold

• Infrastructure and transport spending

  • Investment in roads, ports and logistics infrastructure can lower distribution costs and improve supply reliability

  • This benefits firms with national supply chains, particularly large manufacturers distributing to supermarkets

• Business support and innovation funding

  • Government grants and schemes for skills, apprenticeships and productivity can support investment in new machinery or training

  • Smaller firms benefit most where access is straightforward, though many lack awareness or capacity to apply

The business cycle and confectionery businesses

• The business cycle is the regular pattern of growth and decline in an economy over time, including periods of boom, slowdown, recession and recovery

Resilience, but not immunity

• Confectionery and biscuit markets tend to be more resilient than many other sectors over the business cycle because these products are often seen as small, affordable treats

  • During periods of economic slowdown or recession, consumers are more likely to cut back on big-ticket items such as holidays, cars or home improvements

  • They continue, however, to buy low-cost indulgences

• This resilience does not mean immunity

  • As the economy moves from growth into slowdown or contraction, consumer behaviour changes

  • Instead of maintaining previous buying habits, consumers:

    • reduce how often they buy treats

    • switch to cheaper brands or own-label products

    • rely more heavily on promotions and price-marked packs

• Premium demand also becomes more polarised during downturns

  • Some higher-income consumers continue to trade up to premium or ethical products

  • Others trade down to value options, increasing pressure on mid-priced brands

Impact on small businesses

• Small confectionery and biscuit firms typically feel economic pressures more sharply because they have less scale and less financial cushion