survey of the uk food and drink manufacturing industry 2018

Survey of the UK Food and Drink Manufacturing Industry 2018Survey of the UK Food and Drink Manufacturing Industry FO0506 January 2019
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This information is licensed under the Open Government Licence v3.0. To view this licence, visit www.nationalarchives.gov.uk/doc/open-government-licence/
The views expressed in this document are not necessarily those of Defra. Its officers, servants or agents accept no liability whatsoever for any loss or damage arising from the interpretation or use of the information, or reliance on views contained herein.
Research Report
Survey of the UK Food and Drink Manufacturing Industry 2018 Prepared for: Department for Environment, Food and Rural Affairs (Defra) – FO0506
Prepared by: BMG Research
Survey of the UK Food and Drink Manufacturing Industry 2018
Prepared for: Department for Environment, Food and Rural Affairs (Defra) – FO0506
Prepared by: June Wiseman, Director; Philip Roe, Research Director and Emma Parry, Associate Director, BMG Research
Date: June 2019
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Table of Contents
Executive summary ............................................................................................................... 1
Context .............................................................................................................................. 1
Access to finance by SMEs in the FDM sector .................................................................. 3
Labour and skills issues in the FDM industry ..................................................................... 4
Business growth in the FDM sector ................................................................................... 4
Sub-sector and urban/rural variations ................................................................................ 5
Overview ........................................................................................................................... 5
2 Context: the UK Food and Drink Manufacturing industry ................................................ 9
Introduction ....................................................................................................................... 9
Key performance indicators ............................................................................................. 13
Innovation .................................................................................................................... 14
3 Profile of the Food and Drink Manufacturing Industry ................................................... 18
Sub-sector, size, and geographical distribution of the sample ......................................... 18
Age of businesses ........................................................................................................... 21
Main market geographies ................................................................................................ 22
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Future innovation ............................................................................................................. 38
Innovation in the FDM industry: summary points ............................................................. 40
5 Exporting...................................................................................................................... 41
Future expectations of exporting...................................................................................... 46
Reasons for not exporting................................................................................................ 48
Exporting by the FDM industry: summary points .............................................................. 59
6 Access to finance ......................................................................................................... 61
Awareness of sources of finance ..................................................................................... 61
Seeking finance in the recent past ................................................................................... 62
Purposes of finance ......................................................................................................... 63
Types of finance .............................................................................................................. 66
Discouraged non-applicants ............................................................................................ 73
Demand for finance in the future...................................................................................... 75
Views on equity finance ................................................................................................... 81
General views on financial markets ................................................................................. 82
The supply of finance: finance providers’ perspectives .................................................... 83
Access to finance: summary points ................................................................................. 87
7 Workforce and skills ..................................................................................................... 90
Key occupational groups ................................................................................................. 90
Perspectives on skills issues: in-depth interviews ............................................................ 96
Staff retention .................................................................................................................. 98
Reasons for not employing apprentices ......................................................................... 102
Future use of apprenticeship ......................................................................................... 104
Apprenticeship: perspectives from depth interviews ...................................................... 105
Key workforce issues ..................................................................................................... 105
Labour and skills issues in the FDM industry: summary points ...................................... 108
8 Business Growth ........................................................................................................ 109
Productivity monitoring .................................................................................................. 110
Business planning ......................................................................................................... 111
Future business intentions ............................................................................................. 123
Business growth in the FDM sector: summary points .................................................... 127
9 Variation by sub-sector, urban or rural location, and home nation .............................. 129
Introduction ................................................................................................................... 129
Employment and skills ............................................................................................... 133
Rural/urban variations ................................................................................................... 133
Sub-sector variation ................................................................................................... 133
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Markets ...................................................................................................................... 135
Innovation .................................................................................................................. 135
10 Overview ................................................................................................................ 138
Appendix I: Geographic Distribution of FDM Employment in the United Kingdom ............ 145
Appendix II: Statement of Terms ....................................................................................... 149
Table of Figures
Figure 3: Nation (all respondents) ....................................................................................... 20
Figure 4: Years established (all respondents) ..................................................................... 21
Figure 5: Primary geographical markets (all respondents) .................................................. 22
Figure 6: Introduction of new or significantly improved products or processes in the last three years, by company size (all respondents) ........................................................................... 25
Figure 7: Whether new or significantly improved products were new to the market or just new to the company, by company size (where introduced new/significantly improved products in the last three years) ............................................................................................................ 27
Figure 8: Company activities in respect of innovation in the last three years - prompted, multiple response (where innovated) ................................................................................... 32
Figure 9: Extent to which activities were valuable to innovation undertaken by companies (where innovated and undertook activities) ......................................................................... 35
Figure 10: Reasons for not innovating in the last three years - prompted, multiple response (where have not innovated) ................................................................................................. 36
Figure 11: Intentions to innovate in the next three years, by company size (all respondents) ........................................................................................................................................... 38
Figure 12: Proportion that have installed new labour saving equipment or technology for us in production in the last three years, by company size, sub-sector and number of sites (all respondents) ....................................................................................................................... 39
Executive summary
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Figure 13: Proportion of companies that have exported, by nation, company size, sub-sector and number of sites (all respondents) ................................................................................. 42
Figure 14: Ways in which companies export, by company size – prompted, multiple response (where export) ..................................................................................................... 43
Figure 15: Export destinations - % of exporters (where export) ........................................... 44
Figure 16: Importance of exporting to the success of the company, by export destination (where export) ..................................................................................................................... 46
Figure 17: Reasons for not exporting – unprompted, multiple response (where do not export) ........................................................................................................................................... 49
Figure 18: Sources of support for exporting that respondents are aware of – prompted, multiple response (where export/have capacity to export) ................................................... 50
Figure 19: UK-wide sources of support for exporting that respondents are aware of, by nation – prompted, multiple response (where export/have capacity to export) .................... 52
Figure 20: Sources of support for exporting that companies have had contact with (where aware of each source) ......................................................................................................... 53
Figure 21: Sources of support for exporting that companies that export and do not export have had contact with (where aware of each source) .......................................................... 54
Figure 22: Sources of support for exporting that companies that export and those that do not export have had contact with (where exporting is a possibility) ........................................... 55
Figure 23: Usefulness of sources of support (where used) .................................................. 56
Figure 24: Usefulness of nation-specific sources of support (where used) .......................... 57
Figure 25: Awareness of sources of finance, by whether recently applied for finance (all respondents) ....................................................................................................................... 61
Figure 26: Awareness of sources of finance, by legal status and whether recently applied for finance (all respondents) ..................................................................................................... 62
Figure 27: Reasons for seeking finance (where sought finance in last three years) ............ 63
Figure 28: Sources of equity finance (where sought equity finance in last three years) ....... 68
Figure 29: Status of specified finance sought (where sought finance in last three years) .... 69
Figure 30: Impact of not obtaining all the finance sought (where did not obtain all finance sought) ................................................................................................................................ 71
Figure 31: Proportion of companies that would have found external finance useful or valuable but did not apply for it, by company size, sub-sector, innovation and growth (all respondents) ....................................................................................................................... 74
Figure 32: Likelihood of seeking new external finance in the next three years, by exporting, innovation, previous finance applications and growth plans (all respondents) ..................... 76
Figure 33: Reasons why companies are unlikely to seek external finance, by company size – prompted, multiple response (where unlikely to/certain not to) ............................................ 77
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Figure 34: Types of finance companies have sought compared with those they might consider – prompted, multiple response (where sought in last three years/might seek in next three years) ......................................................................................................................... 80
Figure 35: Statements about equity finance that apply to companies, by company size – prompted, multiple response (where likely to seek new finance other than equity finance) . 82
Figure 36: Extent to which respondents agree or disagree with statements about finance providers (all respondents) .................................................................................................. 83
Figure 37: Proportion of companies that have sought to recruit new staff within the last year – including current vacancies, by nation, company size and sub-sector (all respondents) ... 92
Figure 38: Proportion of companies that have experienced recruitment difficulties in the last year, by nation, company size, sub-sector and other key variables (all respondents) .......... 93
Figure 39: Proportion of companies that have experienced recruitment difficulties in the last year, by nation, company size, sub-sector and other key variables (where tried to recruit) . 94
Figure 40: Main causes of recruitment difficulties – unprompted, multiple response (where have had hard-to-fill vacancies) .......................................................................................... 95
Figure 41: Whether recruitment difficulties have proved to be a moderate or severe constraint on company operations and performance, by nation and company size – (where have had hard-to-fill vacancies) .......................................................................................... 96
Figure 42: Main causes of staff retention issues – unprompted, multiple response (where have had difficulties retaining staff) ..................................................................................... 99
Figure 43: Impact of staff retention issues on company operations and performance (where have had difficulties retaining staff) ................................................................................... 100
Figure 44: Proportion of companies that currently have apprentices, by nation, company size and sub-sector (all respondents) ....................................................................................... 101
Figure 45: Reasons for employing apprentices – unprompted, multiple response (where employ apprentices) .......................................................................................................... 102
Figure 46: Reasons for not employing apprentices – unprompted, multiple response (where do not employ apprentices) ............................................................................................... 103
Figure 47: Likelihood of taking on apprentices in the next 2 years, by whether currently employ apprentices (all respondents) ................................................................................ 104
Figure 48: Extent to which specified workforce matters will represent a challenge to the company over the next two to three years (all respondents).............................................. 106
Figure 49: Employment growth and changes in sales turnover in the last 12 months, by company size (all respondents) ......................................................................................... 109
Figure 50: Employment growth and changes in sales turnover in the last 12 months, by company size, (all respondents) ........................................................................................ 110
Figure 51: Proportion of companies that measure their productivity, by nation, company size and growth plans (all respondents) ................................................................................... 111
Figure 52: Approaches to business planning, by company size, number of sites, company type, exporting, innovation, finance and growth (all respondents) ..................................... 112
Executive summary
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Figure 53: Proportion of companies that aim to grow sales in the next three years, by company size and sub-sector (all respondents) ................................................................ 115
Figure 54: Proportion of companies that have sought business support to further their aims for growth, by company size, sub-sector, exporting, innovation activity and recently seeking finance (all respondents - rebased) ................................................................................... 119
Figure 55: Proportion of companies that have sought business support to further their aims for growth, by nation (all respondents - rebased) .............................................................. 120
Figure 56: Usefulness of business support (where sought business support) ................... 122
Figure 57: Company plans over the next three years (all respondents) ............................. 124
Figure 58: Profile of sub-sectors by company size (all respondents) ................................. 130
Table of Tables
Table 1: The geographical distribution of FDM employment in the United Kingdom - an all- sector comparison ............................................................................................................... 11
Table 2: Distribution of SMEs in the UK Food and Drink Manufacturing industry by size and sub-sector ........................................................................................................................... 13
Table 3: Food and drink manufacturing sector distribution (all respondents) ....................... 19
Table 4: Research and development facilities within companies, by company size and sector (all respondents) ................................................................................................................. 29
Table 5: Company activities in respect of innovation in the last three years, by company size - prompted, multiple response (where innovated) ................................................................ 33
Table 6: Percentages of businesses receiving or not receiving external support to innovation which had different elements of an internal infrastructure for innovation (all respondents) .. 34
Table 7: Reasons for seeking finance (where sought finance in last three years) ................ 64
Table 8: Types of finance sought by company, by business size (where sought finance in the last 3 years) ........................................................................................................................ 67
Table 9: Reasons why companies did not apply for additional finance – prompted (where finance would have been useful/valuable) ........................................................................... 75
Table 10: Reasons for taking on new external finance – prompted, multiple response (where likely to seek new finance) .................................................................................................. 78
Table 11: Types of finance that companies might consider when it seeks new external finance - prompted (where likely to seek new finance) ........................................................ 79
Table 12: E1 Occupational groups currently employed (all respondents) ............................ 91
Table 13: Workforce matters that are expected to represent a major challenge to companies over the next two to three years, by nation and company size - prompted (all respondents) ......................................................................................................................................... 107
Table 14: Main vision for the company - unprompted (all respondents) ............................. 114
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Table 15: Sources of business support, by nation – unprompted, multiple response (where sought business support) .................................................................................................. 121
Table 16: Company plans over the next three years - prompted (all respondents) ............ 125
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Executive summary
Background to the survey The UK’s Food and Drink Manufacturing (FDM) sector may, in its Small and Medium Enterprise (SME) segment, have a number of limitations which, if overcome, would allow the industry to increase these contributions further. The possible limitations concern difficulty in accessing finance for the investments on which business growth depends, levels of innovation and exporting which do not meet the industry’s full potential for these activities, and problems in getting the labour and skills it needs.
In order to inform policy action to assist the industry in such areas, this study was commissioned by the Department for the Environment, Food and Rural Affairs. (DEFRA).
The study had three main elements:
• A large telephone survey of 1000 SMEs in the industry • In-depth interviews with 32 SME managers in the industry • In-depth interviews with 10 financial institutions
The telephone survey, undertaken in the summer months of 2018, was structured to achieve targets for SMEs of different sizes, in different sub-sectors, and in the 4 home nations of the UK.
The questionnaire for the survey formed the basis of telephone interviews, usually lasting on average around 23 minutes, with industry SMEs selected randomly. The questionnaire asked questions on a variety of themes including those on the basic characteristics of the business and its attitudes and behaviours in respect of productivity, innovation, exporting, access to finance, and business ambitions.
This quantitative survey was supported by 32 in-depth interviews, usually lasting between 30 and 45 minutes, with businesses which, in the survey, had agreed to a further discussion and by a further 10 in-depth interviews were held with financial institutions to gain insight into the supply of finance into the sector.
Context As context for this report of survey findings, a brief review of existing reports and statistics on the Food and Drink manufacturing industry shows some key features of that industry – its large size, its significance to the broader economy and labour market, and its wide distribution across varied sub-sectors, different sizes of enterprise, and the UK’s nations and regions. The review also shows some primary concerns of the industry related to its levels of productivity and innovation and its access to two key inputs, finance and labour and skills, on which effective performance and growth depend.
However, the reports and statistics are sometimes somewhat dated, may not be wholly specific to the manufacturing segment of the ‘farm-to-fork’ food chain, or to the SME segment of the Food and Drink Manufacturing sector (which is the concern of this report), or may be based on surveys of small numbers of businesses in the sector which are not representative of the sector as a whole.
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The survey reported here thus sought to build on the existing evidence base. Key findings from the survey are summarised below.
FDM industry profile • The SME segment of the Food and Drink Manufacturing sector has a
distribution across varied sub-sectors, with some particular concentrations in bakery, meat processing and other food/drink products sub-sectors.
• Its distributions by size and location of enterprises show that a preponderance of enterprises comprises micro-businesses with fewer than 10 staff and businesses located in England.
• The sector has a majority of mature enterprises but also a significant level of business formation with around 1 in 7.5 enterprises having been established in the last 3 years.
• Around 4 in 10 SMEs have a market orientation which is at least national in extent, that proportion more than doubling in enterprises with between 50 and 249 employees. More than 1 in 10 SMEs in the sector have markets which are essentially international in scope.
• Most SMEs in the FDM sector operate from a single site and ‘private limited company’ is much the most frequent ownership model.
Innovation in the FDM industry • Innovation in the FDM industry is frequent, with over half of firms having
introduced new products in the last three years. • Introduction of technology to substitute for labour inputs is also quite frequent,
over 4 out of 10 businesses having made such introductions in the last 3 years. • Frequency of innovation in the sector is higher than is average both across all
sectors of the UK economy and in manufacturing industry more particularly. • However, much innovation in the sector is not based on formal Research and
Development, many fewer businesses having formal internal facilities or staffing for R&D activity than report having innovated.
• Most innovation is financed from within the business rather than by external finance, and, most frequently, was seen as ‘ad hoc’ rather than formally budgeted for. Lack of financial resource was frequently regarded as a constraint on innovation.
• Where businesses have not innovated, the most frequent reasons for this are the businesses’ reliance on the ‘traditional’ character of their products or processes or successful but lack of time and resource is also frequent, particularly in micro-businesses,
Exporting by the FDM industry • Nearly a third of FDM SMEs (29%) exported some of their output in the 12
months prior to survey. This proportion is above the average for all businesses in the UK economy but below the average for other UK manufacturing industries.
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• Export business is regarded as ‘very important’ to the success of the business by 47% of exporters and as ‘quite important’ by a further 25%. 79% of current exporters plan to increase their exports over the next few years.
• 14% of current non-exporters say they have plans to start exporting. • Businesses which currently do not export (71% of the total) mainly do not do so
because their output is not ‘exportable’, because their business is seen as too small, or because they are operating at full capacity in domestic markets.
• As proportions of all SMEs in the sector, most sources of support had been used by 1 in 10 or fewer businesses in each case.
• Suggestions for improvement in external support for exporting included that the language used in export information should be simplified and that advice and information services should be improved and more widely publicised.
Access to finance by SMEs in the FDM sector • Around 4 out of 10 businesses had sought external finance in the last 3 years. • Success in obtaining finance varied chiefly by the type of finance sought and
applications for non-traditional sources including crowd funding, public funding and peer-to-peer lending were less likely to be successful than those for more traditional sources, such as bank overdraft facilities, bank loans, credit cards and commercial mortgages.
• Two-thirds of businesses which had sought finance had sought it to deal with cash flow and to supply working capital whilst (an overlapping) two-thirds had sought it for investment – most often in equipment and vehicles.
• Traditional lending – overdrafts, loans, and leasing – was the most frequent source of finance. Peer-to-peer lending, equity finance, and crowd-funding were much less frequently sought.
• 27% of businesses reported that, in the last 3 years, there had been occasions when external finance would have been advantageous for the business but that they had not applied for it.
• The most frequent reasons for not applying were that the business did not want to take the risk, concerns about the cost of finance, lack of knowledge of financial markets, lack of time, and expectation of rejection.
• The main reasons why a majority of businesses will not seek new finance in the next few years are that all planned investment can be internally financed, dislike of debt, or absence of plans for major investments.
• Some finance providers tend not to support very small or new businesses irrespective of their sector. Reasons, which vary between different types of provider, include absence of an adequate trading record, minimum thresholds for lending or investment, and poor presentations of the business case for finance.
• In addition, some factors may particularly inhibit finance for some FDM SMEs. These include high dependence on supermarket contracts, production of generic foodstuffs (rather than a premium, branded product) which were widely open to price competition, inability to scale-up quickly compared with tech
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businesses making them less attractive to equity stakes, the bespoke nature of much FDM equipment which, because of lower resale potential, made this equipment a less attractive base for asset finance, and some particularly strong concerns about the impacts of Brexit on the sector, including on labour supply and costs, on tariffs, and on supply chains for foods with a short shelf life.
Labour and skills issues in the FDM industry • Over half of SMEs in the sector (55%) had recruited in the last year. • Over half of these (53% or 29% of all businesses in the sector if non-recruiters
are included) had experienced difficulty in recruitment. • The most frequent reasons were shortages of skilled applicants, of applicants
with the right personal characteristics, of applicants at all, and/or of people with the right work experience or qualifications.
• 13% of businesses reported staff retention difficulties, with the proportion rising to 31% of large SMEs.
• 8% of all SMEs in the sector (and 27% of large SMEs) employed one or more apprentices at the time of the survey.
• Most apprentices were employed to improve skills supply into the business rather than, more negatively, to obtain subsidised training or cheap labour.
• When employers, as in the great majority of cases, did not employ apprentices this was most frequently because there was an absence of need, the business had no jobs suitable for applicants, or the company was seen as too small to host apprenticeship. ‘Supply side’ issues, such as lack of appropriate apprenticeship frameworks/standards, unsuitable apprenticeship applicants, or the costs of apprenticeship were less frequently mentioned.
Business growth in the FDM sector • Considerably more businesses in the FDM SME sector grew their employment.
and sales turnover in the 12 months prior to survey then saw them decline. • Nearly 6 out of 10 businesses (57%) monitor their productivity. • Around half of businesses in the sector (52%) have a formal business plan. • Key constraints on growth include lack of finance for investment, regulatory
costs, and labour and skills supply. • Nearly a quarter of businesses (23%) had sought external support to assist
business growth. • The most frequent sources of support were private consultants, local authorities
and other agencies such as Local Enterprise Partnerships and Growth Hubs. • In-depth discussions with a small sub-set of SMEs in the sector identified
suggestions for improved external support. These focussed on better and more pro-active advice and information services, financial assistance from the government in the form of subsidy or public investment, and constraint on regulatory and other costs which are externally imposed on businesses.
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Sub-sector and urban/rural variations • Businesses in the alcoholic and non-alcoholic drinks and ‘other foods’ sectors
tend, particularly in the first two cases, to be younger businesses which more frequently report innovation, open attitudes to external finance and non- traditional sources of that finance, and employment and sales growth.
• Conversely, the bakery sub-sector, with a relatively high proportion of small businesses, more frequently shows a ‘constrained’ position – local markets, non-exportable products and a low rate of exporting, conservative positions on use of external finance, challenged by the minimum wage, and a relatively low frequency of employment and sales growth.
• The meat and fish processing sectors stand out as being particularly reliant on exports (particularly to EU countries) but have a higher than average frequency of difficulty in retaining staff.
• There are relatively few and mostly minor differences between the operations and perspectives of rural and urban businesses. However, on average, rural businesses show somewhat higher growth rates and, perhaps in consequence, more frequent labour supply problems.
• Similarly, there were no significant differences between the four home nations on many survey indicators and where there were differences these often did not generate a picture of clear distinctions.
Overview • The study has revealed the Food and Drink Manufacturing SME sector as
strongly oriented to growth, innovation and, amongst existing exporters particularly, to export growth. However there is evidence that SMEs in the sector may be somewhat limited in pursuit of their ambitions by problems in raising finance and sourcing adequate labour and skills. If external intervention is to assist and encourage more SMEs to achieve growth then a key message of the study is that intervention needs to be simplified and marketed more actively, and signposted and delivered, as far as resources allow, through single, human, points of contact.
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1 Introduction
1. As the next chapter of this report identifies, the Food and Drink Manufacturing (FDM) industry is a large and important one, making valuable contributions to the UK economy and supplying employment to several hundred thousand people.
2. However, it is believed that the industry, in its Small and Medium Enterprise (SME1) segment, may have a number of limitations which, if overcome, would allow the industry to increase these contributions further. The possible limitations concern difficulty in accessing finance for the investments on which business growth depends, levels of innovation and exporting which do not meet the industry’s full potential for these activities, and problems in getting the labour and skills it needs.
3. In order to inform policy action to assist the industry in such areas, this study was commissioned by the Department for the Environment, Food and Rural Affairs. (DEFRA).
4. The study had three main elements:
• A large telephone survey of 1000 SMEs in the industry • In-depth interviews with 32 SME managers in the industry • In-depth interviews with 10 financial institutions
5. The telephone survey, undertaken in the summer months of 2018, was structured to achieve targets for SMEs of different sizes, in different sub-sectors, and in the 4 home nations of the UK. The Inter Department Business Register (IDBR) – a national database of UK businesses maintained by the UK government – was used to determine the size of the in-scope UK business population and as the basis for calculation of these targets.
6. The targets set were for proportional representation in the sample of the UK’s population of FDM businesses in respect of industry sub-sectors but for non-proportional targets for each of the four home nations to ensure a minimum sub-sample size in Scotland, Wales and Northern Ireland where the populations of FDM businesses are significantly smaller than in England. In the case of size of businesses, larger SMEs were deliberately over- sampled in order to achieve a sub-sample of these businesses which was sufficiently large to allow differences between larger and smaller SMEs to be observed with a reasonable level of statistical reliability. In subsequent treatment of the data, the sample was weighted to match the actual distribution of SMEs in the UK industry in order that overall survey estimates, as well as those for nation and the size bands of SMEs, should be accurate.
7. The questionnaire for the quantitative survey formed the basis of 1000 telephone interviews, usually lasting on average around 23 minutes, with industry SMEs selected randomly (within the target structure) from a large commercial database. The
1 Companies with between 1 and 249 employees across the whole enterprise
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questionnaire asked questions on a variety of themes including those on the basic characteristics of the business and its attitudes and behaviours in respect of productivity, innovation, exporting, access to finance, and business ambitions. It is included for reference in Appendix II in this report.
8. With a sample of 1000 cases, the survey achieved estimates which, in at least 19 out of 20 cases of these estimates, are accurate within plus or minus a maximum of 3 per cent of the reported percentage. For example, if the survey reports that 50% of industry SMEs in the survey take part in activity x, it is highly likely that the proportion of all industry SMEs which do so, lies between 47% and 53%.
9. When comparing a sub-sample, or variable, of cases with the sample average, or when comparing two or more sub-samples, or variables, with each other, determining whether differences between responses are statistically significant is more complex. This is because of varying sample base sizes and response values. When preparing the data tables on which analysis of the telephone interviews is based the software package employed (MERLIN) applied statistical tests to the data enabling confident reporting of statistically significant differences. These ‘T-Tests’, as they are known, test mean values either against each other, the rest of the sample or against a constant to see if there are significant differences at desired significance levels. All statistically significant differences discussed in the report are based on the results of ‘T-Tests’ applied within the MERLIN data analysis software.
10. A major factor in the level of statistical reliability is the size of the sample reported on. The larger the sample size the higher the level of statistical reliability. However, this should also be considered in the context of the population represented by the sample. A small sample size which represents a small population will provide a reliable indication of the views of that group. As a rule, however, in this report, sub-samples of lower than 20 are flagged as small and it is recommended that caution is exercised when interpreting these responses.
11. This quantitative survey was then supported by 32 in-depth interviews, usually lasting between 30 and 45 minutes, with businesses which, in the survey, had agreed to a further discussion. These discussions, using a more open ‘topic guide’ than the survey questionnaire, allowed additional insights into the themes of the study to be acquired. The businesses interviewed in-depth ranged from micro-breweries or small bakeries, each with a handful of staff, to large processing plants with up to 240 staff in one case. In total, 21 of these interviews were with micro-businesses employing between 2 and 9 people, 6 were with mid-range SMEs employing between 10 and 49 people, and 5 were with large SMEs employing 50 or more people.
12. Finally, the ‘access to finance’ issue may not just be a demand side one (such that the positions and perspectives of SMEs are wholly explanatory of the issue) but may equally concern positions and perspectives on the ‘supply side’ – the providers of finance and individual decision-makers who determine whether and on what terms finance is made available to SMEs in the industry. Because of this, a further 10 in-depth interviews were held with financial institutions to gain insight into this aspect of the issue.
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13. The remainder of this report now sets out findings from these various research elements. Statistical survey outputs supply the main structure for the report but additional or illustrative material from the in-depth interviews is inserted at particular points.
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2 Context: the UK Food and Drink Manufacturing industry
Introduction 14. As context for the analysis of survey findings, this chapter offers a brief overview of the
UK’s Food and Drink (FDM) industry based on a variety of reports and statistics. These include both published reports and unpublished analyses undertaken by DEFRA officials. The sources used are listed at the end of this chapter.
Key dimensions of the industry 15. A first set of statistics offers an outline of the size and structure of the industry.
16. An obvious characteristic of the industry is its significant size. Overall, the ‘agri-food chain’, including primary agricultural, horticultural, and fishery production, food and drink processing, and food and drink distribution (via the wholesale/retail chain and hospitality outlets) contributed £113 billion of Gross Value Added (GVA) to the UK economy in 2016 – 6.4% of total UK GVA – and employed 3.9 million workers or 14% of all UK employment.2
17. Within this, the food and drink manufacturing sector specifically generated around £29.5 billion of GVA in 2016 – 2% of total UK GVA and 17% of total UK manufacturing GVA – and employed 447,000 people.
18. Within this total employment, food manufacturing employed 406,000 people whilst drink manufacturing employed 41,000 people.
19. With these dimensions, food and drink manufacturing is the UK’s single largest manufacturing sector ahead even of the next largest manufacturing sector, ‘transport equipment’ which encompasses manufacture of motor vehicles and railway equipment and the aerospace industry.
20. Further key features of the FDM industry are its distribution across a number of key sub- sectors and its wide geographical distribution across the UK.
21. In respect of industry sub-sectors, further statistics from the Office for National Statistics3 show that, within total industry employment in excess of 400,000 individuals, some key areas of employment are the processing of meat and meat products (employing around 93,000 people), the bakery industry including manufacture of bread, cakes, biscuits and other pastry products (92,000 employees), dairy operations and the manufacture of dairy products (28,000 employees), manufacture of prepared meals and dishes (34,000 employees), processing of fruit and vegetables (21,000 employees), manufacture of chocolate and sugar confectionary (21,000 employees) and distilling of spirits and the manufacture of beer and cider (around 13,000 and 16,000 employees respectively).
2 https://www.ons.gov.uk/economy/grossvalueaddedgva 3 https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/datasets/employmentbyind ustryemp13
Figure 1: Profile of industry employment
Base: All businesses c410,000 Source: ONS
Bakery and pastry products, 92,000
Dairy operations/ manufacture,
21,000 Processing of meat and meat products,
93,000
11
22. Geographically, the industry is spread across all regions and countries of the UK. A table below (ONS statistics4) shows, for Great Britain:
• The number of people employed in the FDM industry in each region. • The proportion of all employment (in all sectors) which employment in the FDM
sector represents in each region (Column b). • The proportion of the total of the UK’s FDM industry employment which is
located in each region (Column c). • For comparison, the proportion of the total of all-sectors employment which is
employed in each region (Column d)
Table 1: The geographical distribution of FDM employment in the United Kingdom - an all-sector comparison
(a)
FDM industry
(c) % of all FDM employment which is in each region
(d) % of all
each region North East 11,400 1.1 2.7 3.5
North West 57,000 1.7 13.4 10.8
Yorkshire & Humber 58,500 2.4 13.8 7.8
East Midlands 60,500 2.8 14.2 6.9
West Midlands 36,500 1.4 8.5 8.3
East 31,000 1.1 7.3 9.1
London 26,250 0.5 6.2 16.6
South East 23,000 0.5 5.4 13.9
South West 37,000 1.4 8.7 8.3
Wales 19,250 1.4 4.5 4.3
Scotland 42,000 1.6 9.9 8.3
Northern Ireland 22,500 3.0 5.3 2.4
United Kingdom 425,000 1.4 100.0 100.0
Source: ONS, 2016
23. Table 1 shows that there is a significant volume of FDM industry employment in all regions but that employment is particularly high in the North West, Yorkshire and Humber, and the East Midlands where: (1) the FDM industry’s employment has the highest shares of all employment in the region (Column b); where (2) the region has a relatively high share of all employment in the FDM industry (Column c); and where (3)
the regions’ shares of FDM employment exceed those regions’ shares of all employment in the national economy as a whole (Column c compared with Column d). Statistics relating to Columns b, c and d are also visually mapped across the UK and these maps are included in Appendix I.
24. In Northern Ireland, FDM is relatively significant in terms of its share of employment but, because the industry is relatively small in numerical terms, it does not have an above- average share of the UK’s total employment in the FDM sector. At the other extreme, all these measures show FDM industries to be least significant to the economies of London and South East; but, even across these two regions, food and drink manufacturing supports around 45,000 jobs.
25. A final key dimension of the industry concerns its distribution according to the size of enterprises within the industry.
26. Looking just at small and medium enterprises (SMEs) in the industry, overall, the government’s Business Population Estimates (ONS, 20185) suggest that there are around ten thousand such enterprises in the industry across the UK (10,005 latest estimate). This total includes very small enterprises run solely by self-employed individuals without employees. If only SME enterprises which have at least one employee are included in the analysis, then there are around seven thousand (7,040) of these.
27. On a slightly different measure6, the government’s Inter Departmental Business Register (IDBR7) identifies 9,316 SMEs in the sector, of which 7,497 are in England, 922 in Scotland, 477 in Wales, and 420 in Northern Ireland. The distribution of enterprises by size (in terms of number of employees) and sub-sector on this measure is shown in Table 2 (following). The table shows:
• The bakery sub-sector is the single largest sub-sector in terms of number of enterprises
• Only around 7% of enterprises are in the ‘large SME’ category (employing between 50 and 249 people). The proportion varies between sub-sectors. It is highest (at around 21%) in the grain milling sub-sector and lowest (at around 3%) in the beverages sub-sector.
5 https://www.gov.uk/government/statistics/business-population-estimates-2018 6 Note: Business Population Estimates are an estimate at a particular fixed point in time each year whereas IDBR is a live register of businesses operational at a point in time as near as possible to the date at which the register is consulted. 7 https://www.ons.gov.uk/aboutus/whatwedo/paidservices/interdepartmentalbusinessregisteridbr
Zero employees
1-9 employees
10-49 employees
Processing of fruit and vegetables 251 196 95 49 591
Manufacture of oils and fats 36 15 8 5 64
Manufacture of dairy products 177 279 131 45 632
Grain milling 45 45 16 29 135
Manufacture of bakery products 461 1387 690 145 2683
Manufacture of other food products 648 640 316 123 1727
Manufacture of animal feeds 142 156 79 46 423
Manufacture of beverages 857 718 190 53 1818
Total 2899 3896 1880 641 9316
Source: Inter Departmental Business Register, 2018
28. In addition to industry SMEs, there is a further major segment of the industry – large enterprises employing 250 or more people. Around 250 large FDM enterprises operate in the UK, around 4% - 5% of the total of enterprises with employment or around 3% of all enterprises in the Food and Drink Manufacturing sector (including those sole trader/sole partner businesses without employees).
29. While SMEs (businesses with fewer than 250 employees) comprise much the greater proportion of businesses in the sector – 95% or a little more – their proportion is less than is the case for other sectors in the UK economy, in which, overall, SMEs constitute 99% of all enterprises. It has also been noted (Grant Thornton, 2017) that the UK FDM sector has an unusually high degree of consolidation such that around 15% of UK enterprises in the FDM sector employ at least 50 people whilst the comparable proportions in Italy and France are below 3%.
Key performance indicators 30. Within this broad context, a number of inter-linked features of the industry contribute to
its overall performance in terms of its aggregate contribution to national income and the national employment base.
Productivity levels and change
31. An analysis by the Department for Business, Energy, and Industrial Strategy (BEIS, 20188) shows that labour productivity in the Food and Drink Manufacturing industry
8 Total Factor Productivity of the United Kingdom Food Chain 2016 – provisional release, GOV.UK, updated January 2018
14
ranks in mid-table compared with all other sectors in the economy – below financial services and a number of other manufacturing sectors such as automotive, aerospace, chemicals, and ICT but above a range of mainly service sectors such as retail, catering, and health and social care.
32. It is also the case that, as in many other sectors, micro and small businesses in the sector have productivity (in terms of turnover per employee hour) which is half or less that of medium and large businesses in the sector.9 (Internal DEFRA analysis)
33. However, in some comparisons, the FDM industry compares favourably. For example, statistics show an average increase in the productivity of the FDM industry over the 2005-2016 period of 0.5% and with a particular sharp gain of 3% in 2016. With this level of growth, the sector presents as one of only two manufacturing sectors (the other being transport equipment) to show consistent growth over the 10 year period.
34. And figures10 indicate that, whilst UK labour productivity in the FDM industry is below that of the Netherlands, it exceeds that of FDM industries in Germany, France, Spain, and Italy.
Innovation
35. Innovation in the Food and Drink Manufacturing sector is, as in other sectors, difficult to measure precisely. However, a variety of statistics (some not particularly up-to-date) suggest that:
• Investment in Research and Development in the sector as a share of total manufacturing output is fairly modest at around 2% and, while overall sector expenditure on R&D rose from around £330 million in 2010 to nearly £450 million in 2013 it fell back to around £420 million in 2015. (ONS statistics, 201611).
• The rate of growth in R&D expenditure in the sector, 27% between 2010 and 2014, broadly matched the rate of growth in UK manufacturing as a whole (29%) and across all UK sectors (28%) (OECD R&D statistics12).
• The UK sector is second only to the United States sector in the number of new product variants it develops (Food and Drink Federation, 2011).
• In a 2016 survey of 510 industry representatives 13, 70% of firms planned to invest more in new product development than they did in 2015 (compared with a much lesser 21% which intended to reduce this form of investment).
9 SME analysis of the Food and Drink sector, Internal DEFRA paper, 2017 10 https://warwick.ac.uk/fac/soc/ier/research/strategic_lmi/ier_2016_food_and_drink_sector_productivity_report.pdf 11 https://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/researchanddevelopmentexpenditure/datasets/ukbusinesse nterpriseresearchanddevelopment 12
https://stats.oecd.org/Index.aspx?DataSetCode=BERD_INDU#_ga=2.3313904.1533839552.1560244340- 1696415619.1560244340 13 State of the UK food and drink manufacturing sector 2016, William Reed and the Food Manufacture Group, 2016
36. Overall, the sector has a reputation for being highly innovative, based on its level of new product development, increasing adoption of automation, and its strong network of dedicated university and other research institutes. However, it is also recognised that innovation may be concentrated in some sizes and sub-sectors. Also, overall, annual net capital investment (ONS statistics14) in the sector (at constant prices) has not risen since 2003 (albeit that this finding is in line with general lack of growth in business investment in the UK economy over the same period).
37. Generally, therefore, the sector’s performance in respect of innovation is ambiguous – clearly substantial innovation takes place but how close the volume, type, and distribution of innovation are to their hypothetical optimal levels is far less clear.
Exporting
38. Overall, the UK is a net importer of food and drink products – broadly, a combined effect of the UK’s inability to produce some products for climatic reasons, of its excess of consumer demand over the ability of UK farmers and growers to supply that demand, and of consumer tastes for some products produced overseas. Over the last decade and more, the gap between imports and exports has widened, with the value of the former increasing somewhat faster than the value of the latter.
39. Nevertheless, the UK has very substantial food and drink export volumes and values. These exports rose by 9.7% between 2016 and 2017 (from £20.2 billion to £22.1 billion). Between 2007 and 2017 food and drink exports grew by 93% with an average annual growth rate of 7% (Food and Drink Federation statistics15). In comparative terms, the UK has (between 2011 and 2015) maintained its share of a fast-rising global total food and drink exports market at around 2.3% (World Trade Organisation statistics16)
40. However, as in other sectors, export activity amongst small businesses in the sector is quite limited. One study, for example (Plymouth University, 201117) found that fewer than 10% of SMEs in the sector were export-active, often because they felt their business was too small and/or because they had no interest in exporting.
41. Essentially, in respect of exporting, as with innovation above, the FDM industry is very active and very successful – but there is obviously wide scope for exporting to increase if key barriers, both internal and external, were overcome (a matter to which Brexit is of course, very significant). In seeking to overcome these barriers, a wide variety of support services, supplied by industry organisations or UK governments and administrations, are on offer (see for example the opentoexport.com/food-and-drink website supported by a range of government departments18). However, this breadth, and its complexity, may in itself somewhat restrict the effectiveness of the support repertoire as a whole for
14 https://www.ons.gov.uk/economy/grossdomesticproductgdp/datasets/businessinvestmentbyindustryandasset 15 https://www.fdf.org.uk/exports.aspx#item2 16 https://www.wto.org/english/res_e/statis_e/tradebysector_e.htm 17 Obstacles to Export Growth for Agrifood Small and Medium Enterprises, Final Report, Plymouth University, November 2011 18 https://opentoexport.com/food-and-drink/
Access to finance
42. A particular factor in the ability to grow at the FDM industry (as in all others) is access to the credit or equity finance on which investment depends (in the many cases in which internal resources or profitability are insufficient to fund the necessary development).
43. Difficulty in securing finance has been widely recognised (see for example Access to Finance, first report of session 2016-2017, BEIS strategy committee House of Commons19) as being, in many sectors, a substantial or frequent barrier to the scaling up of SME businesses at various growth stages.
44. Bank of England statistics suggest, particularly, that lending to the FDM sector fell by 22% between mid-July 2012 and December 2016 compared with an overall 5.2% reduction for lending to manufacturing in general – although it is not known what shares in this fall were due to reduction in demand for finance or to a fall in its availability from banks and other financial institutions.
45. In a 2016 survey (William Reed20) of FDM industry managers, 27% reported that lack of access to finance had had a detrimental effect on their businesses in the year previous to the survey. And a 2013 study (Arthur D Little21) of innovation in the FDM sector observed that ‘this study has identified that obtaining funding for technological innovation is the most significant barrier to such innovation’.
46. Generally, there is a concern that limited access to finance for FDM businesses, particularly those which are smaller and/or newer, may be impacting significantly on the overall performance of the sector (without being precisely quantified).
Labour and skills
47. While there is scope for debate about some of the issues which have been briefly outlined in this chapter – for example, as to whether the industry’s levels of productivity, innovation, or access to finance are major barriers to industry growth – there is wider consensus that labour and skills issues do present such a barrier. For example:
• A survey by BDO and the Institution of Mechanical Engineers (2016)22 showed that 70% of FDM firms surveyed experienced difficulties in recruiting the skilled people they required and highlighted this as their second highest challenge to business performance.
19 https://publications.parliament.uk/pa/cm201617/cmselect/cmbeis/84/84.pdf 20 Op cit 21 Arthur D. Little Limited (2013) Mapping current innovation and emerging R&D needs in the food and drink industry required for sustainable economic growth. Final Report to DEFRA, May 2013 22 https://www.bdo.co.uk/en-gb/insights/industries/manufacturing/food-and-drink-previous-reports
• A study of innovation in the FDM sector (Arthur D Little23) identified a shortage of appropriately skilled staff, from shop floor to professional engineering levels, as the second most frequent barrier to innovation.
• A 2017 study (Grant Thornton24) observes the relatively high dependence of the sector on migrant workers (about two and a half times that of the economy as a whole), the substantial proportion of the workforce which is in pre- retirement years, and the high number of unfilled vacancies (particularly for R&D, engineering, and food preparation roles).
• A Food and Drink Federation report (2017)25 also notes the industry’s high dependence on migrant labour and discusses the possible difficulties in labour and skills supply which may arise following the UK’s exit from the EU.
• A 2016 survey of industry managers (William Reed26) reports that 61% of industry businesses had difficulty recruiting people with the appropriate skills.
• A BDO report (2017)27 observes that 57% of businesses in the industry have recruitment difficulties and consequently that ‘a shortage of unskilled and skilled labour remains an ongoing challenge for companies in the industry.’
Context: summary 48. A brief review of existing reports and statistics on the Food and Drink manufacturing
industry shows some key features of that industry – its large size, its significance to the broader economy and labour market, and its wide distribution across varied sub-sectors, different sizes of enterprise, and the UK’s nations and regions. The review also shows some primary concerns of the industry related to its levels of productivity and innovation and its access to two key inputs, finance and labour and skills, on which effective performance and growth depend.
49. However, the reports and statistics are sometimes somewhat dated, may not be wholly specific to the manufacturing segment of the ‘farm-to-fork’ food chain, or to the SME segment of the Food and Drink Manufacturing sector (which is the concern of this report), or may be based on surveys of small numbers of businesses in the sector which are not representative of the sector as a whole.
50. The report which follows, of a recent large survey of the FDM industry at SME level, supported by a range of in-depth interviews, is, therefore, able to add very considerably to the knowledge base on which public policy in support of the industry draws.
23 Op cit 24 https://www.fdf.org.uk/publicgeneral/FDF-Economic-contribution-Full-report.pdf 25 https://www.fdf.org.uk/publicgeneral/Breaking-the-Chain.pdf 26 Op cit 27 Op cit
Sub-sector, size, and geographical distribution of the sample 51. This chapter describes key features the survey sample on which subsequent analyses
are based. In the first three cases, the tables and charts showing sample characteristics are based on data which has been weighted so that sample distributions (by sub-sector, size, and nation) match the actual distributions of those characteristics of the population of all UK SME’s in the Food and Drink Manufacturing sector.
52. Thus, a first table, Table 3 (overleaf) shows that relatively high proportions of businesses are in the bakery and ‘meat’ sub-sectors and in the catch-all category of ‘other food products’ which encompasses the manufacture and processing of the wide variety of food and drink products which remain after the other, individually more substantial, categories in the table have been identified:
19
Nation Company size
10+ em ployees
101 Processing and preserving of meat and production of meat products
11% 11% 4% 18% 15% 9% 15% 17% 15%
102 Processing and preserving of fish, crustaceans and molluscs
4% 3% 15% 1% 3% 3% 4% 6% 5%
103 Processing and preserving of fruit and vegetables
5% 5% 3% 1% 13% 5% 5% 8% 6%
104/106 Manufacture of vegetable and animal oils and fats, manufacture of grain mill product, starches and starch products
2% 2% 1% 0% 0% 2% 1% 5% 2%
105 Manufacture of dairy products 7% 6% 9% 7% 4% 7% 7% 7% 7%
107 Manufacture of bakery and farinaceous products 35% 34% 27% 42% 41% 36% 37% 23% 33%
108 Manufacture of other food products 17% 18% 22% 12% 12% 16% 17% 19% 17%
109 Manufacture of prepared animal feeds 4% 5% 3% 3% 5% 4% 4% 7% 5%
110.10-50 Manufacture of beverages - alcoholic/fermented
14% 13% 18% 15% 7% 17% 10% 7% 9%
110.60-70 Manufacture of beverages - soft drinks, non- alcoholic, water
1% 2% 1% 0% 0% 2% 1% 1% 1%
Unweighted bases (all respondents) 1000 790 104 60 46 607 290 103 393
Weighted bases 1000 791 98 61 49 607 293 100 393
53. Figure 2 and 3 which follow show, respectively, the breakdown of the sample (and, by inference, the population) by size of enterprise and by UK nation.
54. Figure 2 reveals that 6 out of 10 enterprises within the SME population are micro- businesses with fewer than 10 employees; whilst Figure 3 shows, as might be expected, that the numbers of enterprises in the sector broadly reflect the relative size of the economies and resident populations of the four home nations:
20
Figure 3: Nation
1-9 employees 61%
10-49 employees 29%
50-249 employees 10%
21
Age of businesses 55. The age of enterprises (since their establishment under their current ownership) is
shown in Figure 4 following. [It should be noted that from this point onwards, analyses, while based on a sample weighted for sub-sector, size, and nation are not weighted by the characteristic which is being investigated (in this case, age of business) – essentially, from here, analyses are of survey findings, rather than being (as in Table 1 and Figures 2 and 3 above) simple reflections of known population structures].
56. It can be seen from Figure 4 (following) that around 6 out of 10 enterprises (57%) are relatively mature, having been established for 10 or more years. However, around a third (30%) are young businesses, in the period of 3 to 10 years since their formation, and there is some dynamism in the sector in the sense that 13% of enterprises have been formed in the last 3 years.
57. There is, as would be expected, a correlation between the age and size of enterprises. Further analysis (not pictured here) shows, for example that 86% of enterprises with between 50 and 249 employees were established 10 or more years ago whilst only 45% of enterprises with fewer than 10 employees have this longevity; and, of the businesses established in the last 3 years (125 cases in the sample), 86% had fewer than 10 staff whilst only 14% were larger than this.
Figure 4: Years established
Within the last year 2%
1-3 years ago 11%
30%
20%
37%
22
Main market geographies 58. Key markets, in broad geographical terms, are shown in the next chart, Figure 5. This
shows that, overall, around 4 in 10 enterprises (41%) see their main market as at least being nationwide in extent and, within this, in 11% of cases, the enterprise reports itself as being essentially an international operator. Width of market clearly correlates with business size such that larger SMEs are significantly more likely than smaller ones to have a wide market focus:
Figure 5: Primary geographical markets
unweighted bases in parentheses: All respondents A7
42%
42%
43%
38%
43%
53%
34%
4%
17%
16%
9%
21%
31%
18%
17%
12%
30%
31%
27%
34%
13%
23%
36%
50%
11%
11%
20%
7%
12%
7%
13%
34%
Nationally – UK-wide
23
59. Survey statistics also show two other characteristics of the sector:
• 84% of these FDM SMEs operate from just a single site, with 16% being multi- site businesses (having at least 2 sites from which they operate). As would be expected, these multi-site businesses are larger – they constitute 27% of enterprises with between 50 and 249 employees, 14% of these with between 10 and 49 employees, but only 5% of micro-businesses with fewer than 10 employees.
• Similarly, larger SMEs are more likely to be private limited companies (89% of 50-249 employee businesses, 82% of 10-49 employee businesses, and 72% of 1-9 employee businesses).
60. Nearly one in five businesses (19%) describes themselves as being in sole proprietorship, with 80% of these having fewer than 10 staff.
FDM industry profile: summary points 61. Survey analysis shows:
• The SME segment of the Food and Drink Manufacturing sector has a distribution across varied sub-sectors, with some particular concentrations in bakery and meat processing and product sub-sectors.
• Its distributions by size and location of enterprises show that a preponderance of enterprises comprises micro-businesses with fewer than 10 staff and businesses located in England.
• The sector has a majority of mature enterprises but also a significant level of business formation with around 1 in 7.5 enterprises having been established in the last 3 years.
• Around 4 in 10 SMEs have a market orientation which is at least national in extent, that proportion more than doubling in enterprises with between 50 and 249 employees. More than 1 in 10 SMEs in the sector have markets which are essentially international in scope.
• Most SMEs in the FDM sector operate from a single site and ‘private limited company’ is much the most frequent ownership model.
24
4 Innovation
62. In the earlier ‘context’ chapter of this report it was observed that the FDM sector has a reputation as an innovative sector, largely based on its wide scope for product development (across a huge range of food and drink products) and on its capacity to automate processing and packing functions. This chapter gives further insights into the sector’s innovativeness.
Innovation activity 63. A first analysis, set out in Figure 6 following, shows that 55% and 35% of enterprises in
the sector report innovation in the last 3 years in products or processes respectively, with these proportions rising with increasing size of the business. These figures are considerably in excess of the corresponding figures for all SMEs in the UK economy (35% and 20% respectively) and all SMEs in UK manufacturing sectors (41% and 32% respectively)28. Nor does the apparent higher level of innovation in the FDM sector reflect different distributions of business sizes – FDM businesses had distinct advantages over other sectors across all SME size bands.
28 These comparator statistics are from the Small Business Survey (SBS), 2017, Department for Business, Energy, and Industrial Strategy
25
Figure 6: Introduction of new or significantly improved products or processes in the last three years, by company size
unweighted bases in parentheses: All respondents B1/B3
64. In terms of sub-sectors, product innovation was most frequent in the manufacture of non-alcoholic beverages (90% innovated products), manufacture of alcoholic beverages (71%), ‘other foods’ (62%), and processing of fruit and vegetables (61%) sub-sectors. Product innovation was least frequent in the fish processing (31%) and meat processing (42%) sub-sectors.
65. Process innovation was particularly frequent in the fruit and vegetable processing sub- sector – undertaken by 47% of firms in this sub-sector compared with the whole-industry average of 35% – but otherwise did not vary significantly between sub-sectors.
66. In terms of business age, it is often observed that new and young businesses can frequently be the most innovative – in some cases being formed specifically to exploit an innovative idea. In this case, the findings give some support to this perspective – thus, the percentage of firms reporting product innovation declined with business age (1-3 years old, 69% innovative; 3-10 years old, 62%; 10-20 years old, 55%; 20+ years old, 46% innovative).
67. However, this relationship was less evident in other measures of innovation: the innovated product being wholly new to market was most frequent for firms aged between 3 and 10 years (51% compared with an average of 44%) rather than older or younger than that; whilst process innovation was most frequent for firms aged between 3 and 20
55%
55%
52%
60%
46%
50%
61%
70%
63%
35%
35%
31%
45%
38%
29%
42%
54%
45%
Products
Processes
26
years (41% compared with 34% for firms in the 1-3 years bracket and 31% for firms in business for more than 20 years.
68. Considering this ‘new to market’ versus just ‘new to the company’ distinction more widely, FDM businesses were more likely than businesses in general (SBS statistics29) to say that, where new products had been introduced, at least some of those were completely new to the market: 44% of FDM SMEs said this (see Figure 7 following) compared with 29% of UK businesses generally.
69. However, whilst as noted above, UK SME manufacturers as a whole were less likely than FDM SMEs to report product innovation, other manufacturers were somewhat more likely (49% against the 44% above for the FDM sector) to say that, when they did innovate, their new products were completely new to market.
70. The effect, in terms of the introduction of completely new products, is that, overall, businesses in FDM (24%) were more likely than businesses in manufacturing generally (20%) to introduce completely new products [because their greater propensity towards product innovation at all (55% for FDM businesses against 41% for manufacturing generally) outweighed their lesser propensity for that innovation to be of completely new products (44% for FDM businesses against 49% for manufacturing generally)].
71. Figure 7 also shows, notably, that where product innovation occurs, the likelihood of its ‘new to market’ attribution does not vary greatly by the size of the business making this innovation.
29 Small Business Survey (SBS), 2017, Department for Business, Energy, and Industrial Strategy
27
Figure 7: Whether new or significantly improved products were new to the market or just new to the company, by company size
unweighted bases in parentheses: Respondents that introduced new/significantly improved products in the last three years B2 % Don’t know/refused not shown
72. When asked about innovation, over half of employers interviewed in-depth identified innovations either in products or processes, for example:
“We've introduced new products that we make ourselves; we've sourced new products from different suppliers. We've purchased new equipment.” (8 staff, ham and cheese products)
“New machinery has enabled us to really increase the numbers we can produce by a factor of between 10 and 100 and product quality also higher.” (9 staff, cake and puddings manufacturer)
“Introduced a new canning machine, brought packaging in-house to improve profits.” (3 staff, micro brewery)
“Introduced new containment vessels; developed a beer delivery system for festivals.” (24 staff, brewery)
“Introduced 6 new products and 3 new ranges, mostly related to cheese.” (4 staff, savoury snacks manufacturer)
44%
41%
48%
60%
65%
45%
38%
52%
42%
55%
58%
49%
40%
35%
54%
59%
48%
56%
Northern Ireland (24)
1-9 employees (317)
10-49 employees (175)
50-249 employees (72)
10+ employees (247)
At least some new to the market All just new to the company
28
73. Some respondents said that their product or process was completely new, for example:
“We’re a unique brand. Everything we produce is developed in-house” (2 staff, sports nutrition products)
“We designed our own canning machine. My father is a scientist and together we constructed a new automated process” (3 staff, micro-brewery)
74. Some businesses were uncertain as to whether their innovation was completely new or not, but others acknowledged that they had adopted products or processes already in place elsewhere, for example:
“It improved on what's out there at the moment.” (5 staff, animal feed producer)
“We do try and copy the kind of people that we think do things best in our industry in our sector.” (8 staff, ham and cheese products)
“We took inspiration from how stuff was done a long time ago so we're using more old-fashioned processes than something that's particularly new. We're doing things in a very basic handmade kind of way.” (2 staff, micro-brewery)
75. The timescale for new product or process innovations was described in two cases as being part of a continuous development strategy and in 3 cases as being a matter of between 2 and 9 months, but in most cases, development was a matter of years – from 1 year up to 4 years, for example:
“The bigger projects take 3 or 4 years to get to market.” (120 staff, dairy products)
“18 to 24 months which is standard for our industry.” (45 staff, English wine producer)
Infrastructure for innovation 76. While innovation is shown above to be frequent in the FDM sector, part one of Table 4
(following) suggests that much of this innovation, particularly in smaller SMEs, is informal. Thus, many fewer enterprises in the sector report having a formal infrastructure as a base for innovation than report that they innovated. This infrastructure is more frequent in larger SMEs – for example, 56% of FDM SMEs with between 50 and 249 employees have one or more of an R&D unit or team, a formal R&D budget, or a role to promote automation, compared with the much lower 19% of FDM micro-businesses which have one or more of these.
77. The proportions of enterprises in different FDM sub-sectors (see part two of Table 4) which have an ‘innovation infrastructure’ also vary somewhat but some of these statistics are based on fairly small sub-samples which may (particularly in the 104/106 oils/grains/starch category) have a high error margin.
29
Table 4: Research and development facilities within companies, by company size and sector
Nation Company size No. of
sites
a formal research and development department/unit or team
15% 15% 10% 13% 17% 9% 18% 40% 24% 13% 27%
a formal research and development budget 10% 9% 8% 22% 10% 6% 12% 26% 16% 9% 17% a role concerned specifically with labour- saving technology/automation
10% 10% 11% 9% 16% 8% 12% 15% 13% 10% 13%
Summary: Any of these 26% 26% 20% 36% 30% 19% 30% 56% 37% 23% 42% Unweighted bases (All respondents) 1000 790 104 60 46 607 290 103 393 833 153
Sector
9% 2% 33% 32% 14% 11% 25% 21% 9% 16%
a formal research and development budget 7% 11% 19% 28% 11% 6% 15% 11% 6% 20%
a role concerned specifically with labour- saving technology/ automation
14% 11% 13% 13% 16% 9% 8% 8% 7% 5%
Summary: Any of these 23% 20% 42% 60% 32% 20% 37% 32% 18% 26% Unweighted bases (All respondents) 124 37 56 18* 77 224 195 54 196 19*
B7 *caution, small sample base
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78. The importance of an innovation infrastructure is shown by the relationship in the survey data between possession of an infrastructure and actual participation in innovation. Thus, of businesses with one or more elements of an innovation infrastructure in place, 77% and 53% respectively had introduced new products or new processes. The corresponding proportions for businesses with no infrastructure for innovation were 47% and 29%.
79. Going beyond possession of a formal infrastructure for innovation, managers who took part in in-depth interviews explained the factors which prompted innovation. These were varied but mainly included:
• Product innovation to meet consumer tastes or to keep up with competitors, for example:
“To increase revenue streams; to increase the products that we offer; to offer customers different lines so they're not limited by choice and also to keep up with competitors who are doing similar things.” (8 staff, ham and cheese products)
“To respond to a gap in the market for more artisan products.” (2 staff, micro- brewery)
“We need to stay ahead of competitors” (2 staff, dairy products)
“We had carried out market research to identify our audience. We wanted to target a younger market and the trend towards healthy eating” (4 staff, gourmet biscuits manufacturer)
• Process innovation to introduce technology to increase production and sales:
“Just increasing capacity so that we can sell more.” (2 staff, micro-brewery)
“Desperation really – we were really struggling to keep with demand” (2 staff, micro-brewery)
“Just increasing capacity so that we can sell more” (2 staff micro-brewery)
80. Innovators generally reported that their innovations had been successful, reporting increased sales, good customer reactions, and increased efficiency. Some examples were:
“It's been great. It's given me a point of difference from the rest of the market which has obviously given me a position within the market and allowed the brand to grow. Being able to compete and get the product on the shelf and a position in the market has been key to all of that.” (5 staff, animal feed producer)
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“Successful. Judged by increased speed of production (for given volume) and increased total volume of production, both without increase in staff.” (9 staff, cake and puddings manufacturer)
“Very successful; all of the new flavours have been very well received." (4 staff, gourmet biscuits manufacturer)
81. Most of the businesses, and all of the micro-businesses, reported that their funding for innovation was ‘ad hoc’ – not something for which they formally budgeted; for example:
“It is mainly on an ad hoc basis but I am budgeting a small amount per year at the moment just to develop new products.” (5 staff, animal feed producer)
“Ad hoc basis, using in-house revenue streams.” (8 staff, ham and cheese products)
82. Additionally, businesses in these in-depth interviews were more likely to say that the availability of finance was a constraint on their innovation than that it was not.
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External support to innovation
83. An analysis of some of ways in which innovation is externally supported and of the frequency with which these forms of support are accessed is set out in Figure 8 (following). The figure shows that inter-firm collaboration was the most frequent source of support followed by support from industry bodies and then from university or other research institutions. Direct support from government in the form of R&D tax credits or support from Innovate UK was less frequent:
Figure 8: Company activities in respect of innovation in the last three years - prompted, multiple response
unweighted base: Respondents that had innovated in the last 3 years, 657 B9
84. A more detailed analysis (Table 5 following) shows that larger innovating SMEs in the sector were somewhat more likely to have sought and acquired most of the forms of the support than were smaller SMEs. This is apart from inter-firm collaboration which is more frequently employed by businesses with between 1 and 49 employees than by businesses larger than that.
39%
30%
24%
18%
14%
5%
19%
Collaboration with other businesses
Had support or assistance from a food and drink industry organisation or trade association or
equivalent
Collaborated in some way with a university or research institute or equivalent
Had advice or guidance on innovation from a private consultancy or not-for-profit advisory
service
Received R&D tax credits
Had support or funding from Innovate UK, the governments innovation agency
Had any other form of support with innovation from any other individual or organisation external
to the company
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Table 5: Company activities in respect of innovation in the last three years, by company size - prompted, multiple response
Nation Company size
N orthern Ireland
1-9 em ployees
10-49 em ployees
50-249 em ployees
10+ em ployees
Collaboration with other businesses 39% 38% 47% 52% 30% 39% 41% 35% 39% Had support or assistance from a food and drink industry organisation or trade association or equivalent
30% 27% 49% 37% 37% 29% 30% 40% 32%
Collaborated in some way with a university or research institute or equivalent
24% 21% 31% 43% 40% 21% 26% 36% 29%
Had advice or guidance on innovation from a private consultancy or not-for-profit advisory service
18% 17% 21% 25% 25% 15% 23% 22% 23%
Received R&D tax credits 14% 12% 13% 14% 31% 6% 18% 33% 22% Had support or funding from Innovate UK, the governments innovation agency
5% 6% 1% 2% 5% 4% 5% 8% 6%
Had any other form of support with innovation from any other individual or organisation external to the company
19% 18% 11% 27% 26% 17% 18% 25% 20%
Unweighted bases (Respondents that had innovated in the last 3 years)
657 524 63 40 30 366 206 85 291
B9
85. Further analysis also suggests that most forms of support to innovation were more likely to be accessed by FDM firms in Scotland, Wales, and Northern Ireland than by FDM firms in England and, perhaps related to this, by firms located in rural areas. There were also other associations in the data – such that firms receiving innovation support were also more likely to export – but it is likely that such associations are driven by the common factor of business size (larger firms being more likely to receive support and to export) than necessarily by any clear causal link.
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86. Survey analysis also shows that there was an

survey of the uk food and drink manufacturing industry 2018

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