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FDF_Sustainable growth report
 

FDF_Sustainable growth report

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Informe de Food Drink Federation "El desarrollo sostenible de la industria de alimentación y bebidas en Reino Unido".

Informe de Food Drink Federation "El desarrollo sostenible de la industria de alimentación y bebidas en Reino Unido".

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    FDF_Sustainable growth report FDF_Sustainable growth report Presentation Transcript

    • Sustainable Growth in the Foodand Drink Manufacturing Industry Grant Thornton report commissioned by the Food and Drink Federation
    • Contents Contents Section Page 1. Introduction and executive summary 5 2. Methodology and survey population 15 3. UK FDM sector overview 19 4. Growth drivers and exporting 29 5. Competitive advantages and areas for improvement 43 6. Growth barriers and risks 65 7. The role of Government in optimising growth 85Lushani Kodituwakku 8. Feedback from international federations 103Director, Head of Strategy & Commercial AdvisoryT +44 (0) 207 865 2428E lushani.kodituwakku@uk.gt.com Bibliography 113Ioana NobelManager, Strategy & Commercial AdvisoryT +44 (0) 207 865 2142E ioana.nobel@uk.gt.comVangelis ApostolidisExecutive, Strategy & Commercial AdvisoryT +44 (0) 207 865 2535E vangelis.apostolidis@uk.gt.com Page 3
    • Glossary Introduction and executive summary Glossary Section 1 ABIA Associação Brasileira das wFIAB Federación Española de Indústrias da Alimentação (Brazilian Industrias de la Alimentación y Association of Agro-food Industry) Bebidas (Spanish Federation of Food & Beverage Industry) ANIA Association Nationale des Industries Introduction & Alimentaires (French National Food & Beverages Food, soft drinks and alcoholic drinks Association of Agro-Food Industry) Food, Beverages & Food, soft drinks, alcoholic drinks and CAGR Compound annual growth rate Tobacco tobacco products Capex Corporate Capital expenditure Above £50m in turnover GVA H&W Gross value added Health & wellness executive summary FAO Food and Agricultural Organisation IBD Institute for Management Development of the United Nations (Swiss Business School) FDF Food and Drink Federation NPD New product development FCPC Food and Consumer ONS Office for National Statistics Products of Canada PBT Profit before tax FDII Food and Drink Industry Ireland SME Small and medium-sized businesses; FDM Food and soft drinks manufacturing below £50m turnover WEF World Economic ForumPage 4 Page 5
    • Introduction and executive summary1.1 FDF Message from President Jim Moseley Food and drink manufacturing in the UK is a So we decided to ask Grant Thornton to help us in this task by conducting Great British success story. By contrast with an independent research project into what FDF members really think are the many of the UK’s traditional industries, we threats and opportunities they face – and who needs to do what about them. have shown resilience and resolve to grow and adapt: increasing our exports in each of The research findings constitute a powerful case for our industry to be central the last six years, reducing our environmental to the UK’s economic recovery whilst continuing to make a real and unique footprint, providing job opportunities over difference to a more sustainable future for society and to individual health and a range of skills and levels and developing wellbeing. With the right entrepreneurial approach on the part of business, healthier products, while continuing to and the right operating framework from Government, working together we deliver value and choice to our customers. believe we can fulfil our vision to achieve a 20% increase in sustainable output by 2020 – provided that we work in genuine partnership with the shared This has not been easy. Businesses have strategic objective of ensuring safe, nutritious and affordable food for all. dug deep to reduce costs and become more efficient, as well as to cope with a range A number of excellent initiatives are already in place, from us, from of external factors from new regulation to Government and as joint projects. But more needs to be done – this report justifies our belief that we should be ambitious in our aspirations for what extreme volatility in commodity prices. The the food industry can achieve. That is our 20/20 vision for the future.way ahead is just as demanding. We know we are going to have to produce more,from less and with less impact in order to meet the twin challenges of food securityand climate change. And we know that simply improving our efficiency will notautomatically guarantee our future competitiveness – even though it is a vitalpre-condition. It is also clear we need innovation and investment – and a better Jim Moseleyunderstanding of the limits and barriers to our growth potential in a global context. FDF President Page 7
    • Introduction andexecutive summary Introduction and executive summary 1.2 Introduction 1.3 Executive summary 1.2.1 Project objectives – Section 4: (Growth drivers and exporting) presents results from our Sector overview and contribution to the UK economy • However, the segment that is expected to suffer the most is the mid-range The Food and Drink Federation (FDF) commissioned this report to investigate the primary and desktop research on growth drivers for the UK FDM both products category as consumers combine better value at lower prices with The food and soft drinks manufacturing industry (FDM) is the largest manufacturing following key issues: within the UK market and abroad through exports. The section also innovative, premium priced products sector in the UK and contributes substantially to the UK economy. The latest analyses certain geographies where export opportunities may lie for the – How can the UK food and drink manufacturing sector generate available figures show that in 2009 the FDM sector contributed to the UK economy • In terms of brand vs. private label products, the views are split, with corporates UK. These findings are meant to inform the issue of how the UK FDM value and be seen as a contributor to economic recovery? through turnover (£72.7 billion), gross value added (£19.7 billion), exports (£10.8 believing that private label is more likely to drive growth, while SMEs expect can continue to grow in order to contribute to the economic recovery billion), employment levels (377,000 average)1, employment salaries and tax branded products to drive growth. Desktop research (Mintel) indicates that – What are the main risks for the UK food and drink contributions (£10.1 billion) generated. Moreover, as a non-cyclical sector, the – Section 5: (Competitive advantages and areas for improvement) During during the recession, branded food products outperformed private label. manufacturers in a globalised world? FDM has shown particular resilience in the face of major recent challenges such our survey we asked the businesses to rate the UK FDM’s competitive Therefore, it is reasonable to suggest that this trend may continue despite the – What are the competitive advantages that the sector has? advantages and to rate other countries’ advantages and capabilities. This as volatility of raw material prices and low consumer confidence during the increasingly trusted or premium image that private label brands such as Tesco section presents our findings supported by an analysis from secondary economic downturn. Moreover, the exchange rate has favoured exports which Finest or Sainsbury’s Taste the Difference may be enjoying with consumers – What capabilities does the food and drink sector need to grew by 40% in nominal terms during the 2007-2010 period (from £7.7 billion to research on most of the competitive advantages or disadvantages build to effectively compete with other countries? £10.8 billion). In contrast, other manufacturing sectors have been severely affected • The ageing population (both in the UK and worldwide), as well as the health covered by the survey (e.g. skills, labour costs, productivity, NPD, etc) by the economic downturn, reducing their turnover by 15% between 2007-2009 agendas increasingly promoted in the Western world, are expected to impact – What support is needed from the Government to generate growth? – Section 6: (Risks and barriers to growth) presents the current and future (from £441 billion to £376 billion) and employment salaries and tax contribution by the demand for Health & Wellness (H&W) products and, therefore, be one of the 1.2.2 Project structure risks of the UK FDM industry as rated by our companies, namely access £12 billion (reaching £66 billion) over the same period. All these figures indicate main categories to drive the industry’s growth The report has been structured in such a way as to clearly address the to raw materials, education and training, innovation, taxation, and the that the FDM sector is an important contributor to the UK economic recovery. key issues originally agreed with FDF. • Both in the UK and globally, the forecasted population growth will result in a regulatory environment. The section also considers other aspects that have However, during the recession, profit margins have been squeezed, especially for larger consumer base, which should drive the demand within the food and • The report is organised in the following seven sections: a significant impact on the industry such as the bargaining power of food SMEs. Therefore, food and drink manufacturers surveyed/interviewed during this soft drinks market. The UK is amongst the European countries with the fastest manufacturers across the supply chain and their relationship with retailers project are requesting a positive regulatory environment to overcome challenges – Section 1: (Introduction and executive summary) provides an domestically and improve their competitiveness internationally now and in the future. population growth, forecast to reach 71.3 million in 2030 (15% growth from 62.3 introduction to the report, highlighting the five key objectives – Section 7: (The Role of Government in optimising growth) the final million in 2010). France is forecast to grow at 11% reaching 73.5 million in 2030. Growth drivers originally agreed with FDF and an executive summary with the section of our study deals with Government measures that are needed This contrasts with the 1% population decline in Germany and the stagnation key findings from the primary and secondary research across the FDM supply chain. This includes current actions undertaken • From the Grant Thornton surveys and interviews, companies were prompted to in Poland (at 39.7 million people in 2030 vs. 39.5 million in 2010). However, by the Government and quotes additional measures needed based on identify key growth drivers for UK FDM with reference to the types of products in the UK, the shape and pace of economic recovery may impact consumer – Section 2: (Methodology) presents the methodology we followed that will help drive growth during the next 5-10 years. Companies believe that the responses received from our survey and follow-up interviews expenditure which in turn may affect consumer purchasing patterns and the in order to build the report. It depicts the different types of primary “value” products are more likely to drive the growth of the UK food and drink degree of real growth of the food and drink industry. Therefore, the positive research that we undertook with leaders of the UK FDM industry and – Section 8: (Feedback from international federations) provides a high- market than premium products, as the disposable income of UK consumers is effect from the forecast population growth figures showing a 2.5 million increase five foreign food federations. Moreover, the section provides details level analysis of the competitive advantages, risks and the role of the increasingly squeezed and consequently consumers will continue to look for between 2010 and 2015 may be moderated due to the latest negative consumer of the survey population that answered our online questionnaire Government in each comparison market. This analysis is based on better value products and business confidence indicators as well as the Bank of England’s 1% GDP interviews with FDM federations in Brazil, Canada, France, Ireland and Spain – Section 3: (Sector overview) provides a perspective of the UK FDM. 1 According to FDF this does not account for seasonal fluctuations, and therefore the employment level can peak to growth forecast for 2012 400,000 at some points in the year It includes the sector’s historic performance, its business structure, M&A activity over the last five years, and export performance Page 8 Page 9
    • Introduction andexecutive summary Introduction and executive summary Export opportunities industry, according to the executives interviewed, are efficient supply chains, Areas for improvement • The interviews with FDM executives also revealed that access to finance and low waste and high levels of regulatory compliance retailer consolidation pose growth barriers for the sector. Businesses stated that • Although UK FDM businesses continue to regard Europe as an important • The businesses surveyed rated the UK FDM’s competitiveness low in terms of access to finance is currently an issue in particular for SMEs, as banks have trading partner, they also recognise the increasing opportunities presented by • These characteristics were considered to contribute towards the industry’s labour cost. An international comparison proves that not only are UK labour tightened lending criteria and are more risk-averse, affecting ability to invest in developing nations. Globalisation, fast economic growth and rising income competitiveness, allowing it to maintain margins and present itself as a reliable costs above other countries’, but, unlike most countries analysed, the growth in order to drive future growth. This view is supported by data from an EU survey levels in the emerging markets are expected to drive a shift in their populations’ partner when conducting business abroad labour costs outpaced productivity growth (between 2003-2007) (with 25,000 SMEs across 20 countries and across industries) which indicates diet, specifically an increase in the consumption of proteins and convergence • The analysis conducted based on desktop research supports the FDM • Businesses also stated that they operate in a highly regulated environment that in the UK, the success rate of bank loan applications has decreased from towards Western diets executives’ views. According to Mintel’s NPD Database, the UK food and drink and Government does not adequately support them in areas such as taxation, 91% in 2007 to 65% in 2010. Only Ireland and Spain had a success rate of bank • However, businesses will need to strategise effectively whilst marketing their industry has the highest number of new product variant launches outside the advice provision and cutting ‘red tape’. Therefore, they ranked the UK FDM’s loans lower than in the UK, whilst in France and Germany, 84% and 75% of products to these markets to ensure they address local consumer needs, US. Between 2005-2011 (up to October), UK manufacturers launched 49,995 competitiveness low in areas such as the ability to operate in a positive SMEs respectively were able to access loan financing in 2010 purchasing power and preferences product variants compared to 47,677 in Germany, 41,005 in France, 36,652 in regulatory environment, indicating that this is an area where the sector may • Retailer consolidation has skewed the balance of power in the industry’s supply Brazil, 32,019 in Japan, 24,209 in Spain and 13,868 in Canada have a competitive disadvantage • Despite growing its food, beverage and tobacco exports by 5.4% year-on- chain and, to an extent, has acted as a growth barrier for the sector, despite year between 2000-2010, the UK has lost market share as world exports grew • The businesses surveyed credit the UK FDM with equally developed R&D, Risks and growth barriers offering manufacturers increased access to consumers and driving innovation. by 10% year-on-year. Over the same period (2000-2010), most comparison and technology capabilities when compared to Western counterparts. This • The businesses surveyed perceive labour cost/legislation and the tax system as More specifically, the difficulties in passing on raw material price increases markets grew faster than the UK (Canada at 7.7%, France at 6.5%, Spain is consistent with the R&D investment data available from Organisation for the biggest risks the industry has to deal with at present, while access to raw and the need to participate financially in retailers’ promotion campaigns have at 8.9%), whilst some countries have increased their market share by Economic Cooperation and Development (OECD) which indicates that among materials is expected to be the major risk in the future resulted in lower margins for FDM businesses outperforming the world average export growth (e.g. Poland at 21%, Brazil comparison markets, the UK food, beverage and tobacco companies invest the • The UK has improved its ranking in international competitiveness indices and • Another barrier that the industry faces is access to skills. The industry’s at 16.9%, Germany at 10.7%). This indicates that despite the opportunities highest percentage of revenue in R&D (0.48% of turnover). However, the UK is seen as an attractive destination for business investment overall. However, outdated image has led to a small number of students pursuing food degrees presented by export markets, UK FDM businesses are likely to face strong FDM is lagging behind Japan and Switzerland both of which when expressed as it is facing increasing competition from a range of developed and developing (3,360 higher education students enrolled in food and drink degrees compared competition from other countries who are also focusing on exports as a way to a percentage of turnover invest almost double in R&D countries. This is echoed by the businesses surveyed which point out that the to the total student population of 2.5 million). Although the economic downturn grow their industry • The FDM executives interviewed stated that productivity improvement is a UK may not have a regulatory environment and tax system that encourage and higher unemployment rate have increased the availability of personnel, the Competitive advantages constant priority for their businesses, although they believe that the UK FDM businesses to invest and thus, puts British manufacturers at a competitive industry still struggles to find suitable candidates for engineering, science and industry has many legacy assets and is characterised by overcapacity. Although disadvantage food technician positions. In particular, companies face issues in recruiting food • The UK FDM industry needs to exploit its competitive advantages, minimise its weaknesses and overcome a range of barriers in order to remain competitive utilisation rates were not tested, international productivity comparisons indicate • In this context, food and drink manufacturers emphasised that corporation tax scientists, food nutritionists as well as technologists and engineers with the in the world FDM market. Some of these issues remain the responsibility of that the UK food and beverages industry has consistently improved productivity is much more attractive in other countries such as Ireland, Poland, Slovakia or ability to handle complex bespoke automated systems. These views expressed businesses, but in many cases they will require the Government to provide a when measured as gross value added per employee. UK’s FDM productivity has Romania, while the highest personal tax rate of 50% in the UK acts as a barrier by FDM businesses during the interviews are consistent with data from FDM’s positive regulatory environment which optimises their growth been steadily growing at an annual rate of 4.7% during the 2003-2008 period. to recruiting skilled personnel from abroad sector skills council Improve and other agencies showing that there is a If compared in Sterling terms, UK ranks above Germany and Japan, both of shortage of qualified food scientists and technologists • The food and soft drink manufacturers that participated in this study regard • Although at present UK FDM businesses have access to raw materials, they are which have substantial manufacturing sectors and are traditionally considered product quality, branding and new product development (NPD) as the industry’s affected by volatility in commodity prices and believe that the UK should have a • According to the FDM businesses surveyed/interviewed, potential employees to invest heavily in technology as a means of improving their productivity main competitive advantages. Other areas of distinction for the UK FDM national food policy to address food security do not find a career in the food industry attractive. They view the food industry Page 10 Page 11
    • Introduction andexecutive summary Introduction and executive summary less prestigious and innovative compared to sectors such as automotive, • Tax system Government bodies could be better at providing SMEs with more – Therefore, FDM businesses have expressed their desire for support engineering, or pharmaceutical effective guidance and advice on the technical, administration and from the Government to widen the definition of R&D activities to – Food and drink manufacturers identified the tax system as the main area logistics processes associated with exporting to specific countries include improvements in products, technology, packaging, not just • These arguments combined with the low numbers of apprenticeships and on- in which the Government can provide support. Despite Government blue sky research which is rare in food and drink manufacturing the-job training programmes lead to many positions being filled by people with plans to gradually reduce the main corporate tax rate from 26% to – During interviews, FDM executives mentioned that other countries are insufficient qualifications and skills 23%, businesses believe the UK tax system is not competitive enough better at supporting their manufacturers to participate in international – In addition, they believe that Her Majesty’s Revenue and trade fairs. In contrast, they perceive that the UK Government is Customs (HMRC) staff would benefit from specialist training to • However, the companies interviewed stated that the food and soft drinks and faces strong competition from both developed and emerging not providing sufficient marketing support. As a result, there is a understand the type of innovation taking place in the food and industry is a more stable employer compared to other industries and has a markets. Currently the UK’s corporation tax rate is on par with the perceived lack of enthusiasm in the UK stands and the UK is under- drink industry and, therefore handle claims more effectively range of roles that need to be better advertised so that potential employees, average of OECD countries, but countries such as Ireland, Poland, represented at international food fairs compared to other EU countries especially young people, understand the wide range of long-term career options Slovakia and Romania have much lower corporate tax rates • Trade barriers and food security such as Germany, Italy or even smaller countries such as Greece available to them in creative, science and engineering areas • Regulations and ‘red tape’ – FDM businesses highlighted the need for the Government to re- • Education and training • In response, the FDF has launched a campaign called “Taste Success engage in discussions with international organisations for the removal – Another area where businesses would welcome Government involvement – Education reform (focused on improving the quality of primary and – A Future in Food” to raise public awareness about the FDM industry’s of trade barriers to help grow exports and reduce the cost of raw is in reducing the burden of EU/Government imposed regulations and secondary education and making courses more relevant for the business contribution to society. The campaign aims to promote the food and soft materials imported. Moreover, they expressed the need for a food the ‘red tape’. SMEs in particular, do not have the resources to deal world) is of major importance to the FDM sector as a means of gaining drink manufacturing sector as a career of choice for new graduates, hoping to policy that clearly addresses long-term issues such as food security engage young people and change the outdated image of the industry. At the with the administration required to comply with regulations. Moreover, improved and appropriate access to skills. Businesses would also like and measures to shield the UK FDM from commodity price volatility same time, FDF hope this may help addressing the forecast demand gap of businesses would like Government to push for a uniform implementation to receive Government support to revitalise apprenticeship schemes 137,000 new recruits needed to replace the workforce that will retire or leave of EU regulations across Europe, as they believe that the UK is an early which they perceive as essential for securing a future workforce with • Balance of power in the supply chain the industry in the next few years adopter of EU Directives compared to some countries where regulations industry-specific skills. In this context, the Government pledge to increase apprenticeships across industries by 250,000 until 2015 and – Businesses would welcome Government support in the are not enforced, which puts the UK FDM at a cost disadvantage • However, it is unlikely the industry’s image will change overnight, and will FDF’s initiative of doubling food and drink manufacturing apprenticeships enforcement of a UK Grocery Supply Code of Practice. They most likely require a combination of actions from FDF, manufacturers and – Businesses view compliance of 160 labour regulations as costly and have in England and Scotland will contribute towards securing some of the believe that in order to ensure fairness and competition, the the Government (particularly around the reform of the education system and emphasised the importance of flexible and streamlined regulations in order pipeline of new recruits necessary to replace the ageing workforce Government should monitor not only the food price paid by the support for apprenticeships) in order to improve perceptions, close the skills to help manufacturers grow and in turn maintain employment levels consumer, but also take into account unfair trading practices gap and attract higher calibre candidates • R&D and innovation • Export incentives The role of Government in optimising growth – Businesses would also like the Government to reform R&D tax – In many cases, FDM businesses and SMEs in particular are not credits and tax breaks in order to offer better access to funding and • During the survey and follow up interviews, businesses mentioned several main aware of the end-to-end actions they need to take in order to export. promote innovation. SMEs find the process of claiming R&D tax areas where the industry requires the Government to provide a positive business They also require administration support to navigate through the credits burdensome and have to bring in external consultants to help environment in order to maintain its performance and encourage sustainable regulations of the countries they are planning to export to. SMEs them submit applications. Moreover, FDM companies may not qualify growth. They are: for R&D tax credits or tax breaks as authorities do not recognise requested a greater level of support for their export efforts. Specifically, the type of innovation specific to food and drink manufacturing Page 12 Page 13
    • Introduction andexecutive summary Methodology and survey population Section 2 Conclusion • In conclusion, the FDM industry can generate sustainable growth and contribute to the UK economic recovery by building on its strengths and minimising its weaknesses. However, the industry will only be able to achieve this if it operates in a supporting regulatory environment which incentivises business investment Methodology & and nurtures British food and drink manufacturers. In many cases, to remain competitive the role of the Government in optimising growth is seen as a necessary requirement by those in the industry survey population Page 14 Page 15
    • Methodology andsurvey population Methodology and survey population 2.1 Methodology 2.2 Survey population 2.1.1 Primary and secondary research approach • Our study is also supported by desktop research and analysis. The breadth of Number of companies surveyed by business turnover and number of 2.2.1 Business size and sub-sector representation our sources (please see the bibliography on Page 110) were complemented employees specific to UK FDM This report has been prepared based on extensive primary research supported by The survey and interview sample represents more than 29% of the UK food & secondary research to build a robust picture of the FDM industry in the UK. The by the UK FDF and the foreign food federations who provided us with further soft drinks manufacturing market in turnover terms and covers all sub-sectors methodology includes: information and market data of the industry By business turnover By number of employees • Online survey – Following consultations with FDF, Grant Thornton developed Primary research completed Over £500m Over 2,000 • The businesses that completed the survey and took part in our interviews £0-5m a questionnaire that was sent out to members of the UK FDM industry via International federation 8 10 9 0-49 represent c.29% of the total FDM industry by turnover value 15 Online survey UK FDM interviews interviews an online survey. The questions asked were directly linked with the topics £250-500m 1,000-1,999 Corporates 35 13 Not applicable 8 £5-10m 6 • In terms of the business size distribution across our survey population, it is presented in the project issues objectives section 6 SMEs 42 12 Not applicable almost equally split amongst micro, small, medium and large enterprises. Our • The survey was addressed primarily to executives and other senior members of 5 (Brazil, Canada, France, analysis covers a wide range of businesses from 10 micro companies with Total 77 25 500-999 Ireland, Spain) FDM (SME’s and Corporates) in the UK. The survey was sent out to £100-250m 10 turnover below £5 million to 9 large corporates that each employ more than 11 £10-25m 2,000 people – FDF members (166 members); 16 2.1.2 Research limitations 50-249 25 • Out of the 35 corporates, 12 did not have FDM facilities abroad and the rest – The Regional Food Group Alliance members; and • Our analysis was constrained by the following desktop research limitations: 250-499 £50-100m 12 were multinationals producing in a number of markets, most of which were 10 £25-50m – Grant Thornton’s FDM contacts - Inconsistent time series in the statistical data collected with 8 based in developed markets. Out of 42 SMEs, only 10 manufactured FDM lack of recent data for some countries or gaps in information Sources: 1. Grant Thornton survey analysis products abroad • The online survey ran from 16th of September 2011 until the 12th of October 2011 and the table opposite sets out the response breakdown (SMEs vs. across a number of countries during certain years • By categorising each FDM sub-sector using the SIC 2007 codes, the Number of companies surveyed by manufacturing sub-sector (SIC 2007) corporates) - Wherever food and soft drinks specific data was not available, it businesses that completed the survey represent the whole FDM spectrum FDM manufacturing sub-sector Number of businesses was substituted for food, beverage and tobacco data. However, (excluding alcoholic beverages) with some businesses operating in more than • Parallel to the survey, Grant Thornton conducted 25 telephone/face-to- Processing and preserving of meat and production of meat products 10 wherever this is the case, it has been clearly indicated Processing and preserving of fish, crustaceans and molluscs 3 one sector. Meat, bakery products and soft drinks are strongly represented face interviews with executives and senior staff of UK FDM businesses. The Processing and preserving of fruit and vegetables 7 interviews were designed to gain in-depth views around some of the topics Manufacture of vegetable and animal oils and fats 5 - The surveys included 25 questions for SMEs and 22 questions Manufacture of dairy products 4 addressed by the survey questionnaire and included some additional questions for corporates covering a wide range of issues (e.g. market Manufacture of grain mill products, starches and starch products 8 Manufacture of bakery and farinaceous products 17 • In addition, we conducted further interviews with five food federations from performance, growth drivers, exports, M&A etc.). Therefore, this Manufacture of other food products 30 report does not attempt to analyse in great detail a specific issue/ Manufacture of prepared animal feeds 2 emerging and developed markets to gain a better understanding of their Manufacture of soft drinks; production of mineral waters and other bottled waters 13 markets’ historic performance and outlook, strengths and weaknesses and the area, instead it considers all of the above issues in the context of Wholesale of other food, including fish, crustaceans and molluscs 3 Other (please specify) 2 role of Government in their countries. These interviews were conducted with the addressing and supporting FDF’s key strategic objectives Note: a. Some of the 77 companies surveyed are active across more than one sub-sector federations of: Brazil (ABIA), Canada (FCPC), France (ANIA), Ireland (FDII) and Sources: 1. Grant Thornton survey analysis Spain (FIAB) Page 16 Page 17
    • Methodology andsurvey population UK FDM sector overview 2.2 Survey population Section 3 Exporting activities by category 2.2.2 Export and R&D profile of businesses surveyed 100% Most of the companies surveyed are active both with exporting and 23% 19% R&D Activities % of companies surveyed 80% • The majority of the companies (61 out of 77) that took part in the survey export 60% No exporting their goods. Only 19% of the SME participants do not export. Overall, out of UK FDM Exporting the companies that do not export, one third were large businesses, one third 40% 77% 81% medium sized and the rest small businesses 20% • In terms of exporting activities, SMEs are focused on the near Western EU sector overview 0% countries. Overall, companies are primarily exporting to the EU and Russia. In Corporates SMEs addition, many companies export to USA, Australia, Middle East and a few to emerging markets • In terms of R&D facilities, the majority of corporates stated they maintain an Sources: 1. Grant Thornton survey analysis R&D facility within the UK whilst four corporates stated they have more than one facility. Approximately half of the SMEs said they have a UK R&D facility. UK R&D facilities by category However, through the interviews, a few SMEs noted that their R&D facilities are 100% not focused so much on research and development of brand new products and 23% packaging formats but are more concentrated on investigating and improving % of companies surveyed 80% 48% existing products 60% No UK facility • Moreover, half of the corporates also have R&D facilities abroad, based in 40% 77% UK facility in place mainly developed countries across Western Europe and North America 52% 20% 0% Corporates SMEs Sources: 1. Grant Thornton survey analysis Page 18 Page 19
    • UK FDMsector overview UK FDM sector overview 3.0 Section summary 3.1 The UK FDM contribution • The UK food and soft drink manufacturing sector is the largest of all UK UK manufacturing sector turnover size by segment 3.1.1 Turnover manufacturing sectors with a 2009 turnover of £72.7bn Other • The UK FDM sector is the largest manufacturing sector in the UK, followed 600,000 • The sector also contributed £19.7bn in gross value added and employed 491,727 by the automotive and chemicals sectors accounting for 9% and 8% of total 500,000 448,517 Fabricated metal products (except manufacturing turnover respectively. The UK FDM sector generated £72.7bn in 377,000 people incurring £10.1bn in labour costs both in salaries and tax machinery and equipment) contributions 400,000 turnover in 2009 218,353 Coke and refined petroleum £m 211,935 • In nominal terms, UK FDM’s exports have been rising in 2007-2010 period with 300,000 • Moreover, the sector is non-cyclical and maintained its stability during the recent 34,266 Machinery and equipment EU accounting for 77% of total exports. However, exports to non-EU regions 200,000 39,320 29,015 economic downturn. Although there has been a shift in consumer demand 36,932 31,192 31,343 towards more value products, the sector has performed better than the wider have been growing twice as fast (34% vs. 66%) 41,858 33,796 Chemicals 100,000 50,553 38,564 manufacturing sector and continued to grow as demonstrated in the tables • Unlike other manufacturing sectors, FDM maintained its performance during the 70,445 72,672 Automotive 0 economic downturn due to its non-cyclical nature (as food is a necessity good) • However, the 2008 spike in food and soft-drinks revenues is due to the changes 2008 2009 Food and soft drinks made in the SIC code classification from the SIC 2003 system to the SIC 2007 • The FDM industry’s margins have been affected by the downturn with small system. More specifically, some companies with food manufacturing activities were and medium-sized businesses registering lower profit margins compared to Notes: a. SIC codes 10 and 11.7 represent the food and soft drinks manufacturing segments b. SIC code 20 represents automotive and SIC code 29 represents chemicals classified elsewhere under the SIC 2003 code and were brought into the food SIC corporates Sources: 1. ONS (2011), Annual Business Survey 2007 code in 2008, creating an artificial increase in revenue in 2008 compared to • By number of businesses, the UK FDM sector appears to be smaller than UK turnover food and soft drinks vs. other manufacturing the years before. According to the Office for National Statistics (ONS) one major international comparison markets. In the UK, out of a total 6,505 companies in category responsible for this were companies in the chemicals sector 2011, 13% were medium sized businesses and larger corporates 600 13% 15% Other • The 2007-2009 FDM performance is in contrast to the 3% and 13% decline • During the last five years, more than 520 M&A deals took place in the UK FDM 500 10% manufacturing experienced by other manufacturing sectors turnover sector. M&A activity reached its peak in 2007 but, since then, activity has 3% 3% 3% 3% 3% 3% Turnover, £bn Food and soft Growth, % 400 1% 3% 5% – over the same period, the sectors with the largest decline stabilized at approximately 80-90 deals per year. Amongst foreign companies (1)% (0)% (1)% 4% drinks turnover 300 (2)% (3)% 3% 430 0% were basic metals (26%) and automotive (24%) that acquired UK FDM businesses, Irish and American companies were the 414 411 423 441 406 393 389 399 376 Food and soft most active 200 (3)% (5)% drinks growth (%) (13)% 100 (10)% Other 55 56 57 59 61 61 60 62 70 73 manufacturing 0 (15)% growth (%) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Notes: a. The increase in turnover in 2008 & 2009 is due to SIC code reclassification (from 2003 to 2007 system), which brought companies previously listed under non-FDM related codes into the FDM sector Sources: 1. ONS (2011), Annual Business Survey Page 20 Page 21
    • UK FDMsector overview UK FDM sector overview 3.1 The UK FDM contribution 3.1 The UK FDM contribution UK gross value added at basic prices 3.1.2 Gross value added and employment – the food and soft drinks sector employed on average 377,000 people in 2009 vs. 484,000 in 2000, i.e. a decline of 22% compared • The food and non-alcoholic drinks sector also contributes 15.2% of the total 180 7% 10% to a 44% decline for other manufacturing sectors, who reduced 5% Other gross value added (GVA) of the manufacturing sector 160 4% 3% 4% 1% 5% manufacturing their workforce from 3.6 million in 2000 to 2.2 million in 2009 140 GVA 5% (1)% 4% 3% • The sector has increased GVA during the economic downturn in contrast 120 2% 0% Food and soft – according to FDF, the employment levels fluctuate during the year, with (1)% with the rest of the manufacturing sector, which experienced a 7% decline Growth, % (1)% drinks GVA GVA, £bn 100 (2)% (3)% (3)% (5)% the sector employing up to 400,000 people during the course of the year 80 133 129 127 124 130 129 134 139 130 110 in 2008 and a further 15% in 2009. FDM’s growth combined with the decline Food and soft 60 (7)% (15)% (10)% drinks growth (%) experienced by other manufacturing sectors have allowed for the sector to • Employment contributions for the industry reflect a similar picture with GVA. 40 increase its contribution to total manufacturing GVA from 12% in 2005 to 15% Despite the fact that FDM employment levels have been reduced by 22% (15)% 20 Other 16 17 17 18 19 18 18 19 19 20 manufacturing in 2009 from 2000 to 2009, total FDM employment costs have risen by 17% reaching 0 (20)% growth (%) £10.1bn in 2009. On the contrary, the rest of the manufacturing sectors 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 • The sector’s value to the economy can also be measured through employment maintained their labour costs almost constant around £78bn until 2007. But, levels. In comparison with other manufacturing sectors, the food and non- during the downturn, other manufacturing sectors were not able to maintain Sources: 1. ONS (2011), Annual Business Survey alcoholic drinks sector comes across as a relatively stable employer as it has their employment contributions, which got reduced by £12bn, reaching £66bn in experienced a lower decline in employment total in 2009 UK employment levels (average during the year) UK employment costs, £bn • Labour costs portray an important picture for the FDM industry because, not only do they show that FDM continues adding value to the economy, but (1)% (0)% 4,500 (1)% 0% Other 100 6% also that it has sustained its National Insurance and tax contributions to the manufacturing 4% 4% Other 4,000 (2)% 90 4% manufacturing (3)% (2)% employment 80 3% 2% 2% Government, supporting the economic recovery at a time when other sectors (4)% costs 3,500 (4)% (3)% (4)% 1% 1% 1% 2% were unable to do so Labour costs, £bn Employment, 000s Food and soft 70 Food and soft 3,000 (3)% (4)% 1% 0% Growth, % 0% -1% Growth, % (5)% (4)% drinks 60 1% 0% 1% drinks costs 2,500 (4)% (5)% -3% 0% (7)% (5)% employment 50 -2% (6)% 2,000 Food and soft 78.9 78.9 77.8 75.5 76.1 75.9 77.4 78.1 71.1 66.1 40 -4% 3,659 3,505 3,313 3,087 2,973 2,821 2,735 2,665 2,403 2,204 Food and soft drinks growth 1,500 (8)% drinks growth (%) 30 -7% -6% 1,000 (8)% 20 -9% (10)% -8% Other 500 (10)% 10 manufacturing Other 8.6 8.7 8.9 9.1 9.2 9.6 9.7 9.7 10.1 10.1 484 464 449 446 436 431 411 409 392 377 0 -10% growth 0 (12)% manufacturing 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 growth (%) Sources: 1. ONS (2011), Annual Business Survey Sources: 1. ONS (2011), Annual Business Survey Page 22 Page 23
    • UK FDMsector overview UK FDM sector overview 3.2 The UK FDM exports 3.3 The UK FDM margins UK exports of food and non-alcoholic drinks – by receiving region (£m) Growth of UK exports of food and non-alcoholic drinks SMEs vs. corporates margin (profit before tax/net turnover) 3.3.1 UK FDM margins 12,000 CAGR Total growth Share of UK Share of UK Other 2007-2010 2007-2010 exports 2007 exports 2010 8.0% 7.6% • The high labour costs combined with raw material price increases and retailer 10,000 Australia & New Zealand 6.7% 6.8% pressure have resulted in a squeeze on margins. However, SMEs have been EU 10% 34% 81% 77% 7.0% 6.2% Companies with turnover 5.9% 5.9% 8,000 Latin America Non-EU 18% 66% 19% 23% 6.0% 5.4% above £50m turnover more severely affected by the economic and supply chain pressures compared ($80m in 2009 terms) £m Africa North America 16% 56% 4% 5% 4.6% 4.5% to corporates PBT margin 6,000 5.0% Middle East Asia 21% 75% 4% 5% 4.0% 3.1% • SMEs enjoyed profit before tax (PBT) margins of 5.4% in 2007, but these 4,000 Middle East 18% 62% 3% 3% Asia Companies with less 3.0% decreased dramatically in 2008 and 2009 (0.6% in 2009) before showing 2,000 North America Africa 28% 111% 2% 4% 1.5% than £50m turnover 2.0% ($80m in 2009 terms) recovery in 2010. This may be due to price increases taking time to be Latin America 16% 54% 1% 1% 0.6% EU 0 1.0% transferred to and be accepted by customers Australia & New Zealand 16% 56% 1% 1% 2007 2008 2009 2010 0% Other 14% 50% 4% 4% • Lower margins create a circle of decline for SMEs, as the lower margins they 2005 2006 2007 2008 2009 2010 Sources: 1. UK Trade Info (2011), Trade Data Sources: 1. UK Trade Info (2011), Trade Data achieve cannot support financing of R&D and technology, whilst the lack of R&D Top 15 export countries of food and non-alcoholic drinks (£m) 3.2.1 Exports Notes: a. Calculations based on financial results reported by food and soft drinks manufacturers listed under the food and soft and technology investments do not allow SMEs to grow and, therefore, improve Rank Country 2007 Rank Country 2010 drinks NICE codes b. 2010 results are based on a smaller number of companies as not all companies have reported 2010 their margins The UK export statistics indicate that the UK food and non-alcoholic drinks 1 Ireland 2,167 1 Ireland 2,687 results yet manufacturing sector operates mainly in the large, but mature EU market 2 France 931 2 France 1,341 Sources: 1. Bureau Van Dijk – Orbis (2011), Grant Thornton Analysis • Larger companies also suffered in the past few years. However, economies 3 Germany 671 3 Netherlands 907 • UK exports of food and non-alcoholic drinks have grown nominally by 40% Operating profit margin for top 150 FDM UK companies, 2006-2010 of scale and financial strength have given them better bargaining power with 4 Netherlands 574 4 Germany 902 between 2007 and 2010. However, taking into account inflation and the export retailers and allowed them to cut costs in order to protect margins whilst 5 Spain 499 5 Spain 607 performance of other countries (as will be shown in section 4), it appears that 10% 9.0% 8.9% maintaining focus on new product development (NPD), which is one of the main 6 Italy 366 6 Italy 433 8.3% 9% growth drivers in the industry the UK has not been growing fast enough and, as a consequence, has been 7 Belgium 312 7 Belgium 433 7.6% 7.7% 8% losing market share 8 United States 238 8 United States 391 7% • Moreover, the analysis of the financial performance of the Top 150 UK FDM Operating margin 9 Denmark 130 9 Denmark 179 6% 4.9% • Non-EU regions outpaced EU countries with a combined growth of 66% vs. 4.6% 4.5% Brands businesses clearly indicates the differences in operating margins between 10 Sweden 106 10 Portugal 152 5% 3.7% 3.5% Private label corporates with branded products and corporates that produce for private labels. 34%. However, non-EU only accounts for 23% of UK exports, having increased 11 Canada 102 11 Norway 149 4% its share of UK exports from 19% in 2007 3% 12 Russia 97 12 Sweden 142 2% • Whilst the two types of businesses have followed a similar performance • The regions that experienced the highest growth were Africa and Asia, however 13 Portugal 85 13 Canada 139 1% throughout the downturn, brands have historically maintained c.4% difference 14 Greece 76 14 Poland 131 0% in operating margins. This brand advantage can be mainly attributed to higher these account for only 6% of UK exports 2006 2007 2008 2009 2010 15 Poland 76 15 Russia 115 retail prices driven by customer reassurance and loyalty as well as higher • UK exports to the top 15 countries accounted for 80% of total food and non- Top 15 Top 15 bargaining power of the producers with the retailers. The reasons will be countries as countries as alcoholic drinks exports in 2010, with Ireland being the biggest export market. % of 83% % of 80% discussed in greater detail in the following sections Sources: 1. OC&C (2011, 2010, 2009, 2008), The Grocer The only non-EU countries in the top 15 are US, Canada and Russia total UK exports total UK exports Page 24 Page 25
    • UK FDMsector overview UK FDM sector overview 3.4 The UK FDM business structure 3.4 The UK FDM business structure UK food, beverage and tobacco enterprises by employee size 3.4.1 Business structure • Poland and Germany lie in between the UK and France/Italy, with 9% of The impact of M&A activity on SMEs medium and large enterprises (findings from FDF / Grant Thornton survey) 4,740 The UK food and non-alcoholic beverage industry structure is fragmented with 5,000 87% of enterprises qualifying as small (with under 50 employees) 4,500 • The UK food and non-alcoholic beverage industry structure is fragmented with 60% 4,000 3,590 54% • Comparing the UK food, beverage and tobacco data from 2005 and 2011, it 87% of enterprises qualifying as small (with under 50 employees) 3,500 50% is apparent that although the total number of companies has increased, this 3,000 UK food and soft drinks enterprises by employment size 2011 41% Number of enterprises 2005 2,500 was due to a 32% increase in micro-companies (one to nine employees), as 3,500 40% # of SMEs 2011 2,000 all other categories have seen a decrease, with the large companies (over 250 2,955 30% 1,273 3,000 1,500 895 922 755 858 employees) experiencing the most significant decline (42% due to M&A activity; 1,000 650 2,500 20% Number of enterprises 500 364 220 M&A is explored in more detail in the following pages) 2,000 0 10% 5% • In 2007, the latest year for which Eurostat statistics across EU countries are 50-249 250+ 1,500 10-19 20-49 1-9 1,175 0 available, the UK food, beverage and tobacco industry was composed of 1,000 845 715 Negatively affected Not affected Positively affected 7,007 enterprises. In order to show the scale/structure of the UK FDM, we have 355 500 255 Notes: a. Because of SIC code changes a comparison of food and soft drinks companies was not possible, therefore food, 205 compared it to a variety of European countries (with which the UK trades and beverage and tobacco was used as a proxy 0 Sources: Grant Thornton survey results competes) outside of the immediate comparison markets 100 - 249 10 - 19 20 - 49 50 - 99 250 + 0-4 5-9 Sources: 1. ONS (2011), UK Business Activity, 2. Eurostat (2011), Structural Analysis Database 3.4.2 M&A activity Number of food, beverages and tobacco enterprises by employee size 2007 • In terms of number of companies, the UK FDM represents c. 10% of the sector Number of employees 67,995 32,742 70,911 17,018 29,414 7,007 37,638 size in France or Italy. According to our interviews, this may be attributed to the Sources: 1. ONS (2011), UK Business Activity • During the last five years, more than 520 M&A deals have taken place in the 100% fact that other countries, such as France, Italy and Spain, have a bigger food UK FDM sector, indicating a larger number of UK-based FDM businesses have 90% M&A activity in the UK FDM by sector, 2006-2011 80% culture than the UK been acquired either by other UK businesses or by foreign companies. Outside Other 70% 250+ 81 Wholesale & Distribution wholesale & distribution, the FDM sub-sectors that have attracted the most • However, the UK industry is more consolidated. France and Italy have the most 97 % of total companies 60% interest: are meat, fish, poultry and dry grocery. Bakery and dairy products and 50-249 Functional 50% fragmented industry structure, with c. 98-99% of companies employing up to 13 40% 60,442 63,777 31,095 20-49 soft drinks also account for 23% of the total M&A activity 11,941 22,612 49 people. Brazil is also fragmented with 82.2% of the companies classified Frozen Foods 30% 10-19 20 16,300 3,590 as micro enterprises (up to 9 employees). Although 84% of UK companies are Confectionery • M&A activity reached its peak in 2007 when c.124 deals were completed. Since 20% 1-9 20 Meat Fish & Poultry 10% micro and small (up to 49 employees), the UK has a larger share of medium and 78 then, an average of 80-90 deals took place each year, whilst 78 deals have been Fruit & Veg 0% large companies 22 completed to October 2011 Italy Brazil Spain France Poland Germany Soft Drinks UK 30 – 11% of UK companies are medium sized (50-250 employees) compared to 1% in Italy and 2% in France Dairy Dry Grocery 38 68 Notes: a. The statistics refer to the number of enterprises in 2007, b. Data for Canada was not available. Bakery Sources: 1. Eurostat (2011), Structural Analysis Database, 2. Brazilian Food Industry Association (ABIA) 53 – 5% are large companies (with over 250 employees), compared to 0.2% for Italy and 0.5% for France Sources: 1. Thomson Reuters Deal Analytics (2011), M&A Database, 2. BvD Zephyr (2011), M&A Database, 3. Press releases Page 26 Page 27
    • UK FDMsector overview Growth drivers and exporting 3.4 The UK FDM business structure Section 4 • 41% of the SMEs that responded to the Grant Thornton survey stated they had M&A activity in the UK FDM by foreign acquirers by country, 2006-2011 been affected by the consolidation in the industry across the FDM supply chain. Other Ireland Across the supply chain, from suppliers to FDM and retailers, consolidation 19 21 has led to a small number of large corporates and fewer SMEs. As a result, the SMEs surveyed state they have lost customers, who have been absorbed by the larger retailers, and feel that their bargaining power has decreased at both ends USA Growth drivers Other European nations 20 of the supply chain 28 • Approximately 27% of the total UK FDM acquisitions were realised by non-UK India 1 based companies. Irish and American companies together have acquired the Brazil Thailand & exporting 3 17 most UK companies accounting for 29% of total foreign activity. Interestingly Canada 5 Germany France Thai companies follow next with 17 acquisitions. Overall, European companies 6 Netherlands 12 8 realised 75 out of the 140 total foreign acquisitions Sources: 1. Thomson Reuters Deal Analytics (2011), M&A Database, 2. BvD Zephyr (2011), M&A Database, 3. Press releases • During the same period of time, UK businesses have acquired 51 companies abroad, mainly in France, Ireland and Turkey. Europe has been the primary focus M&A activity abroad by UK FDM acquirers by target country, 2006-2011 for UK manufacturers accounting for 63% of the total number of 12 foreign acquisitions 10 10 # of acquisitions 8 “Post consolidation, both the supplies and outlets have become more difficult markets to 8 trade in and manufacturers have to deal with reduced margins.” 6 6 SME (anonymous survey response) 4 4 4 3 3 3 3 3 “We have lost our customers who have been taken over by major retailers.” 2 2 SME # 2 2 0 “Consolidation on the retail side means they can use combined strength to buy at lower price Turkey Italy Ireland Netherlands South Africa Brazil France Spain Other Germany Other European USA from FDM.” SME # 3 “Raw material suppliers as well as packaging suppliers are fewer due to industry consolidation.” Sources: 1. Thomson Reuters Deal Analytics (2011), M&A Database, 2. BvD Zephyr (2011), M&A Database, 3. Press releases SME (anonymous survey response) Page 28 Page 29
    • Growth drivers and exporting Growth drivers and exporting 4.0 Section summary 4.1 FDM growth drivers for the UK consumer market • The section relies on feedback from the FDF / Grant Thornton survey and Growth drivers for the UK market in the next 5-10 years (1 – least important, 4.1.1 Growth drivers (from survey output) interviews supported by desktop research 5 – most important; findings from FDF / Grant Thornton survey) During the next 5-10 years within the UK, the companies responded that growth Average score will be driven by a mix of Health & Wellness (H&W) and value products addressing • Both in the UK and globally, population growth will help grow the food and Health & Wellness products 3.41 different needs and market segments soft drink market whilst an ageing population in most regions is likely to shift Demand for value products 3.40 consumer spending towards health and wellness products • The companies surveyed were asked to comment on key drivers for FDM Demand for premium products 3.31 growth during the next 5-10 years across three different axes, namely price (i.e. • Specifically in the UK, the shape and pace of economic recovery may premium vs. value products), brand (i.e. branded vs. private label products) and Demand for branded products 3.23 impact consumer expenditure which in turn may affect consumer purchasing purpose served (e.g. Health & Wellness, CSR related or other products) patterns and therefore the growth of the food and drink industry Demand for own label products 3.14 • The majority of the companies expect the UK FDM market to stay relatively Appetite for CSR related products 2.72 • Globalisation, fast economic growth and rising income levels in the emerging flat during the coming years. Despite these conditions, H&W products ranked markets are expected to drive a shift in their populations’ diet, specifically 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% at the top of growth drivers. This is being facilitated by the fact that the food increasing consumption of proteins and converging towards western diets % of responses health agenda is being increasingly promoted to the public by Government and 1 2 3 4 5 media. However, during the interviews, a few companies stated that H&W will • Survey results indicate that 36% of the UK FDM future growth will be driven Sources: 1. Grant Thornton survey analysis be able to drive the market as a whole once economic recovery has taken place by exports. Whilst manufacturers agree that emerging markets offered many “Health & Wellness has got to be top of the list. There is still place for indulgence products, and when consumers will be willing and able to spend more for these types of opportunities for UK FDM, they believe that Western and Eastern Europe but the public perception is that we should avoid them.” products that in many cases may be at a price premium will remain the main markets due to geographic proximity and stronger purchasing power Corporate # 4 • With regards to price, businesses believe that value products are more likely “Irrespective of the downturn, consumer expenditure on food in Western economies to drive growth. Companies thought that consumers have become very price reflects a smaller amount of income compared to our predecessors. As such, the premium aware and, as their disposable income is being squeezed, they will continue to manufacturers have the most opportunities to penetrate more effectively new marketplaces look for the best offers and value in the market. However, demand for premium and sell volume and value.” products will not necessarily recede as consumers in the UK will aim to maintain Corporate # 5 their lifestyle and continue purchasing high quality products across certain categories. In this context, the middle/everyday segment is expected to suffer the most because of lack of differentiation • Across the overall survey sample, branded products obtained a higher score than private label products. However, if we are to analyse the responses of SMEs vs. corporates, SMEs believe the growth is more likely to come from branded products, while many corporates see private label as a more important growth driver Page 30 Page 31
    • Growth drivers and exporting Growth drivers and exporting 4.1 FDM growth drivers for the UK consumer market 4.1 FDM growth drivers for the UK consumer market • In terms of other parameters that will help drive growth, a few businesses stated “Branded products are well positioned as consumers are seeking for reassurance and value. UK GDP forecasts, £bn 4.1.2 Growth drivers (supporting evidence from desktop research) that the UK population, which is forecast to grow to 70 million by 2030, will Moreover, health issues will increasingly shape branded goods’ agendas. However, consumers According to the IMF and United Nations forecasts, the UK is forecast to enjoy 1,500 2.7% 3% are seeking value for money at the same time.” 2.6% certainly act as a significant driver in growing the market volume. Also, they 2.4% more positive economic outlook and population growth compared to main stated that UK growth will be largely dependent upon the industry’s ability to SME # 4 1,450 3% Western European countries. But low consumer confidence and the shape/ pace of the economic recovery may impact consumer purchasing patterns and, innovate and introduce new products to the market “I think that whether there is a real product difference or not, you will see growth at the top 1,400 1.6% 2% therefore, the growth of the food and drink industry 1.4% GDP £bn and bottom end and I think mass market brands will get lost in between. The majority of 1,350 1.1% 2% 1,456 GDP growth (%) • In the latest IMF data, the UK GDP is forecast to grow by 1.1% in 2011 and brands will struggle to keep their price premium.” 1,418 1,300 1,382 1% show positive, yet still low digit growth up to 2015. The latest Bank of England Corporate # 7 1,350 1,314 1,329 forecasts from the 15th of November are more pessimistic, expecting the the 1,250 1,297 1% “I think that premium remains a growth opportunity. If you think of the premium segment’s UK economy to stagnate until the middle of 2012 and only reach 1% for the 1,200 0% performance at the moment it is outperforming the everyday and value segments in food and year as a whole 2009 2010 2011 2012 2013 2014 2015 that is in the current climate. ” Corporate # 6 • Private consumption is forecast to grow by 3.6% annually between 2010-2015, Notes: a. GDP at constant prices Sources: 1. IMF (2011), World Economic Outlook Database ignoring inflation. However, analysts expect inflation to fall from 2012, as a result of low economic growth and the absence of temporary inflationary factors (such UK population forecasts as the VAT rise from 17.5% to 20% in January 2011) 80,000 69,403 71,393 • These positive developments should support the domestic growth of the UK 64,776 67,173 70,000 62,261 food and drink manufacturing industry. However, uncertainty persists and recent 20% 22% 60,000 18% 19% 17% UK - Over 65 consumer data is less upbeat. Both recent consumer confidence and spending Population 000s 50,000 23% on food show declines. The GfK consumer confidence index fell to -32 in 25% 25% 24% UK - 45-64 26% 40,000 October as consumers feared unemployment and income growth lagged behind UK - 30-44 30,000 20% 19% 20% 20% 20% UK - 15-29 inflation. Commentators pointed out that this low level has only been previously 20,000 19% 18% 18% 18% reached three times since the survey began in 1974. On both previous 20% UK - 0-14 10,000 occasions (June 2008 and March 1990) the UK economy entered into recession 17% 18% 18% 18% 17% 0 2010 2015 2020 2025 2030 • Moreover, recent data from the Office for National Statistics (ONS) points out that the £18.6Bn total spending on food in Q2 2011 was the lowest quarterly Sources: 1. ONS (2010), National Population Projections figure since spring 2002. On a per household basis, consumers spent £30 less per household on food during April-June 2011 compared to the first three months of 2011. This may be as a result of consumers trading down and looking for better value across both branded and private label combined with changing buying habits Page 32 Sources: Factiva (Guardian, 13 September 2011, UK inflation: what the economists say) Page 33
    • Growth drivers and exporting Growth drivers and exporting 4.1 FDM growth drivers for the UK consumer market 4.2 FDM growth drivers for the global market • The UK population is forecast to grow from 62.3 million in 2010 to 71.3 million UK food and drink vs. private label market World population forecasts by region, 2010 & 2030 4.2.1 Growth drivers (from survey output and supporting evidence in 2030. Growth will be mainly driven by the older age groups; over 65s are 6,000 from desktop research) 135 The difference in the total 4,968 forecast to grow the fastest and reach 15.5 million in 2030. This is expected to markets performance is due 5,000 The worldwide population growth, growing middle class and income growth in 130 to the stronger growth of 4,211 emerging markets offer opportunities for expansion across most FDM categories have a two-fold impact on the food and drink industry: Population, millions 125 branded food and drink 4,000 products compared to • With world population having just reached 7bn, it is forecast that by 2025 it will 120 2010 – First, the overall market that manufacturers can serve is increasing and Index (2005=100) private labels Private label food and drink 3,000 115 2030 reach 8bn. Population growth will help the expansion of the FDM market both as more people may benefit from higher levels of disposable income, Total food and drink 110 2,000 1,572 within the UK and abroad. Within Europe, the population will only increase by it could create further opportunities for manufacturers. However, it is 1,027 105 599 720 2% between 2010 and 2030. This is due to a shrinking population in Eastern worth noting that some over 65s may rely on basic state pensions 1,000 419 449 350 337 358 423 100 Europe and a slow growing population in Western Europe. However, in other 0 areas, such as North America, Latin America and Asia, population is expected – Secondly, IGD research shows that diet and consumption patterns 95 Africa America South America Western Asia Eastern Europe Europe North to grow by 18-20%. At the same time, Africa’s population will grow by more 2005 2006 2007 2008 2009 2010 (est) Central & vary with age. Specifically, over 65s are looking for smaller portions, convenience and locally sourced products and, therefore, a population than 50% increase in this age group is expected to increase demand for these types • Moreover, the increasingly ageing population across the world is expected to Sources: 1. Mintel (2011), Private Label Food and Drink-UK Sources: 1. United Nations, Department of Economic and Social Affairs, Population Division (2011), World Population of products. Moreover, medical conditions and the desire to improve Prospects: The 2010 Revision have a significant impact on the demand for H&W products. Whilst in 2010 the wellbeing through diet may influence their demand for healthy products “I think you need to be in brands. I cannot see an easy path ahead for private labels in the over 45’s accounted for 28% of the world population, in 2030 they will account World population forecasts by age group, 2010 – 2030 current environment. ” for 36%. At the same time, with obesity growing in the Western countries • The companies surveyed/interviewed believe that, in the UK, growth is more Corporate # 5 and people becoming increasing aware on the importance for healthier diets, likely to come from branded products compared to private label products. 9,000 8,000 14% demand for H&W products is expected to be further boosted This seems plausible according to desktop research conducted by Mintel, “I expect 10% growth. It also depends on inflation, which has been going up, since quantities 12% 11% 10% World population, millions 7,000 which shows that, historically, branded products have outperformed private sold are unlikely to change.” 9% 22% Over 65 • Disposable income growth may be a critical parameter in driving spend for 6,000 21% 21% Corporate # 1 19% 20% 45-64 food and drinks in the context of this larger market and in defining which labels products. In addition, the gap in performance between the two types of 5,000 21% 21% 21% 21% 30-44 products are better positioned in each region. Therefore, in the medium term, products has got wider during the last few years of the economic downturn 4,000 21% 15-29 mature economies are forecast to grow at rather slower rates. Western Europe 3,000 25% 24% 23% 22% 22% 0-14 in particular has been very badly hit by the financial crisis and is expected 2,000 to be the worst performing with an average GDP growth of 1.7% by 2016, 1,000 26% 25% 24% 23% 22% whilst USA and Canada are expected to grow at 2.1%. Even the fast growing 0 emerging markets have been affected by the downturn and have lost some of 2010 2015 2020 2025 2030 the momentum they had before the economic downturn. Overall, the global real GDP will not regain its momentum before 2012. But, emerging markets in Asia, Sources: 1. United Nations, Department of Economic and Social Affairs, Population Division (2011), World Population South America and Africa are expected to grow at rates between 4-5%, whilst Prospects: The 2010 Revision African nations are expected to surpass every other region Sources: 1. World Bank (2008). Is the Developing World Catching Up? Page 34 Page 35
    • Growth drivers and exporting Growth drivers and exporting 4.2 FDM growth drivers for the global market 4.2 FDM growth drivers for the global market Real GDP growth forecasts by region, 2010-2016 • As such, Western markets are not expected to grow in income terms significantly • China and India are expected to grow their average private consumption per Where industry growth will come from in the medium term and therefore the opportunities for UK FDM lie primarily in capita the fastest by 2015, followed by Brazil. Even at those rates, China’s and (findings from FDF / Grant Thornton survey) 7% World attracting larger local market share. Nevertheless, premium and niche value- India’s average consumption will remain at low levels by western standards and 100% 6% North America added products may be better positioned because of their perceived quality, the market will continue to be dominated by value products. Within Europe, 90% % share of industry growth 80% 37% 35% which helps justify the higher end price that exported products tend to have which is UK’s key trading partner, Poland presents opportunities for growth with Real GDP growth, % 5% Western Europe 70% 4% (associated with the higher costs due to transport and/or duties) consumption forecast to grow at 8%, a significant rate above EU average 60% Transition economies From exports 50% 3% • According to World Bank, the income growth across emerging markets will • The specific opportunities for each FDM area will be better defined by From the UK Asia & Australasia (incl 40% 2% Japan) 63% 65% help generate a larger middle class that will reach 1,150 million in 2030 up from analysing the consumer demographics in each region (e.g. urbanisation, single 30% Latin America 20% 1% 430 million in 2010. At this rate, middle class will account for 17% of the total households, etc) as well as consumers’ purchasing patterns and tastes Middle East & North 10% 0% Africa population in 2030 versus 8% in 2000 (and as a result shrinking the low income Sources: 1. OECD & FAO (2011). OECD-FAO Agricultural Outlook 2011-2020 2. World Bank (2008). Is the Developing World 0% 2010 2011 2012 2013 2014 2015 2016 Sub-Saharan Africa class’ share from 82% to 62% of the total population). Asian countries are Catching Up? Corporates SMEs understood to be the largest contributors to this middle class growth. China and Sources: 1. Economist Intelligence Unit (2011), Views Wire India specifically are meant to contribute about two thirds of the total growth in the global middle class Sources: 1. Grant Thornton survey analysis Private consumption per capita, $ at current prices CAGR • This growing middle class with a higher disposable income is expected to shift “I think the opportunity for the UK will be in premium products. I think we are a fairly high cost 2010 2015 2010-2015 diets and upgrade to Western products. In this context, it is important for UK place to be manufacturing basic food products and we cannot compete with the emerging FDM companies to customise their strategies when targeting these markets. markets. Therefore, if we want to export to these fast growing regions and attract market Brazil 6,630 10,220 9.0% share, we need to do more than just produce basic, non-differentiated products.” Canada 26,829 33,573 4.6% Businesses will not necessarily be able to sell the same types of products they SME # 6 China 1,500 3,550 18.8% sell in the West. Australia & NZ 51,651 59,705 2.9% “In terms of an ageing population and in terms of a broader obese population, there will be an • According to our interviews, many people from Asia and the BRICs, who are India 830 1,380 10.7% increased demand for healthier food.” Poland 7,550 11,160 8.1% increasingly travelling to the west and the UK, are developing a growing appetite FDII (Food and Drink Industry Ireland) United Kingdom 23,731 28,287 3.6% for Western premium products. In addition, according to OECD and FAO, consumer demand on a global scale will continue shifting from staple foods “UK growth will be driven by a rise in global demand and a shortage in global supply.” Sources: 1. Economist Intelligence Unit (2011), Views Wire Corporate #2 towards more processed and prepared food products that contain a higher “In the BRIC market, as the GDP grows, the wealth grows and there seems to be demand for amount of protein driven by the growing middle class Western types of products.” “Global population is a significant driver… especially combined with higher GDP on a Corporate # 7 global scale.” Corporate # 4 Page 36 Page 37
    • Growth drivers and exporting Growth drivers and exporting 4.3 Exporting opportunities 4.3 Exporting opportunities 4.3.1 Export driven growth and opportunities (from survey output) Export potential for UK FDM manufacturers “In terms of soft drinks exports, there are big opportunities in Europe as well as Middle East 4.3.2 UK historic export performance (findings from FDF / Grant Thornton survey) and Africa. China is a market everyone wants to enter but it’s very difficult to penetrate.” Both SMEs and corporates view a significant potential in exporting as a UK’s main trade partners have historically been Western developed nations, growth driver for the FDM industry SME # 4 but FDM exporters have also been targeting emerging markets especially in Eastern Europe • Interestingly, both corporates and SMEs have a similar view of where the growth “While in the USA and the rest of the Western world demand has been declining, countries in will come from. The companies surveyed believe that domestic market demand the Far-East have an increasing appetite for premium European food products.” • Considering the evolution of UK exports of food & soft drinks over the years, will remain the key industry growth driver but exporting will drive approximately SME # 5 it appears that the UK exporters have managed to increase their exports 36% of the growth “The Commonwealth countries present good opportunities because they are familiar with significantly to large European markets like France, Spain, Germany and Ireland brands that originated in the UK.” (which is UK’s largest export market but has been excluded from the chart for • Companies expect that the UK market will remain relatively flat over the next five Corporate # 7 scaling purposes). Despite the relatively low export values, UK has been steadily years as the consumers’ disposable income is under increasing pressure and increasing its exports to Russia, Poland and China as well therefore any value increases will mainly reflect inflation. As such, companies “We see opportunities in the emerging Central and Eastern European markets where there indicate that they will need to look abroad to both developed and emerging is a demand for premium imported brands alongside strong local brands. There are also • However, with large non-EU developed markets like USA and Japan, UK has markets to grow their business in the medium term. This is the case with Spain Key: Over 25 responses increasingly sophisticated and disciplined customer channels which were difficult to penetrate had a volatile performance over the past decade, whilst the value of output where, according to the Spanish food federation (FIAB), exports have helped 20-24 responses in the past as they were very fragmented.” towards the fast growing markets of Brazil and India is at particularly low levels 15-19 responses Spanish FDM to weather the crisis and is considered the industry’s growth driver Corporate # 5 10-14 responses (even though exports to India have been growing strongly) in the medium term 1-9 responses • By examining the trade value growth and market penetration, amongst countries • Given the economic conditions currently prevailing in the Western markets Sources: 1. Grant Thornton survey analysis that have increased their food, beverage and tobacco imports at double digit (presented in the sections above), it is important for UK manufacturers to diversify growth, the UK exports to these countries have only outpaced imports in Poland their activities abroad and into the emerging markets, where both disposable • Grant Thornton’s survey results show that 18% of the companies see no income and population figures are growing much faster. However, penetrating significant export potential. The rest of the companies have selected the – it should be noted that this comparison is made in US$, but, in these markets is expected to be difficult given the increasing local and areas where they see the most export potential for UK FDM according to the terms of £, 2010 UK exports show a more positive picture as international competition map above the exchange rate has reduced the $ value of UK exports • China and other Asian markets rank at the top because of the fast growing • Similarly, amongst the largest importers of food, beverages and tobacco, the populations, the growing middle class, increasing income levels and the growing UK is only tapping into the demand for France and Netherlands where it has a appetite for western, premium products. Similarly, Eastern European countries relatively high share of the country’s imports such as Russia and Poland also rank very highly. Nevertheless, established, mature market places such as France, which is already a big market for UK • Based on 2010 data, the main untapped markets for the UK appear to be exports, and USA ranked as important export targets for the UK because of their Russia, Japan and China who are large importers, but account only for a small market size and value percentage of UK exports Page 38 Page 39
    • Growth drivers and exporting Growth drivers and exporting 4.3 Exporting opportunities 4.3 Exporting opportunities UK exports of food & soft drinks, 2000, 2005 & 2010 UK exports of food, beverages and tobacco Historic and forecast private consumption, US $ 4.3.3 Export potential and barriers to export CAGR of UK exports to CAGR of country % share of UK exports Share of country’s Whilst the UK is seeking to penetrate the fast growing markets, it has lost global each country, imports, to country’s imports, imports as a % of 40,000 market share from other rival nations who have been more successful in growing 2005-2010 2005-2010 2010 world imports, 2010 Brazil 1,000 35,000 their exports 900 Australia 6.1% 12.2% 3.2% 0.8% Canada UK Food & Soft Drinks Exports, 30,000 800 Brazil 16.0% 21.1% 1.5% 0.7% China • Private consumption forecasts suggest that during the coming years the UK 700 25,000 may need to divert its export focus outside its established Western European US $ 600 2000 Canada 7.0% 9.7% 1.4% 2.4% France 20,000 500 2005 China 2.8% 22.5% 0.3% 5.0% Germany markets. Consumption in markets like Ireland, France and Germany is expected £m 400 15,000 300 2010 France 7.3% 6.7% 6.1% 4.4% to grow at slow pace, whilst BRIC countries and Poland present significant India 10,000 200 Germany 11.1% 7.6% 2.0% 6.9% opportunities with an average annual growth in private consumption expected 100 Ireland 5,000 0 India 9.3% 20.7% 0.8% 1.0% to exceed 8%. Consumption in Canada is also expected to grow at 4.6% Poland Australia 0 Japan Ireland 6.8% 5.4% 63.1% 0.6% France* Spain Russia Poland China Germany USA 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 United Kingdom • During the surveys, businesses stated what countries are expected to drive UK Italy 5.1% 5.5% 1.8% 3.8% FDM growth in the future (presented above and highlighting both Europe and Japan (0.3)% 3.6% 0.4% 5.4% Notes: a. UK exports to France in 2010 reached £1.3bn, but for viewing purposes they have been scaled down. Similarly, Mexico 14.9% 7.9% 0.6% 1.7% Notes: a. Based on EIUs estimates and forecasts emerging markets). However, during the follow-up interviews, we specifically Ireland that is UK’s largest export market has been excluded from the graph even though exports to Ireland have been growing Sources: 1. Economist Intelligence Unit (2011), Views Wire inquired if British companies are able to take advantage of the growth forecasts strongly Netherlands 13.4% 8.5% 2.8% 4.4% Sources: 1. UK Trade Info (2011), Trade Data New Zealand 3.0% 9.8% 1.4% 0.3% Global exports of food, beverages and tobacco in developing markets. The answers were mixed and some companies pointed Poland 22.6% 15.9% 2.0% 1.1% out that food is not easily transportable and exports should be focused in the Global export of food, beverages & tobacco 2000-2010 European Union 27* European Union 27* near regions to the UK. Others thought that the only way to effectively penetrate Russia 6.8% 13.9% 0.7% 2.9% 22% 22% Region CAGR 2000-2010 Region CAGR 2000-2010 Other these markets is by setting up a local/regional manufacturing facility. After Spain (0.3)% 4.3% 4.9% 2.8% 30% Other Australia 5.7% Japan 8.2% 35% accounting for these parameters, interviewees expressed that Western and USA 4.5% 6.0% 2.0% 8.2% Brazil 6.9% Poland 21.0% Eastern Europe appeared to be better targets for FDM manufacturers looking to Canada 7.7% Russia 11.8% Sources: 1. World Trade Organisation (2011), Statistics Database export and ship their products abroad USA China 12.5% Spain 8.9% USA 10% Ireland 13% “What we have learned from our experience in China is that if you want to enter similar mega- 1% • Whilst the UK is seeking to remain globally competitive and maintain or grow its France 6.5% United Kingdom 5.4% Ireland Australia markets, you have got to treat them as many small markets and win in each one of them 3% 1% market share in global exports of food & soft drinks, the global market shares Germany 10.7% USA 7.5% Australia Germany Brazil before replicating the model in other regions.” 3% China France 2% 6% have been redistributed over the last decade Ireland 5.1% European Union 27 9.0% France Corporate # 5 3% 8% United Kingdom Germany 2% Canada China Brazil 6% Italy 9.1% World 10.0% United Kingdom Spain Canada 6% 3% Spain 4% 6% 3% 4% 4% 3% • Large exporters such as France and USA have lost part of their market share. However, it is the UK along with Ireland and Australia who have suffered a Notes: a. EU 27 excludes France, Germany, Spain, UK and Ireland which are shown separately significant loss in global market share (approximately 35% each) Sources: 1. UK Trade Info (2011), Trade Data • From Grant Thornton discussions with the food federations of France, Ireland and Spain, it became apparent that all countries will focus on exports to drive Page 40 Page 41
    • Growth drivers and exporting Competitive advantages & areas for improvement 4.3 Exporting opportunities Section 5 growth in the medium term whilst the domestic market is trying to recover from the downturn. This will put more pressure on UK FDM efforts to boost its exports abroad because of increasing international competition. However, according to the French food federation, the French FDM industry consists of a large web of micro and small companies who are not appropriately equipped to Competitive advantages export abroad • At the same time, Brazil and China that used to account together for 6% of global exports in 2000, now account for more than 10%. This suggests that these two markets, which the UK and other developed countries consider as an & areas for improvement opportunity to grow their export footprint into, are, from another perspective, becoming larger threats to the UK and the global food and drink industry • In addition, over the past few months, the world economic outlook has been changing with questions being raised about the ability of countries such as China or India to maintain their economic growth rate. However, they are still forecast double digit GDP growth, which can help UK food and drink manufacturers to increase exports to these countries • Another barrier to export growth addressed by many corporates and SMEs is the lack of Government support in exporting and in providing effective direction especially for SMEs. According to businesses, the Government could provide better advice to businesses and also put more focus on the free trade agenda. We are looking into these areas in greater detail in the following sections “Following the crisis, the domestic market has been hurt and there is a severe restructuring taking place domestically, so growth will certainly come from abroad during the next few years.” FDII (Food and Drink Industry Ireland) “We believe that growth can come from export markets, and we encourage them to look towards exporting, but, unfortunately, the web of food companies is not sufficiently well armed to attack it.” ANIA (French National Association of the Food Industry) Page 42 Page 43
    • Competitive advantages& areas for improvement Competitive advantages & areas for improvement 5.0 Section summary 5.1 The attractiveness of the UK as a place to invest • In this section, we present the areas of competitive advantages and World Economic Forum 2011 IMD Business School 2011 World 5.1.1 UK world competitiveness ranking opportunities for improvement of UK FDM as scored by businesses in the World Competitive ranking Competitiveness Yearbook Between 2007 and 2011, the UK has improved its ranking in competitiveness FDF / Grant Thornton survey. The areas that were highlighted as the strongest Ranking Country Ranking Country indices, but is facing increasing competition from a range of developed and advantages or disadvantages were separately analysed and benchmarked with 1 Switzerland 1 Hong Kong developing countries which investors/businesses may consider more attractive other comparison countries, supported by desktop research and discussions 2 Singapore 2 US • The World Economic Forum (WEF) and the Institute for Management from the follow-up interviews with FDM businesses 3 Sweden 3 Singapore Development (IMD) Business School compile recognised country competitiveness 4 Finland 4 Sweden • Survey participants rated product quality as giving FDM businesses the ranking. They assess a country’s attractiveness as a place to invest and rely 5 US 5 Switzerland strongest competitive advantage. Most people interviewed believe that ‘Made heavily on the views of business executives. But the rankings are the result of 6 Germany 6 Taiwan in Britain’ products stand out internationally and particularly in Commonwealth different methodologies and, therefore may not be directly comparable 7 Netherlands 7 Canada countries who are more familiar with UK products 8 Denmark 8 Qatar • According to the WEF ranking, the UK has moved back in the top 10 for the 9 Japan 9 Australia first time since 2007. The UK achieved major improvements in areas that are • New product development and brand loyalty were the second strongest areas 10 UK 10 Germany considered as productivity enhancements such as the efficiency of its labour for the UK FDM as rated by FDM businesses. As desktop research indicates, 12 Canada 19 China during the past five years, on a global scale, Britain has developed the most market (ranked 7th out of 142), in sharp contrast to the rigidity of those of many 18 France 20 UK product variants after the USA other European countries. Moreover, the UK has sophisticated (ranked 8th out 26 China 24 Ireland of 142) and innovative (ranked 13th out of 142) businesses that are able to use • Businesses rated UK R&D and technology investments as satisfactory. The 29 Ireland 29 France the latest technologies for productivity improvement. However, the UK appears supporting research pointed out that UK FDM has been investing in both 36 Spain 32 India to lose its edge when it comes to macro-economic indicators because of high R&D and technology more than a few comparison countries although capital 41 Poland 34 Poland fiscal deficit, public debt and lower national savings rate 53 Brazil 35 Spain expenditures have remained stagnant over the past decade. In addition, the 56 India 44 Brazil • The IMD scores on individual factors are not publicly available, therefore, we majority of the businesses surveyed had a positive outlook, planning to maintain 66 Russia 49 Russia are unable to comment on UK’s performance on individual areas. However, the or increase their level of investments during the next five years Sources: 1. World Economic Forum(2011), World Competitive Ranking, 2. IMD (2011), World Competitiveness Yearbook UK is relatively low in the ranking being overtaken by US, Canada, Australia, • Businesses rated UK productivity and labour skills in the FDM sector as Germany, as well as China, Singapore and Qatar average. However, desktop research indicates FDM productivity has been higher in the UK than in comparison countries • Although these ranking are not FDM specific, they are useful indicators of how the UK performs vs. other countries in creating positive conditions for • UK labour costs, Government support and regulation were ranked the weakest businesses to grow. Therefore, they can be used for benchmarking purposes in our survey. A comparison with rival nations proved that UK labour costs were and partially address the views expressed by FDM executives regarding the above other countries’. Businesses also stated that they operate in a highly state of the UK industry regulated environment and Government does not adequately support them in areas such as taxation, advice provision and cutting ‘red tape’ Page 44 Page 45
    • Competitive advantages& areas for improvement Competitive advantages & areas for improvement 5.2 UK FDM competitive advantages 5.2 UK FDM competitive advantages UK’s competitive advantages – ranked by average score (1-weakest, 5.2.1 FDM competitive advantages (from survey output) • In addition, businesses surveyed believe that the UK is distinguished by high “We have good innovation and R&D capabilities and a strong food science expertise. That, 5-strongest; findings from FDF / Grant Thornton survey) efficiency and low wastage in the production process and exemplary conditions combined with the strength of our creative industries, such as branding and advertising, According to the survey conducted, UK FDM is distinguished by strong product Average score allows for the continued development of our products and brands.” quality and NPD capabilities but a number of important areas, such as labour in the production facilities compared to some other developed nations Product quality 3.9 New product development 3.5 skills and Government support, seem to have been overlooked Corporate # 5 Brand loyalty 3.5 • Labour skills were ranked as average with businesses stating that they are • In the efforts of UK FDM to become a strong and competitive global player, both “Our technology, food safety record and quality and innovation are good. The question is how R&D 3.4 in need of specialised food engineers and better quality graduates across Technology 3.3 corporates and SMEs agree that product quality, NPD and brand strength are easy it is to export these strengths.” Productivity 3.2 all levels. In most cases, companies stated they recruit part of their factory Labour skills 3.1 the top competitive advantages for UK FDM. In the context of our report, NPD Corporate # 7 floor staff and even some skilled labour from Eastern Europe. Nevertheless, Exchange rate 2.8 reflects new products launched including line extensions/product variants (e.g. companies were overall happy with the quality level of general engineers “SMEs don’t have the know-how to export and the Government could offer them a lot of Foreign partnerships/trade agreements 2.8 Labour cost 2.4 existing with a new flavour or different size). Companies stated that ‘Made in and services staff (e.g. sales, marketing) but stated that the sector needs an support in doing so in terms of contacts. UKTI should help.” Government support 2.1 Britain’ goods are very well regarded internationally in terms of their quality in improved profile to attract high calibre individuals who would otherwise choose Corporate # 4 Regulation 1.9 the manufacturing process, packaging and ingredients, whilst Britain is amongst a career in other industries 100% 10% 20% 30% 40% 50% 60% 70% 80% 90% 0% the world’s leaders in developing new (or improved) packaged food and soft 1 2 3 4 5 % of responses • Even though exchange rates were not ranked by the survey respondents as a drinks or new packaging formats. Overall, most companies deemed that only Sources: 1. Grant Thornton survey analysis Canada and USA have better NPD capabilities than the UK significant competitive advantage, the Irish food federation thought that it has been very helpful for the UK FDM market during the downturn when Sterling How the UK FDM compares with other countries (1-UK is much less • However, a few global players interviewed expressed strong disagreement with developed, 3-UK is equally developed, 5-UK is much more developed; was depreciated at the expense of the Irish FDM market the above statement pointing out that the UK does not have such a strong findings from FDF / Grant Thornton survey) 4.5 brand abroad and that there are very few renowned UK global brands • Both corporates and SMEs agree improvement is required around labour costs, the role of Government in providing a positive business environment 4.0 • Moreover, companies thought that ‘Made in Britain’ is not very strongly and regulation. Companies feel that the ‘red tape’ and regulation around labour represented abroad and that the Government and the industry together can 3.5 R&D has turned the UK labour market, which is supposed to be one of the most do a lot more to promote British products and the image of the industry. Some Average score NPD flexible ones on a global scale, into a rather inflexible one which incurs high 3.0 businesses brought up international trade fairs as an example where the UK Technology costs on businesses unnecessarily. This pressure is even larger for SMEs is normally underrepresented compared to other countries, even smaller ones 2.5 that do not have the scale, margins and resources needed to deal with all the such as Greece paperwork and the additional costs incurred. Moreover, there is a range of 2.0 • R&D and technology were ranked relatively highly but lagging behind a few Government support measures where companies feel we are lagging behind. France Australia and NZ Brazil Canada China Eastern Europe Germany India Ireland Rest of Asia Western Europe Spain USA Countries above the line Rest of were deemed to be less developed countries. Businesses thought that Germany and USA are leading in Whilst corporates suggested that taxation is too high and there are not sufficient developed than the UK in the chosen areas the technology field, whilst the UK was also deemed to be less developed than tax breaks available, SMEs proposed further grants to be made available to the France and Canada in R&D. In the context of this project, R&D is broader than industry and a more effective system supporting them Sources: 1. Grant Thornton survey analysis NPD and includes areas such as new product formulations, packaging research, developing new processes and innovating new aromas and ingredients Page 46 Page 47
    • Competitive advantages& areas for improvement Competitive advantages & areas for improvement 5.3 Competing markets Regions the UK FDM is facing competition from 5.3.1 Competition “The BRICs can be viewed both as opportunities and threats. They are developing fast, they Top 100 food and soft drink companies in the world by turnover, 2003 (findings from FDF / Grant Thornton survey) are cheaper today, with good education systems and eager middle classes.” Because of the nature of the industry, European nations continue to be viewed as 45% the biggest competitors to UK FDM Corporate # 4 35 33 40% 30 • In terms of the international competition for the UK FDM, European nations are “A lot of manufacturing went to Poland 15 or 20 years ago. And as more Eastern European 35% 25 countries join the EU, they are becoming potential targets for manufacturing there.” # of companies % share of responses 30% seen to be the largest threat by both SMEs and corporates. France, Germany 20 17 Corporate # 7 Top 51-100 25% Corporates as well as Poland were considered to be the largest European rivals for the 15 Top 50 20% SMEs UK. Businesses surveyed stated that Germany had better technology and R&D “France has an easier red tape and is more flexible in terms of planning regulations.” 10 6 5 5 4 15% 5 3 2 2 2 2 2 capabilities and France had many rival, good quality food and soft drinks as Corporate # 9 10% 0 well as less stringent regulations, whilst Poland had an educated and skilled Mexico Denmark Australia Netherlands Ireland Italy Japan France Germany Canada UK USA 5% “We see a lot of competition coming from Continental Europe, particularly those countries labour force at a lower cost and better access to raw materials. Moreover, 0% that have a good traditional heritage like Netherlands, Italy and Germany. Also, we see a lot North America corporates saw a significant threat from Ireland primarily due to its favourable South America Asia Europe Oceania of Commonwealth competition, particularly Australia, who have built good brands and their corporate tax environment Government has a very export oriented mindset.” Sources: 1. Leatherhead Food Research (2004), Top 100 Food & Beverage Companies Corporate # 5 • Whilst SMEs thought that Asia as a region may be a bigger threat than Western Sources: 1. Grant Thornton survey analysis Europe to the UK, corporates believed that Western Europe remains the number Top 100 food and soft drink companies in the world by turnover, 2010 one threat to the UK. Corporates believe it would be hard for Chinese and Main markets the UK FDM is facing competition from (findings from FDF / Grant Thornton survey) other Asian manufacturers to penetrate many key UK FDM markets without 35 establishing a local FDM facility due to the difficulties associated with shipping 30 30 many FDM products across long distances 25 # of companies 20 • Overall, emerging markets such as Brazil, China, India and other Asian nations Top 51-100 15 12 are considered to pose a significant threat to the UK mainly due to their cheap 10 Top 50 5 5 4 4 labour, access to raw materials as well as R&D capabilities. China in particular 5 3 3 3 2 2 2 2 2 gathered the most votes and was considered as being the number one global 0 Switzerland Denmark Mexico Netherlands Brazil Ireland Italy Japan France China Germany Canada UK USA threat to UK FDM. Corporates however believe that France and Germany are larger threats to the UK than China Key: Over 13 votes Notes: a. The UK ‘loss’ from 2003 reflects the buy-out of Cadbury’s by Kraft. However, Cadbury’s remains a separate brand 9-12 votes with a UK identity 5-8 votes 1-4 votes Sources: 1. Leatherhead Food Research (2011), Top 100 Food & Beverage Companies Sources: 1. Grant Thornton survey analysis Page 48 Page 49
    • Competitive advantages& areas for improvement Competitive advantages & areas for improvement 5.4 Brand loyalty and awareness 5.5 New product development “Asian countries are developing their own brands and pushing them in Europe slowly and they • According to the businesses interviewed, the UK Government does not offer New product variants by country, 2005-2011 5.5.1 NPD activity can take market away from UK manufacturers.” any financial incentives for UK companies to take part in exhibitions and it is too FDM has been very active in new product development with private labels Corporate # 4 financially strenuous for SMEs to participate at their own expense. As a result, 140,000 accounting for a significant share of growth in this space 120,000 # of new product variants “UK has strong brands in confectionery. Moreover, a range of Anglicized products sold to there is normally a perceived lack of enthusiasm at those exhibitions from the 100,000 • The UK appears to be one of the most innovative markets in terms of NPD. Commonwealth countries enjoy strong brand recognition.” UK side, which is underrepresented compared to other European missions such 80,000 Judging by the total number of product variants launched between 2005- Corporate # 4 as Germany, Greece or Italy 60,000 2011, the UK lies ahead of other European rivals such as France, Germany 40,000 5.4.1 Brand loyalty and awareness • In an effort to calculate the international reach and reputation of UK brands, and Spain. The UK surpasses innovative nations such as Japan and large 20,000 The UK has maintained its influence in the global sales of food and soft drinks, Grant Thornton considered the Top 100 food & soft drink manufacturers by 0 FDM markets such as Brazil and China. However, the UK remains second but the Government can help more with promoting the image of the UK brand and global turnover in 2003 and 2010. Whilst the industry is being dominated by at a distance from USA that is leading with more than double the number of Netherlands Brazil Ireland Italy Japan India Spain France China Germany Canada UK USA UK products abroad American and Japanese brands, the UK is currently following at a distance with product variants introduced • The UK brand and that of its products was ranked by the survey respondents as four companies (following Cadbury’s takeover). In addition, France maintained • Within the UK, private labels seem very active in driving innovation growth in a strong competitive advantage that differentiates the UK from its competition. its 2003 position and Germany managed to increase its dominance. However, Notes: a. The variants above may refer either to brand new product launches or to product refurbishments or to the same terms of NPD. Despite the large concentration in the retail market across most Some respondents thought that ‘Made in Britain’ carries significant weight four Brazilian and Chinese companies entered the global ranks in 2010 products but with varied properties (e.g. different taste, packaging, etc) of the countries taken into consideration (Brazil is the only country from our Sources: 1. Mintel (2011), NPD Database abroad and that Commonwealth countries in particular may be more aware of five comparison markets where the Top 5 retailers account for less than 50% British brands than others of the total retail market) and despite the relatively high penetration of private Approximation of NPD activity by type of product, 2005 & 2010 label products, private labels abroad do not seem equally active in launching • Other respondents thought that consumers abroad would not go out of their way to buy British products as they would do for other European products. new product variants. For example, in 2010 in France, private labels had 30% 9,000 7,988 Some respondents also stated that the British brand could be regarded more share of the total FDM market, but accounted for c.17% of the total product # of new product variants 8,000 6,734 6,742 highly if the manufacturers adopted a common strategy and promoted their 7,000 variants launched 6,000 5,570 5,168 products abroad as British rather than exclusively Scottish or English for 5,000 4,255 Private label penetration 3,503 3,769 Branded example. They thought that the lack of a common approach dilutes the UK 4,000 2,932 2,842 2010 3,000 Private label brand to the eyes of foreign consumers Brazil 7% 2,000 744 710 Canada 22% 1,000 • In addition, a few respondents thought that the Government could better 0 France 30% support the industry’s efforts to promote British products abroad through food Ireland 2005 Ireland 2010 Brazil 2005 Brazil 2010 France 2005 France 2010 Spain 2005 Spain 2010 Canada 2005 Canada 2010 UK 2005 UK 2010 Ireland* 29% trade exhibitions Spain 32% UK 41% Notes: a. The total numbers of NPD for each country reflect the actual figures sourced from Mintel. However, the split for branded and private label above have been calculated approximately using the Top 10 most active NPD manufacturers in each Notes: a. Ireland’s penetration refers to 2007 country and accounting for the total NPD activity in each case. Sources: 1. Planet Retail data reported in the Food and Drink Europe Data Trends 2011 Sources: 1. Mintel (2011), NPD Database Page 50 Page 51
    • Competitive advantages& areas for improvement Competitive advantages & areas for improvement 5.5 New product development 5.6 Productivity comparison New product variants in the UK by category • On the contrary, within the UK, private labels were responsible for 44% of the GVA per employee at current prices for food and beverage, in £ 5.6.1 Productivity total NPD in 2010, which is above their total market penetration. The private label 70,000 France UK’s food and beverage sector is characterised by high productivity above the GVA per employee at current prices, £ 9,000 NPD share has increased from c.37% in 2005 to 44% in 2010 showing a growing 60,000 average manufacturing level and has been steadily growing over the years 622 Germany 8,000 507 contribution to innovation. This reflects to a positive extent the commentary we • UK’s FDM productivity has been steadily growing at an annual rate of 4.7%. If # of new product variants 7,000 638 50,000 824 542 received from businesses that retailers are driving the FDM market Italy 6,000 compared in Sterling terms, UK ranks above Japan and Germany, both of which 40,000 5,000 486 Soft drinks • Historically, UK NPD for food products has been steadily increasing with Japan have substantial manufacturing sectors and are traditionally considered to 4,000 7,482 7,901 Food soft drinks being rather volatile. There was an overall decrease in activity in 30,000 invest heavily in technology as a means of improving their productivity 6,967 Spain 3,000 6,164 6,313 4,807 2009 due to the economic downturn that obliged activities to cut back in 20,000 2,000 United • Overall, the UK sector’s productivity has been growing faster than the 1,000 spending. Since then, NPD has continued increasing to levels above 2007 and 10,000 Kingdom developed nations covered by this research. In fact, the productivity of 0 2008, which confirms the businesses’ statements that innovation and NPD to USA 2006 2007 2008 2009 2010 2011 Germany, Italy and Japan has slightly decreased over the years (when measured address changing and new consumer demands are required in order to drive 0 in their national currencies) 2003 2004 2005 2006 2007 2008 2009 growth in the marketplace Notes: a. The variants above may refer either to brand new product launches or to product refurbishments or to the same Sources: 1. OECD (2011). OECD Structural Analysis Statistics (STAN), 2. ONS (2011), Annual Business Survey • From 2003 until 2008, USA has been maintaining higher levels of productivity products but with varied properties (e.g. different taste, packaging, etc) Sources: 1. Mintel (2011), NPD Database than the UK although it has been growing at a slower pace. Moreover, in Growth in GVA per employee at current prices for food & beverage, calculated in national currency 2008, UK’s FDM productivity was overtaken by France and Italy, which were “NPD in the UK is much stronger than in Germany. If you look into retailers for example, the previously below the UK. This is due to Sterling’s depreciation that took place at Country CAGR 2003-2008 products they have in Germany are cheaper, but at the same time more basic than the ones the beginning of the economic downturn France 3.5% available in the UK.” Germany (0.5)% Corporate # 11 “Some of the biggest processing plants in Europe are built by Germans and have high Italy (0.4)% productivity. UK has been a follower to these steps and not the pioneer. UK has no particular Japan (1.7)% advantage against Western European nations.” Spain 3.5% SME # 5 United Kingdom 4.7% USA 1.8% “British mindset is very creative in terms of problem solving and, even though we are using similar technologies with other countries, we are achieving greater efficiencies.” Sources: 1. OECD (2011). OECD Structural Analysis Statistics (STAN), 2. ONS (2011), Annual Business Survey Corporate # 6 Page 52 Page 53
    • Competitive advantages& areas for improvement Competitive advantages & areas for improvement 5.6 Productivity comparison 5.7 R&D and technology investment GVA per employee for manufacturing sector vs. food & beverage, 2008 • The UK FDM sector stands out for being one of the most productive sectors for Food, beverage and tobacco R&D expenditure as % of output 5.7.1 R&D 125,306 140,000 the UK manufacturing industry overall. According to data from 2003 and 2008, The UK food, beverage and tobacco industry has one of the highest R&D GVA per employee at current prices, FDM has maintained a higher level of productivity than the overall manufacturing 1.00% Canada spendings among EU countries, but lags behind Switzerland and Japan who 99,162 120,000 sector even though the gap narrowed by 2008 France invest two to three times more as a percentage of output 100,000 national currency 0.80% 69,053 68,611 Germany 66,433 • Although the food, beverage and tobacco sector has a much lower R&D % of output 60,022 60,525 • The UK along with Italy are the only developed countries covered by this 56,953 80,000 Total food & beverage 56,455 50,781 productivity 0.60% Ireland 44,717 intensity compared to sectors such as pharmaceuticals, biotech, technology 39,966 60,000 comparison where FDM achieves a higher productivity rate. In competing Total manufacturing Japan 40,000 productivity markets, such as Germany and France, that have managed to outpace UK 0.40% or healthcare, the success of businesses depends on the introduction Netherlands 9,961 of new products and constant improvement of recipes, packaging and 8,622 20,000 in global food and drink exports, the FDM sector falls far behind the overall 0.20% Poland manufacturing industry manufacturing processes. This drives the need for significant investment in 0 Spain 0.00% technology and R&D Japan* Italy United Kingdom Spain France Germany USA 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 • From our interview with the Irish food federation (FDII), Ireland believes that it United Kingdom has the capacity to significantly increase production output by 2020 to respond United States • Based on the OECD database of food, beverage and tobacco expenditure on to the higher commodity prices and the higher demand for new diets coming Notes: a. R&D expenditure as % of industry output expressed in national currency R&D, the UK has the highest spending in the EU together with the Netherlands Notes: a. Japan’s figures are in 1,000’s Yen from emerging markets. According to FDII, their dairy output (which accounts Sources: 1. OECD (2011), OECD Structural Analysis Statistics (STAN) at around 0.48% of output. Moreover, the UK maintained the R&D investment Sources: 1. OECD (2011). OECD Structural Analysis Statistics (STAN); 2. ONS (2011), Annual Business Survey CAGR 3 y for c.25% of their total FDM production) could be increased by 40% by 2020 (2008-2010) relatively constant since 2000, whilst the Netherlands declined from 0.57% in and they could also significantly increase their meat products output (which also UK Food producers R&D investment/ EU average (0.1)% 2000 to 0.47% in 2008 accounts for c.25% of the total production) if needed Net sales vs. EU and non-EU average 2010 Non-EU average 1.4% • However, the UK lags behind Japan which maintained a double level of 3.5% investment compared to the UK. The clear leader is Switzerland which invested 3.0% Devro (1.7)% 3.0% Unilever (1.9)% 1.54% of output in 2009 (not shown in the graph due to data available only for 2.5% 2.1% BEIG Topco (5.4)% 2009, but not time series 2000-2009) 2.0% 1.6% % 1.3% Tate & Lyle (13.1)% 1.5% 1.1% • Although not statistically representative, as it only includes 33 EU and 22 0.8% 0.7% Premier Foods (6.7)% 1.0% 0.6% 0.6% 0.5% non-EU food producers, the EU industrial scoreboard shows a similar trend Dairy Crest (7.8)% 0.5% 0.2% of EU companies lagging behind non-EU countries with an average R&D net 0% Northern (17.3)% sales ratio of 1.3% vs. 1.6 respectively. Moreover, the impact of the economic Foods Unilever EU average Non-EU average Devro BEIG Topco Tate & Lyle Premier Foods Dairy Crest Northern Foods Investments Wittington United Biscuits United Biscuits (1.6)% downturn is reflected in the growth figures, with EU and UK companies Wittington displaying negative growth 4.6% Investments Notes: a. The EU Industrial Scoreboard for food producers is based on an EU survey of 1000 EU and non-EU businesses across sectors. The data in the graph are based on 33 EU food companies and 22 non-EU companies who responded to the survey, b. Wittington Investments is the ultimate shareholder of Associated British Foods and Fortnum & Mason Sources: 1. EU (2011), The 2011 EU Industrial R&D scoreboard Page 54 Page 55
    • Competitive advantages& areas for improvement Competitive advantages & areas for improvement 5.7 R&D and technology investment 5.7 R&D and technology investment Capital expenditure vs. industry turnover for food & soft drinks 5.7.2 Capital expenditure Technology investment intention in the next five years 5.7.3 Intentions to invest in R&D and technology (from survey output) (Findings from the FDF/Grant Thornton survey) CAGR Although the UK’s capital investments have remained stagnant over the past Most businesses surveyed intend to maintain or increase investments in R&D 2000- decade, they appear to be on par with rival nations’ and technology 2008 78,000 3,000 Dont know 100% Industry • As a measure of technology and machinery investment, we examined the net • 52% of the companies surveyed stated they will maintain the current level of 76,000 1.9% 2,500 turnover capital expenditure of UK FDM businesses and compared it with the turnover investment in technology, whilst 31% of companies plan to increase investment Net capital expenditure, £m 74,000 Higher than current level 52% 48% growth in the industry. Whilst the industry has been steadily but slowly growing, in technology. Similarly, 52% of businesses intend to maintain their R&D spend, 72,000 2,000 Net capital Corporates Turnover, £m 0.7% expenditure net capital expenditure has been growing at a slower pace. Moreover, capital Lower than current level 60% 40% whilst 39% plan to increase investment 70,000 SMEs 1,500 expenditure has been volatile through the years, following a decline until 2004 68,000 and a slow increase until 2008 In line with current level 49% 51% • The main reasons quoted for maintaining/growing the level of investment were: 66,000 1,000 Total turnover 64,000 • This picture reflects some of the views expressed by businesses, namely that No internal capabilities 25% 75% – the belief that growth will be driven by new product development 500 62,000 Net capital that will help companies to differentiate their products expenditure the industry is characterised by an ageing stock of manufacturing facilities 10 15 20 25 30 35 40 45 0 5 60,000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 and equipment – the need to be innovative and consistently take cost out of the business in Number of responses Sources: ONS (2011), Annual Business Survey • When comparing the food & beverage industry investments in the UK and order to maintain competitiveness vs. British and international competitors Investments in the food & beverage industry Germany, the UK seems to be following a similar approach to Germany, Sources: 1. Grant Thornton survey analysis – the ability to respond to changing consumer demands as a % of the industry’s turnover, % which has traditionally invested heavily in technology. However, the economic Investment intentions in R&D in the next five years – growth in exports, especially in emerging markets will require 7% downturn appears to have impacted the UK investments to a larger extent than in Germany, bringing down the capital expenditures from 2.4% of turnover to (Findings from the FDF/Grant Thornton survey) both investment in technology for additional output as well as 5.8% Industry investments as a % 6% 1.8%. However, in absolute terms, Germany’s FDM investment in fixed assets investment in R&D to adapt Western recipes to local tastes 4.9% 4.9% 5% was 28% higher in 2009 than in the UK Dont know 100% of turnover 2008 • However, SMEs pointed out that margin declines have resulted in less financial 4% 2009 • Moreover, in 2009, Brazil’s total investments (including both tangible and Higher than current level 44% 56% resources available for capital allowances. Moreover, financing constraints have 3% 2.4% 1.9% 1.8% 2010 intangible assets) reached 5.8% of the industry’s turnover at £5.4bn, but, in Corporates put pressures on companies and resulted in investments either being reduced 1.8% 100% 2% Lower than current level or focused on key growth areas. Some companies surveyed also mentioned 2010, they returned to the 2008 levels of 4.9% SMEs 1% that R&D is concentrated on product reformulation to replace traditional “A lot of the companies in the UK are old companies even if they are part of new In line with current level 50% 50% 0% commodities such as sugar or cocoa in order to mitigate for volatility and future conglomerates. So, there are a lot of legacy assets and the cost of closing them or upgrading investments scarcity of raw materials Germany - Capex No internal capabilities 75% 25% UK - them is very high.” Brazil - Capex Total Corporate # 5 • As a comparison, a French Institute of Statistics (INSEE) survey, revealed that 10 15 20 25 30 35 40 0 5 Number of responses French food and beverage businesses predict a 7% increase in their technology Sources: 1. ONS (2011), Annual Business Survey; 2. Associação Brasileira das Indústrias da Alimentação (2011), Statistics ; 3. Statistisches Bundesamt Deutschland (2011), Structural Data on the Industry investments in 2011 compared to 2010. However this follows 2009 and 2010 Sources: 1. Grant Thornton survey analysis levels when they reduced investments by an estimated 14% and 9% respectively Page 56 Sources: 1.ANIA (2011), Bilan et Perspectives Economiques Conférence de presse 29 Mars 2011 Page 57
    • Competitive advantages& areas for improvement Competitive advantages & areas for improvement 5.7 R&D and technology investment 5.8 Labour skills “Growth in emerging markets will drive greater requirements of investment in R&D QS 2011 World 5.8.1 Skills and technology.” University Ranking Comparative ranking in reading The UK performs well in higher education league tables, but lags behind SME # 9 competitors in basic skills such as reading and numeracy of 15 year old pupils Top Top Brazil 412 Country 10 100 Russia 459 “New products are driving growth for us and we also see a lot more work on managing cost Spain 481 • The UK ranks highly in higher education league tables with four universities in inflation on raw materials, therefore our investment in R&D will have to grow.” Brazil 0 0 UK 494 Taipei (China) 495 the top 10. The quality of the higher education system is also visible in the top SME # 9 Ireland 496 Canada 0 5 100 where the UK is the best represented country outside the US. A comparison France 496 “Financing constraints have put huge pressure on our business so investments will be US 497 on food science/technology/processing courses is not available, but only one of China & HK 0 6 Germany 500 minimised or focused on key growth areas.” the UK universities in the top 100 ranking offers food science courses Poland 500 SME # 10 Switzerland 501 France 0 2 • However, UK only achieves an average OECD scores in the PISA ranking Netherlands 508 “I think there is a lack of investment which is due to the lack of confidence by manufacturers. Canada 524 for both reading (ranked 25th out of 65 countries) and maths (28th out of 65 Germany 0 4 Hong Kong (China) 533 I don’t think it’s a short term versus long term issue. FDM companies abroad have better tax Shanghai (China) 556 countries).The scores are based on tests taken by students aged 15 across 60 breaks (e.g. Ireland) and have been able to heavily invest in technology.” India 0 0 300 350 400 450 500 550 600 countries. The ranking is dominated by China, Singapore, Korea and Finland. SME # 6 Reading score Ireland 0 1 Canada features in the top 10 countries for both reading and maths whilst “We will continue to invest in R&D at the current level, but the technology investment will be Comparative ranking in maths Netherlands is 10th in reading and 11th in numeracy. Similarly Switzerland ranks lower compared to previous years because of lower capital allowance.” Netherlands 0 3 8th in maths and 14th in reading. Germany, France and Poland are outside the Brazil 386 SME (anonymous survey response) Poland 0 0 Russia 468 top 10, but they outrank the UK in both reading and maths (although not by Spain 483 Ireland 487 much as in general they fit within the OECD average score) “Technology investment will be driven by our green agenda, while R&D will be driven by the Russia 0 0 US 487 need to invigorate the market with NPD to make a point of differentiation with own label.” UK 492 • This is in line with the comments collected during the interviews conducted for SME # 3 Poland 495 Spain 0 0 this study, where businesses have expressed a concern that the people coming France 497 Germany 513 into the workforce are not properly equipped with literacy and numeracy skills. Switzerland 0 3 Netherlands 526 Canada 527 Moreover, businesses feel that the school and university systems are very UK 4 19 Switzerland 534 theoretical and do not equip graduates with practical and business skills which Taipei (China) 543 Hong Kong (China) 555 make them more employable and ready to perform in their workplace US 6 32 Shanghai (China) 600 300 350 400 450 500 550 600 Maths score Notes: a. PISA is the OECD Programme for International Student Assessment, which evaluates the quality, equity and efficiency of school systems throughout the world. , b The QS World University Ranking is produced by QS Intelligence Unit and evaluates 700 universities worldwide Sources: 1. QS Intelligence Unit (2011) QS World University Ranking; 2. OECD (2011) Programme for International Student Assessment (PISA) Page 58 Page 59
    • Competitive advantages& areas for improvement Competitive advantages & areas for improvement 5.8 Labour skills 5.9 Labour costs Manufacturing and processing graduates as % of total graduates 5.8.2 Manufacturing and engineering graduates Labour costs per employee for food, beverage & tobacco, £’s Growth of labour costs vs. production output in food, beverage and tobacco, 2.5% calculated in national currency From 2005 to 2009, the number of UK manufacturing and engineering graduates 50,000 2.0% has not declined, however, they still represent a very small proportion of the total 45,000 France Labour cost per employee, Production output per employee, Labour costs per employee, £ student population Country CAGR 2003-2008 CAGR 2003-2008 40,000 Germany France 2.9%* 4.2% % of tota graduates 1.5% 35,000 Ireland 2005 • The companies interviewed believe that in the UK, less students study towards 30,000 Germany 0.2% 3.7% 2009 Italy 1.0% an engineering or technical degree. They also wanted the Government to 25,000 Ireland 4.3% 4.3%* 20,000 Japan subsidise these courses and advertise together with the industry the choice of Italy 2.3% 1.6% 15,000 Netherlands 0.5% options available for a career in food and drink manufacturing Japan -0.4% 0.5% 10,000 Poland 5,000 Netherlands 2.8% 6.7% 0% • The statistics across manufacturing and engineering, show that although the Spain 0 Poland 2.4%* 7.8%* Switzerland Netherlands Kingdom Italy Brazil Ireland Spain United States France Poland Germany Canada number of graduates has not declined, these degrees are not very popular 2003 2004 2005 2006 2007 2008 2009 United United Kingdom Spain 3.5% 4.0%* United States United Kingdom 4.9% 4.5%* • UK manufacturing and processing students accounted for 0.8% of total USA 2.3% 5.9% Notes: a. Based on ISC code 54 Manufacturing and Processing graduates in 2009, a slight increase compared to 2005 when they accounted for Sources: 1. OECD (2011). OECD Structural Analysis Statistics (STAN) Sources: 1. OECD (2011), OECD Structural Analysis Statistics (STAN) 0.7% of the total graduate population. However, this is very small compared to Notes: a. The figures with an * sign reflect the 2003-2007 period Unit labour cost growth forecasts, 2008 – 2011 Sources: 1. OECD (2011), OECD Structural Analysis Statistics (STAN) business studies which accounted for 16% of the graduates in 2009 Engineering graduates as % of total graduates 5.9.1 Labour costs • Poland has the highest percentage of manufacturing and processing students 6% 30% Despite being regarded internationally as a flexible labour market, the UK’s (2.2%) followed by France (1.1%) and Italy (1%) 4% labour costs are amongst the highest compared to other countries and have been 25% 2% growing at a fast pace over the years 20% 0% Ireland • According to OECD, the UK has one of the most flexible labour markets globally and % of total graduates % 2005 “I’ve been saying this for years, we need our manufacturing engineers to be competitive and (2)% UK 15% the most flexible along with Sweden, Denmark and Ireland within Europe. However, if 2009 be able to produce and develop things and customise technology.” (4)% Eurozone compared in Sterling terms, UK’s FDM labour costs have historically been the highest. 10% Corporate # 12 (6)% The 2008 jump in labour costs for many Eurozone countries can be attributed to the 5% (8)% depreciation of Sterling at the start of the economic downturn (10)% 0% • UK’s labour cost per employee has been increasing at an average annual rate of 6% Switzerland Italy Netherlands Ireland Kingdom Japan Brazil United States Spain France Poland Germany Canada United until 2007, which is above any other country covered in this research. Interestingly, in Sources: 1. European Commission (2010), Forecasts most other countries, production output per employee has outgrown the labour costs per employee (when measured in national currency), but this is not the case with Notes: a. This table includes ISC codes 50 Engineering, Manufacture and Construction and ISC code 52 Engineering and UK. UK FDM labour costs rose 25% faster than production output in the 2003-2007 Engineering Trades Sources: 1. OECD (2011), OECD Structural Analysis Statistics (STAN) period. At the same time, in Germany, production output grew 3.7% annually whilst labour costs remained at the same level Page 60 Page 61
    • Competitive advantages& areas for improvement Competitive advantages & areas for improvement 5.9 Labour costs 5.9 Labour costs Labour costs per employee for food, beverage and tobacco vs. Margin growth for food and soft drinks • In 2011, UK’s minimum wage was at £1,027. A direct comparison with other “We had to switch to overseas manufacturing because of cheaper labour. Whilst a decade ago manufacturing, 2009 in national currency as measured by PBT divided by Turnover markets by making use of 2011 exchange rates would demonstrate a more all our manufacturing was based in the UK, today we only manufacture a fraction of our total 80,000 Country CAGR 2005-2009 output in the UK for branding purposes.” ‘flexible’ picture for the UK labour market given the historical lows of the Sterling- 70,000 Labour cost per employee, Canada (9.2)% euro exchange rate. At a high level, the UK lies above Spain (which is considered SME # 11 60,000 national currency France (1.6)% to have a more rigid labour market), appears to be on par with France and “Our country has become more competitive in labour costs, but there were big increases in 50,000 Food, drink & tobacco Germany (8.6)% 40,000 Canada and ranks below Ireland. Any deeper analysis requires the consideration the past that put it at a less competitive position; during the boom years when the wages were Manufacturing Poland 2.7% 30,000 of a number of parameters such as costs of living, state benefits, etc increased to attract employees.” Spain (8.3)% 20,000 FDII (Food and Drink Industry Ireland) UK (2.3)% 10,000 0 Notes: a. The figures above were extracted by aggregating the information available for each FDM business on the Orbis France* Ireland Italy Japan* Netherlands Poland* Spain United Kingdom United States Germany* database. However, Orbis may not include financial information reported by small companies. Sources: 1. Bureau Van Dijk – Orbis (2011), Grant Thornton analysis • In 2010, according to the European Commission, labour costs across the Notes: a. Japan is quoted in 1,000 Yen; b. The figures for France and Poland are from 2007 while for Germany from 2008 Eurozone are projected to increase by almost 4% for the 2008-2011 period, c. UK’s 2009 labour costs were sourced from ONS and differ substantially from the OECD 2003-2007 figures quoted above whilst Ireland’s labour costs are expected to go down by more than 8%. because they account for different parameters Sources: 1. OECD (2011). OECD Structural Analysis Statistics (STAN); 2. ONS (2011), Annual Business Survey During the same period, UK’s cost growth is expected to surpass the Eurozone reaching c.5% Minimum monthly wage by country, 2011 • When comparing labour costs per employee for the food & beverage sector 1,499 € 1,600 1,365 € 1,424 € with those for the overall manufacturing sector, UK along with Ireland, Italy and 1,400 1,207 € Netherlands are the countries where these costs are very closely aligned (when 1,200 Minimum wage £1,027 1,000 calculated in each country’s national currency). Whilst in countries like Germany 800 641 € and USA the FDM costs lie 40% and 29% below the overall manufacturing 600 sector respectively, the UK FDM costs are only 7% below 371 € 400 234 € 200 113 € • This highlights the need to better control the labour costs in a sector whose 0 margins are rather tight and have been getting increasingly squeezed over the Ireland Netherlands France Spain Poland* Canada* Brazil Russia UK years. UK’s FDM margins (in terms of PBT) decreased from 6.5% in 2005 to 5.9% in 2009. During the same period, other countries’ margins were squeezed at even faster rates Notes: a. Canada applies different minimum wages by state (varying from 8.75CAD to 11.00CAD) that we used to calculate an average minimum. Poland’s minimum wage reflects the new 2012 level to be introduced Sources: 1. Grant Thornton desktop research Page 62 Page 63
    • Competitive advantages& areas for improvement Growth barriers and risks 5.10 FDM profit margin Section 6 Margin (profit before tax/ net turnover) comparison across FDM 5.10.1 Profitability comparison UK FDMs have maintained higher margins compared to most rival nations even 14% during the economic downturn 12% Canada • Competitiveness is a relative notion when applied to companies and can 10% France Gross margin, % be measured in terms of the cost of producing a finished product as well as Growth barriers 8% Germany through non-financial terms as the ability to bring to market products that are 6% Poland different and appeal to customers and consumers. These require investment 4% Spain and, therefore, profitable companies are able to invest 2% UK & risks 0% • UK food and soft drinks manufacturers have had higher profit before tax margins compared to many comparison countries. These figures support the 2005 2006 2007 2008 2009 2010 points made by businesses during the survey and interviews, namely that the Notes: a. Calculations based on financial results reported by food and soft drinks manufacturers b. 2010 results are based for UK businesses distinguishes itself from other developed countries by high a smaller number of companies as not all companies reported 2010 results. Ireland is excluded as only 83 companies were efficiency and low waste in the production process available in the financial database, while the other countries are based on a much higher sample e.g. Germany 4600, UK 1300 Sources: 1. Bureau Van Dijk – Orbis (2011), Grant Thornton analysis • However, UK businesses lag behind German companies. The high degree of Profit before tax margin growth for FDM automation in German factories coupled with lower labour costs per employee Country CAGR 2005-2009 due to the lack of minimum wages may explain the higher margins that German Canada (9.2)% companies enjoy France (1.6)% • Moreover, the margin growth over 2005-2009 has been declining in most Germany (8.6)% countries with the exception of Poland which has shown a greater resilience to Poland 2.7% the downturn, with a CAGR of 2.7% Spain (8.3)% UK (2.3)% Notes: a. Calculations based on financial results reported by food and soft drinks manufacturers listed under the SIC codes, b. 2010 results are based for a smaller number of companies as not all companies reported 2010 results. Ireland is excluded as only 83 companies were available in the financial database, while the other countries are based on a much higher sample e.g. Germany 4600, UK 1300 Sources: 1. Bureau Van Dijk – Orbis (2011), Grant Thornton analysis Page 64 Page 65
    • Growth barriers and risks Growth barriers and risks 6.0 Section summary 6.1 Current and future risks • This section discusses the growth barriers and risks within the UK FDM Current and future risks for the UK FDM manufacturing 6.1.1 Risks (from survey output) industry as identified by businesses participating in the FDF/Grant Thornton (Findings from the FDF/Grant Thornton survey) The businesses surveyed perceive access to raw materials and education as survey and interviews 5 the major issues that the industry will be confronted with in the future. These 4.0 3.8 3.7 are issues that are difficult to change in a short timeframe and require long-term 4 3.6 • Wherever possible, these issues are analysed with supporting evidence from Risk (1 lowest, 5 highest) 3.2 3.3 3.4 3.4 action plans 3.0 2.9 desktop research 3 2.8 2.6 Current • Both corporates as well as SMEs surveyed view the role of Government in Future • The businesses surveyed perceived labour cost/legislation and the tax system 2 providing a positive business environment as the key issue the UK food and as the biggest risks the industry has to deal with at present, while access to raw soft drinks manufacturing industry is confronted with at present. This may be 1 materials is expected to be the major risk in the future because the industry feels the Government does not give FDM the level of 0 attention and incentives that is in line with the contribution the sector makes to of innovation Government Labour cost/legislation Tax system Education system & training Access to raw materials Track record • Food and drink manufacturers emphasised corporation tax is much more incentives & support the UK GDP attractive in other countries such as Ireland, Poland or Slovakia, while the UK has one of the highest personal tax rates which acts as a barrier to recruiting • This is followed by labour cost/legislation, which is not surprising given the skilled labour labour cost increases seen in recent years combined with regulatory changes Sources: 1. Grant Thornton survey analysis such as the Agency Workers Directive • FDM businesses are affected by the volatility in commodity prices and believe “Our high corporate and employment taxes and low accessibility to good UK workforce will that the UK should have a national food policy to address food security • The strong future risk identified is access to raw materials because of increased push production overseas.” demand from emerging markets. Companies believe that this may be an area • FDM businesses stated that access to finance is currently an issue, in particular SME # 12 where the UK is particularly disadvantaged compared to both developing and for SMEs, as banks have tightened lending criteria and are more risk-averse. “The biggest single issue currently is dealing with raw materials and energy price inflation developed markets. Moreover, the issue of food security and reliance on imports This is affecting companies’ ability to invest in order to drive future growth which are pushing up the costs of production. ” will become more important in the future as global population grows. Therefore, • Retailer consolidation has skewed the balance of power in the industry’s supply SME (anonymous survey response) the UK should harness greater innovation to maximise the output derived form chain and, to an extent, has acted as a growth barrier for the sector, despite locally sourced raw materials offering manufacturers increased access to consumers • Although the businesses surveyed stated that, in general, they have access to the people with the right skills, qualitative interviews revealed gaps in engineering and food science Page 66 Page 67
    • Growth barriers and risks Growth barriers and risks 6.1 Current and future risks 6.2 UK performance vs. multinationals’ investment criteria • However, the access to raw materials has been scored highest by SMEs (4.08/5) UK’s performance vs. multinationals investment criteria 6.2.1 Multinationals’ investment criteria (from survey output) whilst corporates have given it a score of 3.17/5. This is because multinationals (Findings from the FDF/Grant Thornton survey) When measured against some of the investment criteria multinationals use have the capacity to source raw materials centrally which can lead to better 5 to decide about where to place their production facilities, the UK’s current 3.9 3.8 access and lower prices 4 3.7 3.5 3.4 performance is low, suggesting a risk that some companies may move 3.2 3.1 3.0 • The other major risks identified are education, training and labour 3 2.6 manufacturing facilities in countries where these parameters are better met 2.4 Mutinationals investment criteria 2.2 2.0 cost/legislation. Corporates view labour cost and legislation as a higher risk Score (1 lowest, 5 highest) 2 Current UK performance • In the FDF/Grant Thornton survey, food and soft drink manufacturers compared to SMEs who scored education and training as the second major risk. mentioned labour cost and legislation, Government incentives and tax 1 SMEs are concerned about having access to a skilled and qualified workforce systems as the most important parameters for investment decisions and and considered it as a major risk, whilst corporates have concerns around 0 they believe that the UK scores low on these. The low labour score may Labour cost/legislation Access to raw materials Track record of innovation Government incentives and Education system and access Tax system access to competitive labour cost abroad which may put UK manufacturers in a be surprising given that in the World Economic Forum ranking the UK is less favourable position to workforce perceived as having a flexible labour market which provides it with an support advantage over Western European countries. However, businesses justified their views by emphasising the increase of the minimum wage, the constraints imposed by EU regulations such as the Agency Workers Directive and over 160 employment regulations they need to comply with Sources: 1. Grant Thornton survey analysis • Similarly, businesses regard the UK tax system as unattractive and point out that in a globalised world, the tax rates are an important driver for attracting investments. However, taking into consideration the international comparisons, the UK has the 8th lowest main rate of corporation tax in the world. Nevertheless, its rate is in line with the OECD average and, therefore, does not necessarily give the UK a competitive edge vs. potential competitors Page 68 Page 69
    • Growth barriers and risks Growth barriers and risks 6.3 Access to raw materials 6.3 Access to raw materials UK commodities’ imports as a % of domestic use CAGR in prices of raw materials 2010 average commodities’ prices across the world, € per tonne • This trend is likely to continue, but we still rely on imports to provide diversity 90% Commodity 2005-2008 2008-2011(a) and choice. In 2008, 25 countries accounted for 90% of UK food supply, up 3,500 domestic use or supply for domestic us 80% Wheat 26.9% 10.4% 3,038 from 20 countries in 1993. European Union continues being the UK’s largest Imports of commodities as a % of 70% 2006 3,000 Barley 26.8% 6.6% supplier and is considered to be a secure source given the stable political 2010 price per tonne, € 2,531 60% 2,500 2007 Oats 18.4% 18.3% environment, the history of collaboration with the UK and the trade agreements 50% 2008 Beef 12.3% 4.2% 2,000 1,686 EU in place 40% 2009 Pork 6.7% 5.0% 1,500 World 30% 2010 Poultry 10.4% 3.3% • Nevertheless, many interviewees regarded access to raw materials a large future 20% 1,000 779 Cheese 10.6% 1.3% 480 460 risk for the UK and a competitive disadvantage compared to other rival nations 10% 500 0% 159 171 155 119 who are more self-sufficient and have more raw materials sourced locally. Notes: a. 2011 prices reflect averages from January until August. 0 Beef and veal There is no doubt that the UK remains particularly dependent on importing Sugar beet Poultry Barley Wheat Pork and sugar Oats Poultry Sugar Beef Barley Wheat 6.3.1 UK self-sufficiency and raw material prices certain commodities. The UK imports more than 60% of the total sugar and Even for commodities where the UK is relatively self-sufficient, we are price pork quantities used domestically. And whilst dependency on sugar imports Sources: 1. Defra (2010), Agriculture in the United Kingdom Sources: 1. European Commission (2011), AGRIVIEW; 2. World Bank (2011), Commodity Markets; 3. FAO (2011), International appeared to be declining from 2006 to 2009, in 2010 the levels of dependency takers rather than price makers in the global market. This means that FDM Commodity Prices businesses are particularly exposed to volatility in raw material prices and exceeded the 2007 levels. However, pork has remained rigid throughout the UK average historic commodities’ prices, £ per tonne availability. One way of mitigating this risk is to seek to develop more resilient OECD 2011-2019 forecasts on average commodities’ prices, $ per tonne 2006-2010 period. The UK also imports substantial quantities of other meat Wheat supply chains as well as seeking greater trade liberalisation 6,000 1,800 9.1% 10% products such as beef and poultry. On the contrary, imports on wheat, barley 1,600 Barley • Successive rounds of Common Agricultural Policy reform have decoupled 5,000 and oats lie at low levels Commodity price per tonne, £ Forecast prices per tonne, $ 1,400 8% 2008-2011 subsidy payments from production in the EU and seen a progressive alignment Food & Drink inflation Oats 1,200 5.6% 5.8% 4,000 2011/2013 • The prices for all key commodities imported by the UK, have significantly 6% of prices to global market rates. This and a combination of increased demand 1,000 4.5% Beef increased in the 2005-2011 period. This demonstrates the importance of and more variable weather patterns has seen increasing volatility in many 3,000 2013/2015 800 3.4% Pork improved risk management and greater resilience in supply chains to ensure 4% 600 2.5% commodity prices. Traditionally the UK has had a relatively low levels of self- 2,000 2015/2017 Poultry future food security 4001.5% 2% sufficiency even in foods which could be produced here because it tended to 2017/2019 200 Food & Drink rely on its extensive trade networks to import at lower costs. Joining the EU 1,000 • According to OECD world sugar stocks in particular fell to their lowest levels 0 0% Inflation changed the position significantly in the 1970s and 1980s, pre-reform. More 0 in 20 years in 2010-2011 supporting higher as well as more volatile prices 2011* 2005 2006 2007 2008 2009 2010 Poultry Brazil Raw sugar Beef Brazil Pork Brazil Wheat recently UK self-sufficiency has been increasing again (60% self-sufficient in before soaring to a 30-year high in Feb 2011. Since 2008, the meat sector Poultry EU Pork EU Beef EU all foods and 74% in foods that can be produced in the UK), both as result of was adjusting to the supply and demand imbalances in the feed sector which Notes: a. 2011 prices reflect averages from January until August. Sources: 1. Defra (2011), Agricultural Price Index; 2. ONS (2011), Consumer Price Indices investment in supply chains here and the competitiveness of UK farming brought along high volatility in food prices, but they started to recover as Sources: 1. Defra (2010), UK Food Security Assessment: Detailed Analysis 2. Defra (2008), Ensuring the UK’s Food Security in Sources: 1. OECD & FAO (2011), OECD-FAO Agricultural Outlook 2011-2020 economies started pulling out of recession. All along, UK food inflation has been a Changing World rather volatile reaching very high levels and thus affecting UK consumers Page 70 Page 71
    • Growth barriers and risks Growth barriers and risks 6.3 Access to raw materials 6.4 Access to finance • By comparing global commodities prices from 2010, the EU seems to have “One of the differences is that our country has raw materials available locally, while the UK SME access to finance to fund current business requirement 6.4.1 Access to finance (from survey output) set very heavy duties across some raw materials resulting in significant price does not.” (Findings from the FDF/Grant Thornton survey) Even if funding is overall available to fund current operations, SMEs acknowledge variances. Poultry imports for example appear to have been 116% more International food federation # 5 they have difficulties in accessing bank loans for investment 100% expensive for the EU than the rest of the world. Additionally, the Food and “Commodities are by far the biggest driver of input cost at about 70%. As we have moved 90% • 87.5% of SMEs surveyed mentioned they have access to financing in order Agricultural Organisation of the United Nations (FAO) forecasts that global from a fundamentals driven market (ie driven by the fundamentals of supply and demand) into 80% to support their current operational requirements. However, in the follow-up commodities prices over the next decade are going to be higher than the last commodities markets driven by financial speculation, pricing has been significantly distorted.” 70% 60% interviews many emphasised that bank financing is not available as lending decade’s prices although in many cases they are forecast to be lower than the % of responses Corporate # 5 50% terms are stricter, more expensive and banks are overall much more risk peak levels experienced in the 2008-2010 period. FAO expects that, during the 40% 87.5% “I think that commodities are becoming scarce and for the food industry access to raw averse compared to the pre-credit crunch time. In addition, SMEs struggle to next decade, in real terms, prices for cereals and meats will go up by 20% and 30% materials is going to be reduced. Other countries will feel similar dynamics and our geographic get access to bank financing for investment in technology and R&D as banks 30% respectively compared to the previous decade 20% nature doesn’t help. I don’t know what the solution is, but that is the single biggest challenge expect projects to have a low risk and a quick pay back time. Therefore, SMEs 10% 12.5% • FAO along with OECD project that a slow growing supply set against high as I look out into the future.” 0% have had to find alternative financing sources such as personal finance or family No Corporate # 6 Yes expected demand underlies the projection of high and volatile commodity and friends prices. The high cost pressures associated with production mean that Sources: 1. Grant Thornton analysis • As some of the businesses pointed out, there seem to be two contradictory agriculture will continue to grow but at a slower rate. Sugar stocks should versions regarding access to finance. On the one hand, banks point out that rebuild in the near term but the stock-to-use ratio is expected to average “I think the biggest barrier to growth at the moment is the banks’ failure to lend money and there has been a lack of demand, whilst businesses believe that there was lower over the coming decade than in the previous 10 years providing support that has happened during the last two years or so and I don’t see any end to it. We have had not necessarily a significant drop in demand, but they are discouraged from for higher prices. The meat market outlook reflects the response to high £800 billion fed back in the economy but very little of it has flown to the real economy. As applying. This is mainly due to the fact that banks have tightened lending criteria feed costs along with firm demand especially from developing markets. High such, the industry is not being helped and cannot create jobs.” or are more risk averse and, therefore, charge high rates commodity prices in the first half of the decade are expected to result in the SME # 13 expansion of livestock inventories and a subsequent expansion in trade during “Banks do not lend as much as needed for expansion and development.” • However, despite the importance of financing for the future survival and the second half Corporate # 10 growth of a business, access to finance was not regarded as the main issue or barrier to growth. Companies interviewed were much more preoccupied with • The bulk of the growth in meat exports is expected to come from North and the future economic growth, volatility in raw material prices, competition and a South America which together account for 84% of the world increase in joined up policy on food meat exports. In the case of meat products, EU prices are expected to be 43% higher than Brazil’s for the 2017-2019 period. According to the Brazilian food federation, their labour costs are high, but it is their locally available raw materials that allow them to maintain competitive prices internationally Page 72 Page 73
    • Growth barriers and risks Growth barriers and risks 6.4 Access to finance 6.5 International tax comparison % of businesses across industries successful in getting loan finance from banks 6.4.2 Access to finance (supporting evidence from desktop research) Comparison of main rate of corporation tax Comparison of highest personal tax rate 120% 45% Country Rate 94% Banks (2007) The UK appears to be one of the hardest places for bank loan financing in Europe 40.0% 89% 89% 86% 97% 40% Sweden 56.6% 100% 84% 72% 79% 91% Banks (2010) 82% 86% • Access to bank loan financing has been reduced across European countries as 77% 75% 74% 35% 33.2% 33.3% 34.0% Denmark 55.4% 80% 72% a consequence of the financial crisis. Banks have tightened lending criteria in 30.0% 31.4% 65% 64% 28.3% 29.4% Netherlands 52% 63% order to meet capital requirements and avoid future losses. Countries such as 30% 25.6% success rate % 25.0% 25.0% 25.0% 26.0% UK 50% 60% Ireland, Spain and the UK, where the credit crunch hit hard have experienced 25% 23.0% 24.0% 21.2% Japan 50% 40% the largest decline. As a result, in the UK, the success rate of bank loan 19.0% 20.0% 20% applications has dropped from 91% in 2007 to 65% in 2010 16.0% 16.5% 17.0% Ireland 47% 20% 15% 12.5% Germany 45% • Therefore, over the same period, UK businesses have relied on other sources China 45% 0% 10% to finance their operations and expansion/investment plans. This is visible Sweden Poland France Italy Germany Netherlands United Kingdom Spain Ireland France 41% from the increase of successful loans from other sources, in particular the 5% USA 35% owners/directors of the business (successful application increased from 81% 0% Poland 32% to 92%), but also family and friends (successful applications increased from Switzerland Brazil Ireland Netherlands India Singapore Spain France Poland Russia China Germany South Korea Canada UK US Italy Malaysia World average Romania OECD average Hong Kong Notes: a. Based on a 2010 survey coordinated by Eurostat which included 25,000 SME businesses (10-250 employees) Brazil 27.3% across 20 EU countries ; b. The graph is based on the responses of SMEs active in industry (excluding construction) looking for 51% to 58%). UK businesses appear more successful at obtaining finance loan financing Sources: 1. Eurostat (2011), Structural Business Statistics from alternative sources, with the highest success rate of getting financing from owners/directors among the comparison countries Sources: 1. KPMG (2011), Corporate and Indirect Credit Conditions Survey: availability and demand for credit across firm sizes Tax Survey 2011 reported in the Q3 survey a b • Although, according to the Bank of England (BoE), in Q3 2011, larger firms Net percentage balances 20 with strong balance sheets were generally able to access bank lending, 6.5.1 Corporate tax Comparison of highest personal tax rate smaller companies still reported difficulties in obtaining finance. The survey This contrasts with the personal tax rate, the UK has one of the highest marginal 15 In the recent years, the UK has reduced its main corporation tax rate, however, on credit conditions undertaken by the BoE revealed that there has been rates of personal taxation, which may act as an inhibitor in attracting talent Increase some EU and low cost countries are still more competitive 10 an increase in demand from medium businesses, whilst the demand from 5 corporates and smaller companies was lower due to the lack of confidence in • Following the Government’s decision to cut the main corporation tax to • Following the Government’s decision to increase the highest personal tax rate future macroeconomic conditions. Moreover, lenders noted that deposits from 26% from 28% (currently awaiting enactment), the UK has one of the lowest to 50%, the UK is one of the least attractive in the world, with only Netherlands, 0 businesses had increased over the recent past as some businesses sought to tax rates in the world. The Government plans to further reduce the tax rate Denmark and Sweden having higher rates (5) deleverage or postpone investment due to current economic conditions to 23% by 2015, which would increase the country’s attractiveness for Decrease (10) • This can restrict businesses’ ability to attract talented and skilled people across • These results highlight the need for new and more flexible ways of providing investment, assuming competitors such as Germany and Netherlands do not (15) managerial and scientific roles access to financing for SMEs. For the UK, one proposed solution was Project reduce theirs further (20) Merlin, agreed in February 2011, under which the top five mainstream banks “Ireland has just delivered a quarter of 1.6% growth. It has happened so because it has very Availability Demand agreed to lend £76 billion in 2011. However, in the first quarter they only lent • Having said this, the UK’s current rate is in line with the OECD average and still Notes: a. Net percentages are calculated by weighting together the responses of those lenders who answered the question. low corporation tax. The big businesses are there not because of the domestic market but £16.8 billion, £2.2 billion short of the £19 billion target. Another solution that higher compared to EU countries such as Ireland, Romania or Poland The bars in the chart show the net percentage balance reported over the three months to early September. The diamonds because of the low tax. That is why the corporations did not move out of the country during show the associated expectations for the next three months. ; b. In the first panel, a positive balance indicates that more credit has been suggested was that the Government could use its leverage with is available. In the second panel, a positive balance indicates an increase in demand. “The £150,000 threshold with the 50% taxation is not good for senior/middle managers and Ireland’s crisis.” Corporate # 8 nationalised banks as a vehicle to trickle down funds towards the real economy Sources: 1. Bank of England Trends in Lending, October 2011 that is a real obstacle to attracting talent.” SME # 9 Sources: 1. Bank of England. (2001) Trends in Lending, October 2011, 2. Factiva, 3. Financial Times Page 74 Page 75
    • Growth barriers and risks Growth barriers and risks 6.6 Balance of power in the supply chain 6.6 Balance of power in the supply chain Balance of power shift in the supply chain over the past five years 6.6.1 Balance of power shift (from survey output) 6.6.2 Impact on FDM (from survey output) “Ten years ago you couldn’t have such a wide distribution. Now, thanks to the retailers you can get into half the households by having a successful product launch in Tesco.” The businesses surveyed stated that in the past 5 years the bargaining power has The consolidation of retailers has both negative as well as positive implications 90% Corporate # 5 77% shifted in favour of retailers for manufacturers 80% 70% • Both corporates and SMEs surveyed agree that the balance of power has • In some cases, the companies interviewed mentioned retailers trying to impose “I am keen to stress out that we as a supplier, may see supermarkets as difficult to deal with, 60% but there is no doubt that some of the reasons why UK manufacturers are enjoying good shifted gradually towards retailers over the past decades. Therefore, in the contractual arrangements to their advantage by demanding retrospective claims, % of responses 50% margins is because of the discipline that retailers have imposed on them.” supply chain the power now lies with the retailers because of the sheer reducing prices in store (and then asking food and soft drink manufacturers to fund 40% Corporate # 7 scale they achieved through consolidation. (see annex for details of grocers’ these promotions), upfront fees as entry fees to negotiations and late payments. 30% 20% market share) 66% of the companies interviewed stated that the unequal bargaining power 13% 10% 10% resulted in lower margins 0% In favour of FDM In favour of retailers No change • This asymmetry in bargaining power may lead to unfair trading practices, as larger “Without a doubt the retailers have the power and even large companies find it tough to negotiate with them.” and more powerful organisations seek to impose contractual arrangements to their Sources: 1. Grant Thornton survey analysis Corporate # 13 advantage. Such practices may occur in the supply chain and include, for example, late payments, unilateral changes in contracts, ad-hoc changes to contractual Impact of balance of power shift on your company “Most of the times retailers are pretty reasonable. It’s when they are under pressure that you terms, upfront payments as entry fees to negotiations see what I would call unacceptable behaviour because they need to improve their results and 100% then everybody has to participate in their promotions.” • As a result, smaller companies may be obliged to operate under reduced 80% 60% 46% 3% Corporate # 13 profitability, limiting their ability to invest in improved product quality and innovation 58% 40% 10% 22% 48% Positive • Interviewees also emphasised the positive aspects of their relationship with % of responses 20% 37% 22% 11% 24% 0% Neutral retailers, namely the discipline and efficiency that retailers have imposed, which (19)% (17)% (20)% (48)% Negative has pushed out cost and waste from the supply chain and resulted in better (40)% (68)% (67)% performances in terms of innovation, quality and prices. This has also improved (60)% (80)% their international competitiveness Turnover Profit margin Technology Contract Payment investment terms terms • Moreover, companies recognise the advantage of a successful launch in a major supermarket: quick access to a large proportion of UK consumers which in turn can Sources: 1. Grant Thornton survey analysis drive rapid turnover growth Page 76 Page 77
    • Growth barriers and risks Growth barriers and risks 6.6 Balance of power in the supply chain 6.7 Access to skills 6.6.3 FDM bargaining power “It’s all about building brands, value-add and bringing innovations/new product development Access to skills (findings from the FDF/Grant Thornton survey) 6.7.1 Skill shortages that cannot be easily copied by the retailer.” Although the businesses surveyed stated that in general they have access to Companies with a strong, innovative brand portfolio are more able to negotiate Corporate # 6 120% people with the right skills, qualitative interviews revealed gaps in engineering with retailers and food science “If you have brands in your portfolio that retailers think will drive their business, then they will 100% • Larger companies are better placed to negotiate with retailers, whilst SMEs • A larger pool of labour is currently available as a result of the recent economic work cooperatively with you. And our job is to make it very clear that our brands can help drive 25% 80% 36% are more vulnerable. Manufacturers of branded products can somewhat downturn given higher unemployment and the availability of migrant workers their business and if we do that properly we get a great reaction.” % of reponses No insulate themselves as they have a relationship with the consumer and, thus, 60% Corporate # 5 Yes • Qualitative evidence from interviews with FDM executives suggests that retailers are more willing to focus the relationship on other aspects beyond “In private label it is much more difficult. Brands can give you something proprietary that you 40% 75% companies have access to sufficient candidates with adequate skills for price. However, the brand needs to be differentiated, innovative and constantly 64% can build on and convince the retailer that you can drive their business.” 20% creative positions (sales, marketing), but struggle to find suitable candidates engaging consumers in order to be an effective bargaining tool. Producers of Corporate # 5 for engineering and science positions. In particular, companies face issues undifferentiated products, for which brand awareness is lower, are likely to be in 0% in recruiting food scientists, food nutritionists as well as technologists and C orporates S ME s a much weaker position engineers with the ability to adapt complex bespoke automated systems • In contrast, manufacturers of own label products do not have the brand cushion Sources: 1. Grant Thornton analysis • This is consistent with data showing that there is a shortage of qualified and are often put in competition with each other in tenders with the aim to drive food scientists and technologists. As a result, one in five food scientist and down price. This significantly reduces their margins “We are always looking for good food engineers and among those that want to work in food technologist vacancies in the UK are hard to fill. According to research the industry there are not many that are very good. Food technology degrees are not conducted by various organisations across the UK, hard to fill vacancies have • The UK FDM is not the only one facing pressures from retailers. In Australia, highly regarded, which makes it difficult for food technologists to rise to senior roles in the dropped compared to pre-recession levels. For example in England, vacancies where the retail market is largely concentrated in the Top 5 grocer chains, organisation.” have dropped from 6% in 2007 to 2% in 2010. In England, the highest shortage the retailers have announced plans for expansion of their FDM market share Corporate # 3 of skills is in process, plant and machine operatives (47%), in skilled trade (25%) through their private label products. However, the Industry Minister recently and in technical staff (25%). In Scotland, companies expressed concern about “It is often the posts requiring relatively high level technical skills that are the hardest to fill.” announced an attack against the large retailers because he considers that the the shortage of qualified engineers and technicians with sector experience, BMG Research, quoted by Improve whilst in Wales, the main skills required were bakery and butchery retailers’ plans would hurt incentives to innovate among supplier firms and would eventually restrict consumer choice and hurt suppliers. The Minister also “Even with relatively high levels of unemployment, we’ve been surprised how difficult it is to pointed out the fact that suppliers had privately complained about supermarkets find expertise in certain areas such as engineering, particularly food technologists.” “The industry has difficulty recruiting in technical and R&D areas, which requires people with misconduct for fear of speaking out publicly against their biggest buyers Corporate # 5 specific skills and training in those areas. It is difficult to find good people as there are not many of them and the good ones are in great demand.” Corporate # 14 Sources: 1. Improve (2010), Sector Skills Assessment for the United Kingdom Food and Drink Manufacturing and Processing Industry (a number of resources were quoted by Improve’s study and were utilised for the purpose of this report) Page 78 Page 79
    • Growth barriers and risks Growth barriers and risks 6.7 Access to skills 6.7 Access to skills 6.7.2 Reasons for skill shortages (from survey output) support for apprenticeships) in order to improve the industry perception, solve UK food and beverage HE students vs. total HE student numbers 6.7.3 UK food and drink course enrolments (supporting evidence from the skills gap and attract higher calibre candidates desktop research) The industry’s outdated image leads to a small number of students pursuing food 4,000 2,600,000 and drink related degrees or apprenticeships and an inability for manufacturers to 2,547,470 FDM manufacturers believe that there are not enough students taking food and attract high calibre talent • Moreover, interviewees pointed out that, in order to remain competitive the 3,500 2,550,000 beverage specific degrees industry needs to upskill its workforce across all levels. Skills needed vary from 3,000 2,500,000 • Over the past decade, the number of students enrolled in higher education (HE) Number of students • The main reasons stated for the reduced access to personnel with the relevant leadership and operational managerial skills all the way to basic literacy and 2,450,000 2,500 2,396,050 Total HE students skills and qualifications were a shortage of engineering and food science Food and food and beverage courses has been experiencing ups and downs, with the numeracy for workers on the production floor 2,362,815 2,400,000 graduates, but more importantly the industry’s inability to attract the higher 2,000 beverage latest years seeing an increase of c. 27% between 2006/7-2009/10. However, 2,306,105 3,380 2,350,000 HE students calibre graduates, apprentices and experienced workers. Potential employees • However, this is in contrast with the fact that in order to control labour costs, 1,500 3,065 students studying towards a degree in food and beverages still represent only 2,650 2,695 2,300,000 Total HE do not find a career in the food industry attractive enough because they view on the factory floor, the industry relies on migrant workers, especially Polish, as 1,000 students 0.1% of the total student population 2,250,000 the food industry less prestigious and innovative compared to sectors such as they are willing to work for lower wages. The industry needs to understand and 500 2,200,000 • According to the website UK Complete Guide to Education, over a quarter of HE automotive, engineering, pharmaceutical. Moreover, executives mentioned that expect higher costs in return for a more upskilled and productive workforce 0 2,150,000 institutions, 44 HE out of the total of 165 offer over 120 university and foundation 2006/07 2007/08 2008/09 2009/10 the industry cannot afford to pay the same salaries as professional services degree courses related to food and beverages. However, many are not directly industries which also hinders the ability to attract the right calibre of candidates. relevant for the manufacturing and processing industry as they are related to “Since I joined the industry 20 years ago, we’ve dropped as a sector in attracting young These arguments combined with the low level of apprenticeships and on-the- hospitality, nutrition or are combined degrees with a wide range of subjects from people. It is hard to make the industry attractive overnight when we compete with sectors Sources: 1. HESA (2011), Students in Higher Education job training programmes lead to many positions being filled by people with philosophy to drama. In the 2011/12 academic year there are 17 pure Food such as IT, finance or creative industries, but we just have to project the right image.” insufficient qualifications and skills UK food and beverage manufacturing and processing FE Science and 7 Food Technology courses offered across British universities Corporate # 5 • However, the companies interviewed stated that the food and soft drinks • The primary research conducted with FDM executives uncovered the need for 40,000 industry is a more stable employer compared to other industries and has a “I think food science used to be bigger in the school curriculum, but it has dropped and the 39,401 the food and beverage programmes to be less theoretical and more focused on range of roles that need to be advertised so that potential employees, especially number for GCSEs in science has also dropped because the public perception of the industry 39,000 the practical needs of the food and beverage industry young people, understand the wide range of long-term career options available is low.” 38,000 “University degrees are not such a big advantage when hiring someone as graduates tend to to them in creative, science and engineering areas Corporate # 7 Number of students 37,000 lack the essential practical knowledge.” • In this context, the FDF has launched a campaign called “Taste Success “We need a long-term reform of the primary and secondary education system. As a country, 36,025 SME # 16 – A Future in Food” to raise public awareness about the FDM industry we do not produce sufficiently literate and numerate students going into industry. We’re good 36,000 “I would like the Government to work with the industry to set accredited courses, but the contribution to society. The campaign aims to promote the food and soft at identifying top performers and giving them the right education and career opportunities but 35,000 industry would get to tailor the curriculum to its needs. This way students would get to build drink manufacturing sector as a career of choice for new recruits, hoping to at the expense of the rest.” 34,000 industry specific knowledge.” engage young people and change the outdated image of the industry. At the SME # 15 2006/7 2008/9 Corporate # 6 same time, FDF hope this may help addressing the forecast demand gap of 137,000 new recruits needed to replace the workforce that will retire or leave • An example of how the industry dealt with the need for more specialised skills is the industry in the next few years Notes: a. The definition has changed, therefore the numbers for 2006/7, 2008/9 may not be directly comparable Project Eden; a dairy industry initiative that aims to educate at the college level, Sources: 1. Improve (2010), FDM UK Sector Skills Assessment (quoting ILR, LSC, 2006/07 – 2008/09; SSC Summary Reports train and prepare industry specialists (please see case study overleaf) • However, it is unlikely the industry image will change overnight, and will most (A-D), WAG, 2006/07 – 2008/09; Modern Apprenticeship Performance Report, SDS, 2006/07 – 2008/09; Bespoke report for IMPROVE NI manager, DELNI, Northern Ireland Assembly) likely require a combination of actions from the FDF, manufacturers and the • During 2006/7-2008/9, enrolments in the 240 further education (FE) institutions Government (particularly around the reform of the education system and providing FDM specific qualifications have experienced a decline Page 80 Page 81
    • Growth barriers and risks Growth barriers and risks 6.7 Access to skills 6.7 Access to skills Project Eden – case study “We decided to come together and develop the programme after we researched and UK food and soft drink apprenticeships starts 6.7.4 Apprenticeships identified the skills gap in the industry, and the fact that none of the six dairy companies could Project Eden is the name of a programme led by the dairy industry, supported 2,500 The concerns expressed by the businesses surveyed around the decline of effectively afford to run the depth of quality course needed.” 2,500 apprenticeships can be supported by recent statistics. But recent Government by the National Skills Academy for Food and Drink and Dairy UK, which aims to Müller Dairy and industry pledges are expected to double apprenticeship numbers and put a Number of apprenticeship starts enable UK based companies to train their staff and prepare industry specialists 2,000 greater emphasis on learning skills on the job and tomorrow’s dairy leaders. The project was initiated by six dairy companies, “Even though the course is focused on food science and engineering, students also develop a UK namely Arla, Robert Wiseman, Müller Dairy, First Milk, Dairy Crest and Milk Link. commercial understanding of the dairy market and products.” 1,500 • The number of UK food and soft drinks apprenticeships declined from 1,022 to 1,022 Northern Ireland 845 2,500 Following extensive development by an industry steering group, a dedicated state Müller Dairy 24 831 Scotland 831 (a 19% decline) between 2006/07 and 2008/09. However, during this period, 1,000 59 35 117 of the art dairy training facility has been developed at Reaseheath College along 32 Wales England and Northern Ireland increased their intake whilst Wales and Scotland 552 35 378 262 with a new curriculum designed to provide employees with a broad education in 500 England declined. In Wales apprenticeships went down from 552 to 262 (a 53% decline), dairy over three years with a combination of on and off the job training. 387 400 417 while in Scotland they declined from 59 to 35 (a 41% drop). Although England 0 experienced a more modest increase of 8% over this period, its share of the 2006/7 2007/8 2008/9 The training programme covers all aspects of dairy technology including practical hands-on craft skills, key science principles associated with dairy and process total apprenticeships has increased from 38% in 2006/07 to 50% in 2008/09. improvement techniques required to run an efficient modern dairy operation. The Notes: a. According to the FDF This declining trend has been reversed in 2009/10 when the total number of curriculum has been designed by the dairy industry to reflect what is needed by Sources: 1. Improve (2010), FDM UK Sector Skills Assessment (quoting ILR, LSC, 2006/07 – 2008/09; SSC Summary Reports apprenticeships doubled to 2500 (according to Improve) driven by among (A-D), WAG, 2006/07 – 2008/09; Modern Apprenticeship Performance Report, SDS, 2006/07 – 2008/09; Bespoke report for the industry currently and in the future. IMPROVE NI manager, DELNI, Northern Ireland Assembly) other things the Scottish initiatives such as the Level 2 Modern Apprenticeship The programme is about more than just learning the skills to work in dairy – it is framework and funding made available for learners over the age of 20 Comparison of total apprenticeship starts (across industries not food specific) about developing employees with a passion for dairy who see the industry as a • The companies interviewed as part of this study pointed out the strong need for career of choice and who will develop both expertise and a real commitment to 1,800,000 1,594,167 1,611,000 apprenticeship programmes to educate people on practical business issues and Number of apprenticeship starts the industry. 1,600,000 develop a workforce with deep knowledge for specific food sectors (e.g. dairy) 1,400,000 Reaseheath College has benefited from a £2.5 million extension and upgrade of its dairy facility and, with direction from the major dairy companies and support 1,200,000 • We were unable to obtain the total UK apprenticeship numbers across industries. 1,000,000 England from leading equipment suppliers, and now has the appropriate equipment to However, whilst Germany offered more than 1.6 million apprenticeships in 200 800,000 Germany support learning. England only offered 15% of that with c.240,000 apprenticeships 600,000 Employees will qualify from the programme with a Foundation Degree that will 400,000 224,800 239,900 • The UK government has announced its commitment to deliver an extra ensure they both value the quality of the learning and are more committed to 200,000 250,000 apprenticeship places by 2015 across industries. Although, this may complete the programme. 0 significantly increase the number of apprenticeships compared to recent levels, 2007 2008 The programme has already been running for the past three years and the UK would still lag behind Germany where apprenticeships are one of the participating companies state they have already seen returns on their investment. Notes: a. England figures are for fiscal years 2007/8, 2008/9 pillars of the economy Sources: 1. The case study above has been compiled based on the information available on the website of the National Skills Sources: 1. Department of Business, Innovation and Skills, 2. Statistisches Bundesamt Deutschland Academy for Food & Drink Page 82 Page 83
    • Growth barriers and risks The role of Government in optimising growth 6.7 Access to skills Section 7 • The Food and Drink Federation (FDF) would like to capitalise on this pledge by doubling the number of apprenticeships available in the FDM sector in England and Scotland by the end of 2012. This should increase the number of apprenticeships in England and Scotland from 1,700 to 3,400. This should help narrow the gap with other components of the food value chain such as The role of Government in retail sector which currently has an intake of 12,000 apprenticeships every year. Moreover, the FDF hopes that the apprenticeship programme will contribute towards securing some of the pipeline of new recruits necessary to replace the ageing workforce approaching retirement “In Germany there seems to be a bigger emphasis on practical skills training. We could have better apprenticeship schemes put in place that actually build useful skills for an organisation.” Corporate # 6 optimising growth “We used to have apprenticeship programmes that trained people on the job, but the education system has changed and the emphasis is on higher education.” SME # 16 Page 84 Page 85
    • The role of Government in optimising growth The role of Government in optimising growth 7.0 Section summary 7.1 The role of Government in optimising growth • During the FDF/Grant Thornton survey and follow up interviews, businesses • SMEs in particular requested more support for their export efforts. Specifically, Areas of Government support (multiple choice survey question) 7.1.1 Areas where support is needed (from survey output) mentioned several main areas where the industry requires the Government to Government bodies could be better utilised to provide them with more effective 5 Businesses surveyed look for lower taxes, flexible labour markets, excellence Support needed score (1 lowest, 5 highest) provide a positive business environment in order to maintain its performance guidance and advice on the technical, administration and logistics processes in education, incentives for training as well as an overall reduction in the 3.8 3.8 3.7 and encourage sustainable growth. Our analysis also includes existing or associated with exporting to specific markets 4 3.4 3.6 3.6 3.6 3.4 regulatory burden 3.0 3.1 proposed Government initiatives which address some of the issues expressed 3 • Taxation is cost to businesses, limiting the resources available for investment. • Businesses would welcome Government support in the enforcement of the UK Corporates during the surveys/interviews Therefore, the food and soft drinks manufacturing sector and UK businesses Grocery Code of Practice 2 SMEs • Food and drink manufacturers identified the tax system as the main area in overall cannot achieve sustainable growth if the tax system does not encourage which the Government can provide support. Despite Government plans to 1 investments and allows businesses enough margin to reinvest reduce corporate tax rates, businesses believe the UK is not competitive and • In this context, it is not surprising that the FDF/Grant Thornton business survey 0 faces strong competition from both developed and emerging markets Labour law Training Education Taxation R&D identified taxation as the most important area where businesses would like to reform • Businesses view labour legislation as costly and have emphasised the see change. Tax was rated as the most important area of Government support importance of flexible and streamlined employment regulations in order to help both in the closed-ended multiple choice questions as well as in an open ended Sources: 1. Grant Thornton survey analysis manufacturers grow questions in the survey • Some Government imposed regulations and the ‘red tape’ associated are The single most important area of Government support • Labour law was also seen as an area of change, with businesses pointing out considered cumbersome especially for SMEs who do not have the resources to (open ended survey question) that the law is both complex and inflexible and recent changes such as the deal with the administration required minimum wage increases and the Agency Workers Directive will drive costs up. 60% 50% The businesses surveyed see the ‘hire & fire’ procedures as too cumbersome, 50% • Education reform is of major importance to the FDM sector as a means of making it difficult to replace underperforming employees 40% gaining improved and appropriate access to skills. In addition, businesses 30% 23% 25% 23% 27% 19% • The reform of the education system and training giving access to more qualified % of mentions would like to receive Government support to revitalise apprenticeship schemes 20% 13% 13% 8% Corporates and skilled workers are also important. But these are areas which are more which they perceive as essential for securing a future workforce with industry- 10% 0% 0% 0% 0% SMEs important for smaller companies, possibly because larger businesses can more specific skills Tax breaks/incentives Education & training Cutting red tape Remove trade barriers & Focus on innovation Employment law easily attract higher calibre workers and have the resources to upskill them incentivise exports flexibility • Businesses would also like the Government to reform R&D tax credits and tax breaks in order to offer better access to funding and promote innovation • Cutting ‘red tape’ is also a priority for both large companies and SMEs who believe that there are many regulatory burdens that are affecting their • FDM businesses highlighted the need for the Government to re-engage in operations. Businesses mentioned the vast amount of compliance regulation as discussions with international organisations for the removal of trade barriers as well as cumbersome procedures that increase administration, impact cost and well as the need for a food policy that clearly addresses long-term issues such Sources: 1. Grant Thornton survey analysis prevent them from focusing on their core activities as food security Page 86 Page 87
    • The role of Government in optimising growth The role of Government in optimising growth 7.1 The role of Government in optimising growth 7.2 Education and training • Companies point out that the legislation is becoming more complex and is “Simplify legislation for tax and employment rights.” Feedback from primary research on the role of Government proliferating rapidly. Moreover, there is no level playing field within the EU, SME # 19 Topic Issue Government actions based on FDM feedback as the UK is an early adopter and implements regulations, whilst some EU “Encourage companies to export with grants and advice.” Basic education • Workers (including native UK workforce) do • The businesses surveyed emphasised the need to reform the primary and secondary education system to improve Member States do not necessarily enforce regulations in a timely manner SME # 18 not have basic numeracy and literacy skills overall literacy and numeracy which makes it difficult for manufacturers to allowing them to operate at lower costs upskill workers and improve productivity “The Government should focus on the wider global economy rather than being focused on the • This is consistent with the low ranking (89th out of 139) that the UK achieved UK. Further reduction of trade barriers and focus on free trade is the best way to see growth in the World Economic Forum competitiveness ranking for regulatory burden on a global basis.” Education linked to • The companies surveyed view the current • The Government has announced it plans to strengthen its strategy for promoting science, technology, engineering on businesses Corporate # 4 business needs education system as too theoretical and and mathematics (STEM) skills. In this context, the FDM industry should explore how it can engage with universities removed from business realities to develop/reform existing food and drink manufacturing degrees to reflect industry needs • Other areas identified during the qualitative interviews were the development “The best thing the Government could do is a bonfire of regulations and reduction in the • Moreover science and engineering degrees • The Government has also set up investment funds for skills (e.g. the Growth and Innovation Fund (GIF), Employer of a joined up food policy. The recognised priority in this area are for the size of the Government at central and local level, which currently create additional are vital for the FDM industry, but the Investment Fund (EIF)) and needs to ensure that they are allocated effectively to reflect needs of FDM as a key industry to be under the clear responsibility of a ministry, rather than falling adminisrative burdens.” number of students pursuing them is contributor to the UK economy between DEFRA and BIS to enable funding and coherent strategies on food SME # 14 relatively low • The Government should also encourage collaboration between universities and businesses. Moreover, the security and Exports “Better quality school leavers or relaxed immigration controls i.e. adequate longterm supply of Government should incentivise universities to have programmes that are linked to real industry needs where businesses can have an input in the curriculum to ensure students develop relevant industry knowledge and are skilled workers.” exposed to sector specific issues “A tax regime that incentivises capital investment and does not penalise consumer purchases SME # 20 (e.g. “fat tax”) and a low corporate tax.” Incentivise apprenticeships • Historically the number of apprenticeships • The Government has launched a new £75 million programme of targeted support to help smaller employers access Corporate # 15 “Reduce labour red tape in hiring and firing staff and increase opportunity to recruit from non- was low as businesses were not Advanced Level and Higher Apprenticeships. This is likely to support FDF members who want to contribute towards incentivised to invest in them. Moreover, FDF’s Apprenticeship Pledge to double the number of apprenticeships in England and Scotland by the end of 2012 EC labour.” “Cut the red tape and the cost of doing business.” modern British society views the university SME # 12 path a pre-requisite for a successful career • However, a more encompassing programme is needed to incentivise the take on of apprentices SME # 17 • However, businesses believe • Apprenticeships need to be reintroduced as an alternative education path and must be effectively marketed by the “If we have to compete within the EU and globally, we need similar tax systems, such as apprenticeships can add real value for both industry and the Government to attract high calibre candidates corporation tax. In this field, Ireland is a real competitor and they have a FOOD HARVEST employees and businesses 2020 strategy, backed by government to grow their FDM and agricultural businesses in quite an aggressive way. Moreover, the Government must support R&D, cut the red tape, support Promote the industry • The food and drink manufacturing industry • BIS has launched a new initiative: See Inside Manufacturing. This is being piloted by the automotive sector whereby as a career choice and has an outdated image and therefore the companies are opening their doors to young people to help change the perception of careers in the sector. This training and efficiency.” industry finds it difficult to attract high programme will extended to the whole manufacturing sector in 2012. The Government and industry must ensure that help recruit people Corporate # 2 across the value chain calibre people the programme: “What we want is minimal government i.e. no false subsidies, no punitive taxes and no tax • Young people do not consider it a career of – Promotes FDM as a long-term career choice with more job security compared to other sectors first choice advantages for large companies who are highly geared.” – Publicises the varied spectrum of professions available from food scientists to marketers SME # 18 • Shortage of engineers and food technologists Page 88 Page 89
    • The role of Government in optimising growth The role of Government in optimising growth 7.2 Education and training 7.3 Food security “Companies can carry out training and apprenticeships better than the Government. What “I am a strong supporter of the German education system with the apprentices working with Feedback from primary research on the role of Government they need is an incentive such as three years payback of the tax and national insurance for the company for many years, getting hands-on experience. I would like to go back to the Topic Issue Government actions based on FDM feedback each trainee. That way companies can have the cash to accelerate training.” education system and train 18-19 year old school leavers with the promise of building strong Raw material supply • As food demand is growing on a global • The Government should develop a clear understanding of UK’s long term needs in terms of commodities and food Corporate # 8 skills in 2-3 years time and at the same time have a qualification degree. However, for the scale and production costs are rising, it supplies and the potential for sustainable increases in domestic production to contribute to greater security and companies to do so, they will need some Government support to help with the investment is important for the UK to develop more resilience in the supply chain “We need a reform of the primary and secondary education system. As a country, we are not resilient supply chains needed. Some of the businesses will not be able to afford this and will need to be subsidised • In light of this, the Government should consider putting in place a strategy which prioritises sustainable food producing literate and numerate students going into industry. Plus our standards are below by the Government (like in Germany).” production including the development and adoption of new technologies (e.g. genetically modified foods) and other European countries’.” measures which incentivise productivity and resource efficiency Corporate # 10 SME # 15 • The Government should consider putting an agenda in place now that sets clear goals over the coming decades “In order to develop more food specific skills, you need to start at the education level. The “We still have people that actually do not know how to compose a sentence, verbally or children need to start thinking of food as a career in school. Over the last 20 years, FDM has Commodity price volatility • Commodities prices have been rather • According to BIAC, OECD’s business committee, enhancing transparency in derivatives markets will benefit investors written. Because of the changing population base, these people are often using English as volatile over the last years. According to and allow them to make informed decisions. The potential publication of positions held by commercial and non- been undermined compared to other manufacturing sectors and obviously other services their second language but not always. Some of the English native speakers still use poorly our interviews, the volatility is not driven commercial investors, setting limits on price movements and stock positions may be amongst measures that will sectors (e.g. banking) but FDM remained the biggest manufacturing sector and is in a good only by market fundamentals but also help with price fluctuations and that the Government should carefully review constructed sentences. They cannot communicate verbally and cannot add simple sums.” position to become more attractive in the future with the uncertain times under way.” by speculators. As a consequence, FDM SME # 9 businesses as well as consumers have been • However, commodities prices are an international affair and the Government should lobby for an effective resolution Corporate # 11 alongside other Governments affected by sudden price increases “If schools could put emphasis on reading, writing, arithmetic, concentration, verbal communication skills, written communication skills, basic hygiene and looking after yourself Public education • There is a public perception that the • The Government should openly acknowledge and promote the wealth of independent and peer-reviewed studies, and cooking, I think it would make a difference to us.” industry must remain ‘traditional’, make including extensive work done by the European Food Safety Authority (EFSA) on the safety and benefits of use of conventional agricultural resources biotechnology applications in food SME # 9 and that the use of new technologies such as genetically modified foods or • Government organisations such as the Food Standards Agency should launch an information campaign to dispel “The Government needs to do more on tying up education to business .” nanotechnology might be harmful myths amongst consumers Corporate # 4 “The colleges and universities are completely out of date. Every three years, university staff that shape the curriculum should have a year out to work and understand the business world.” Corporate # 8 Page 90 Page 91
    • The role of Government in optimising growth The role of Government in optimising growth 7.3 Food security 7.4 Taxation “Our ability to export may be hindered by the fact that we do not use GMOs, which can help “Our ability to manage the price of raw materials will be based on our ability to fundamentally Feedback from primary research on the role of Government produce increased output and crops that are more disease resistant.” produce more and fulfil the demand. GM Crops have massively increased their output in Topic Issue Government actions based on FDM feedback Corporate # 7 South America yet, at the same time in Europe we have this absolute paranoia.” Corporate taxation • UK’s corporate taxation remains at high • The Government is already planning to lower the tax to 23% by 2015. However, it needs to ensure the UK remains Corporate # 8 levels compared to the world average and competitive with other countries that could potentially attract FDM businesses away from the UK if other cost bases “The Food Standards Agency, which looks after consumers’ interests in terms of food and is less competitive than other rival FDM keep increasing disproportionately in the UK (e.g. raw materials, labour costs, etc) drink, have declared genetic modifications are safe, but they haven’t declared it in a way that “In the US, the Government has taken action to address the imbalance in the commodities countries, such as Netherlands, Poland and you and I as a consumer would ever hear that...” industries. But in the UK there is no Government action; it is a completely free market. I do not Ireland • The Government should seek to introduce special taxation measures for SMEs who have been hit the most by the downturn and who generally operate with the lowest margins. An example would be the introduction of a 0% rate Corporate # 7 know how the Government can fix it because they can’t control the market, but they must do • Moreover, through advancements in up to a minimum threshold of profits similar to that introduced for personal income tax. Such a tax would give SMEs something because it is an area that the industry is grappling with.” technology and an increasing degree of more room for re-investments and more cashflow available for their daily operations during this period when access “In terms of sustainability and food security,