sustainable growth in the food and drink manufacturing ... · food & beverage industry) food...

Sustainable Growth in the Food and Drink Manufacturing Industry

Grant Thornton report commissioned by the Food and Drink Federation

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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 85

8. Feedback from international federations 103

Bibliography 113

Lushani KodituwakkuDirector, Head of Strategy & Commercial AdvisoryT +44 (0) 207 865 2428E [email protected] Ioana NobelManager, Strategy & Commercial AdvisoryT +44 (0) 207 865 2142E [email protected] Vangelis ApostolidisExecutive, Strategy & Commercial AdvisoryT +44 (0) 207 865 2535E [email protected]

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Glossary

ABIA Associação Brasileira das Indústrias da Alimentação (Brazilian Association of Agro-food Industry)

ANIA Association Nationale des Industries Alimentaires (French National Association of Agro-Food Industry)

CAGR Compound annual growth rate

Capex Capital expenditure

Corporate Above £50m in turnover

FAO Food and Agricultural Organisation of the United Nations

FDF Food and Drink Federation

FCPC Food and Consumer Products of Canada

FDII Food and Drink Industry Ireland

FDM Food and soft drinks manufacturing

wFIAB Federación Española de Industrias de la Alimentación y Bebidas (Spanish Federation of Food & Beverage Industry)

Food & Beverages Food, soft drinks and alcoholic drinks

Food, Beverages & Food, soft drinks, alcoholic drinks and Tobacco tobacco products

GVA Gross value added

H&W Health & wellness

IBD Institute for Management Development (Swiss Business School)

NPD New product development

ONS Office for National Statistics

PBT Profit before tax

SME Small and medium-sized businesses; below £50m turnover

WEF World Economic Forum

Section 1

Introduction & executive summary

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Food and drink manufacturing in the UK is a

Great British success story. By contrast with

many of the UK’s traditional industries, we

have shown resilience and resolve to grow

and adapt: increasing our exports in each of

the last six years, reducing our environmental

footprint, providing job opportunities over

a range of skills and levels and developing

healthier products, while continuing to

deliver value and choice to our customers.

This has not been easy. Businesses have

dug deep to reduce costs and become more

efficient, as well as to cope with a range

of external factors from new regulation to

extreme volatility in commodity prices. The

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 security

and climate change. And we know that simply improving our efficiency will not

automatically guarantee our future competitiveness – even though it is a vital

pre-condition. It is also clear we need innovation and investment – and a better

understanding of the limits and barriers to our growth potential in a global context.

So we decided to ask Grant Thornton to help us in this task by conducting

an independent research project into what FDF members really think are the

threats and opportunities they face – and who needs to do what about them.

The research findings constitute a powerful case for our industry to be central

to the UK’s economic recovery whilst continuing to make a real and unique

difference to a more sustainable future for society and to individual health and

wellbeing. With the right entrepreneurial approach on the part of business,

and the right operating framework from Government, working together we

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

strategic objective of ensuring safe, nutritious and affordable food for all.

A number of excellent initiatives are already in place, from us, from 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 the food industry can achieve. That is our 20/20 vision for the future.

Jim Moseley

FDF President

1.1 FDF Message from President Jim Moseley

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1.2.1 Project objectives

The Food and Drink Federation (FDF) commissioned this report to investigate the following key issues:

– How can the UK food and drink manufacturing sector generate value and be seen as a contributor to economic recovery?

– What are the main risks for the UK food and drink manufacturers in a globalised world?

– What are the competitive advantages that the sector has?

– What capabilities does the food and drink sector need to build to effectively compete with other countries?

– What support is needed from the Government to generate growth?

1.2.2 Project structure

The report has been structured in such a way as to clearly address the key issues originally agreed with FDF.

The report is organised in the following seven sections:•

– Section 1: (Introduction and executive summary) provides an introduction to the report, highlighting the five key objectives originally agreed with FDF and an executive summary with the key findings from the primary and secondary research

– Section 2: (Methodology) presents the methodology we followed in order to build the report. It depicts the different types of primary research that we undertook with leaders of the UK FDM industry and five foreign food federations. Moreover, the section provides details of the survey population that answered our online questionnaire

– Section 3: (Sector overview) provides a perspective of the UK FDM. It includes the sector’s historic performance, its business structure, M&A activity over the last five years, and export performance

– Section 4: (Growth drivers and exporting) presents results from our primary and desktop research on growth drivers for the UK FDM both within the UK market and abroad through exports. The section also analyses certain geographies where export opportunities may lie for the UK. These findings are meant to inform the issue of how the UK FDM can continue to grow in order to contribute to the economic recovery

– Section 5: (Competitive advantages and areas for improvement) During our survey we asked the businesses to rate the UK FDM’s competitive advantages and to rate other countries’ advantages and capabilities. This section presents our findings supported by an analysis from secondary research on most of the competitive advantages or disadvantages covered by the survey (e.g. skills, labour costs, productivity, NPD, etc)

– Section 6: (Risks and barriers to growth) presents the current and future risks of the UK FDM industry as rated by our companies, namely access to raw materials, education and training, innovation, taxation, and the regulatory environment. The section also considers other aspects that have a significant impact on the industry such as the bargaining power of food manufacturers across the supply chain and their relationship with retailers

– Section 7: (The Role of Government in optimising growth) the final section of our study deals with Government measures that are needed across the FDM supply chain. This includes current actions undertaken by the Government and quotes additional measures needed based on the responses received from our survey and follow-up interviews

– Section 8: (Feedback from international federations) provides a high-level analysis of the competitive advantages, risks and the role of the Government in each comparison market. This analysis is based on

interviews with FDM federations in Brazil, Canada, France, Ireland and Spain

Sector overview and contribution to the UK economy

The food and soft drinks manufacturing industry (FDM) is the largest manufacturing sector in the UK and contributes substantially to the UK economy. The latest available figures show that in 2009 the FDM sector contributed to the UK economy through turnover (£72.7 billion), gross value added (£19.7 billion), exports (£10.8 billion), employment levels (377,000 average)1, employment salaries and tax contributions (£10.1 billion) generated. Moreover, as a non-cyclical sector, the FDM has shown particular resilience in the face of major recent challenges such as volatility of raw material prices and low consumer confidence during the economic downturn. Moreover, the exchange rate has favoured exports which grew by 40% in nominal terms during the 2007-2010 period (from £7.7 billion to £10.8 billion). In contrast, other manufacturing sectors have been severely affected by the economic downturn, reducing their turnover by 15% between 2007-2009 (from £441 billion to £376 billion) and employment salaries and tax contribution by £12 billion (reaching £66 billion) over the same period. All these figures indicate that the FDM sector is an important contributor to the UK economic recovery. However, during the recession, profit margins have been squeezed, especially for SMEs. Therefore, food and drink manufacturers surveyed/interviewed during this project are requesting a positive regulatory environment to overcome challenges domestically and improve their competitiveness internationally now and in the future.

Growth drivers

From the Grant Thornton surveys and interviews, companies were prompted to •identify key growth drivers for UK FDM with reference to the types of products that will help drive growth during the next 5-10 years. Companies believe that “value” products are more likely to drive the growth of the UK food and drink market than premium products, as the disposable income of UK consumers is increasingly squeezed and consequently consumers will continue to look for better value products

1 According to FDF this does not account for seasonal fluctuations, and therefore the employment level can peak to 400,000 at some points in the year

However, the segment that is expected to suffer the most is the mid-range •products category as consumers combine better value at lower prices with innovative, premium priced products

In terms of brand vs. private label products, the views are split, with corporates •believing that private label is more likely to drive growth, while SMEs expect branded products to drive growth. Desktop research (Mintel) indicates that during the recession, branded food products outperformed private label. Therefore, it is reasonable to suggest that this trend may continue despite the increasingly trusted or premium image that private label brands such as Tesco Finest or Sainsbury’s Taste the Difference may be enjoying with consumers

The ageing population (both in the UK and worldwide), as well as the health •agendas increasingly promoted in the Western world, are expected to impact the demand for Health & Wellness (H&W) products and, therefore, be one of the main categories to drive the industry’s growth

Both in the UK and globally, the forecasted population growth will result in a •larger consumer base, which should drive the demand within the food and soft drinks market. The UK is amongst the European countries with the fastest population growth, forecast to reach 71.3 million in 2030 (15% growth from 62.3 million in 2010). France is forecast to grow at 11% reaching 73.5 million in 2030. This contrasts with the 1% population decline in Germany and the stagnation in Poland (at 39.7 million people in 2030 vs. 39.5 million in 2010). However, in the UK, the shape and pace of economic recovery may impact consumer expenditure which in turn may affect consumer purchasing patterns and the degree of real growth of the food and drink industry. Therefore, the positive effect from the forecast population growth figures showing a 2.5 million increase between 2010 and 2015 may be moderated due to the latest negative consumer and business confidence indicators as well as the Bank of England’s 1% GDP

growth forecast for 2012

1.2 Introduction 1.3 Executive summary

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Export opportunities

Although UK FDM businesses continue to regard Europe as an important •trading partner, they also recognise the increasing opportunities presented by developing nations. Globalisation, fast economic growth and rising income levels in the emerging markets are expected to drive a shift in their populations’ diet, specifically an increase in the consumption of proteins and convergence towards Western diets

However, businesses will need to strategise effectively whilst marketing their •products to these markets to ensure they address local consumer needs, purchasing power and preferences

Despite growing its food, beverage and tobacco exports by 5.4% year-on-•year between 2000-2010, the UK has lost market share as world exports grew by 10% year-on-year. Over the same period (2000-2010), most comparison markets grew faster than the UK (Canada at 7.7%, France at 6.5%, Spain at 8.9%), whilst some countries have increased their market share by outperforming the world average export growth (e.g. Poland at 21%, Brazil at 16.9%, Germany at 10.7%). This indicates that despite the opportunities presented by export markets, UK FDM businesses are likely to face strong competition from other countries who are also focusing on exports as a way to grow their industry

Competitive advantages

The UK FDM industry needs to exploit its competitive advantages, minimise its •weaknesses and overcome a range of barriers in order to remain competitive in the world FDM market. Some of these issues remain the responsibility of businesses, but in many cases they will require the Government to provide a positive regulatory environment which optimises their growth

The food and soft drink manufacturers that participated in this study regard •product quality, branding and new product development (NPD) as the industry’s main competitive advantages. Other areas of distinction for the UK FDM

industry, according to the executives interviewed, are efficient supply chains, low waste and high levels of regulatory compliance

These characteristics were considered to contribute towards the industry’s •competitiveness, allowing it to maintain margins and present itself as a reliable partner when conducting business abroad

The analysis conducted based on desktop research supports the FDM •executives’ views. According to Mintel’s NPD Database, the UK food and drink industry has the highest number of new product variant launches outside the US. Between 2005-2011 (up to October), UK manufacturers launched 49,995 product variants compared to 47,677 in Germany, 41,005 in France, 36,652 in Brazil, 32,019 in Japan, 24,209 in Spain and 13,868 in Canada

The businesses surveyed credit the UK FDM with equally developed R&D, •and technology capabilities when compared to Western counterparts. This is consistent with the R&D investment data available from Organisation for Economic Cooperation and Development (OECD) which indicates that among comparison markets, the UK food, beverage and tobacco companies invest the highest percentage of revenue in R&D (0.48% of turnover). However, the UK FDM is lagging behind Japan and Switzerland both of which when expressed as a percentage of turnover invest almost double in R&D

The FDM executives interviewed stated that productivity improvement is a •constant priority for their businesses, although they believe that the UK FDM industry has many legacy assets and is characterised by overcapacity. Although utilisation rates were not tested, international productivity comparisons indicate that the UK food and beverages industry has consistently improved productivity when measured as gross value added per employee. UK’s FDM productivity has been steadily growing at an annual rate of 4.7% during the 2003-2008 period. If compared in Sterling terms, UK ranks above Germany and Japan, both of which have substantial manufacturing sectors and are traditionally considered

to invest heavily in technology as a means of improving their productivity

Areas for improvement

The businesses surveyed rated the UK FDM’s competitiveness low in terms of •labour cost. An international comparison proves that not only are UK labour costs above other countries’, but, unlike most countries analysed, the growth in labour costs outpaced productivity growth (between 2003-2007)

Businesses also stated that they operate in a highly regulated environment •and Government does not adequately support them in areas such as taxation, advice provision and cutting ‘red tape’. Therefore, they ranked the UK FDM’s competitiveness low in areas such as the ability to operate in a positive regulatory environment, indicating that this is an area where the sector may have a competitive disadvantage

Risks and growth barriers

The businesses surveyed perceive labour cost/legislation and the tax system as •the biggest risks the industry has to deal with at present, while access to raw materials is expected to be the major risk in the future

The UK has improved its ranking in international competitiveness indices and •is seen as an attractive destination for business investment overall. However, it is facing increasing competition from a range of developed and developing countries. This is echoed by the businesses surveyed which point out that the UK may not have a regulatory environment and tax system that encourage businesses to invest and thus, puts British manufacturers at a competitive disadvantage

In this context, food and drink manufacturers emphasised that corporation tax •is much more attractive in other countries such as Ireland, Poland, Slovakia or Romania, while the highest personal tax rate of 50% in the UK acts as a barrier to recruiting skilled personnel from abroad

Although at present UK FDM businesses have access to raw materials, they are •affected by volatility in commodity prices and believe that the UK should have a national food policy to address food security

The interviews with FDM executives also revealed that access to finance and •retailer consolidation pose growth barriers for the sector. Businesses stated that access to finance is currently an issue in particular for SMEs, as banks have tightened lending criteria and are more risk-averse, affecting ability to invest in order to drive future growth. This view is supported by data from an EU survey (with 25,000 SMEs across 20 countries and across industries) which indicates that in the UK, the success rate of bank loan applications has decreased from 91% in 2007 to 65% in 2010. Only Ireland and Spain had a success rate of bank loans lower than in the UK, whilst in France and Germany, 84% and 75% of SMEs respectively were able to access loan financing in 2010

Retailer consolidation has skewed the balance of power in the industry’s supply •chain and, to an extent, has acted as a growth barrier for the sector, despite offering manufacturers increased access to consumers and driving innovation. More specifically, the difficulties in passing on raw material price increases and the need to participate financially in retailers’ promotion campaigns have resulted in lower margins for FDM businesses

Another barrier that the industry faces is access to skills. The industry’s •outdated image has led to a small number of students pursuing food degrees (3,360 higher education students enrolled in food and drink degrees compared to the total student population of 2.5 million). Although the economic downturn and higher unemployment rate have increased the availability of personnel, the industry still struggles to find suitable candidates for engineering, science and food technician positions. In particular, companies face issues in recruiting food scientists, food nutritionists as well as technologists and engineers with the ability to handle complex bespoke automated systems. These views expressed by FDM businesses during the interviews are consistent with data from FDM’s sector skills council Improve and other agencies showing that there is a shortage of qualified food scientists and technologists

According to the FDM businesses surveyed/interviewed, potential employees •do not find a career in the food industry attractive. They view the food industry

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less prestigious and innovative compared to sectors such as automotive, engineering, or pharmaceutical

These arguments combined with the low numbers of apprenticeships and on-•the-job training programmes lead to many positions being filled by people with insufficient qualifications and skills

However, the companies interviewed stated that the food and soft drinks •industry is a more stable employer compared to other industries and has a range of roles that need to be better advertised so that potential employees, especially young people, understand the wide range of long-term career options available to them in creative, science and engineering areas

In response, the FDF has launched a campaign called “Taste Success •– A Future in Food” to raise public awareness about the FDM industry’s contribution to society. The campaign aims to promote the food and soft drink manufacturing sector as a career of choice for new graduates, hoping to engage young people and change the outdated image of the industry. At the 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 the industry in the next few years

However, it is unlikely the industry’s image will change overnight, and will •most likely require a combination of actions from FDF, manufacturers and the Government (particularly around the reform of the education system and support for apprenticeships) in order to improve perceptions, close the skills gap and attract higher calibre candidates

The role of Government in optimising growth

During the survey and follow up interviews, businesses mentioned several main •areas where the industry requires the Government to provide a positive business environment in order to maintain its performance and encourage sustainable

growth. They are:

Tax system•

– Food and drink manufacturers identified the tax system as the main area

in which the Government can provide support. Despite Government

plans to gradually reduce the main corporate tax rate from 26% to

23%, businesses believe the UK tax system is not competitive enough

and faces strong competition from both developed and emerging

markets. Currently the UK’s corporation tax rate is on par with the

average of OECD countries, but countries such as Ireland, Poland,

Slovakia and Romania have much lower corporate tax rates

Regulations and ‘red tape’•

– Another area where businesses would welcome Government involvement

is in reducing the burden of EU/Government imposed regulations and

the ‘red tape’. SMEs in particular, do not have the resources to deal

with the administration required to comply with regulations. Moreover,

businesses would like Government to push for a uniform implementation

of EU regulations across Europe, as they believe that the UK is an early

adopter of EU Directives compared to some countries where regulations

are not enforced, which puts the UK FDM at a cost disadvantage

– Businesses view compliance of 160 labour regulations as costly and have

emphasised the importance of flexible and streamlined regulations in order

to help manufacturers grow and in turn maintain employment levels

Export incentives•

– In many cases, FDM businesses and SMEs in particular are not aware of the end-to-end actions they need to take in order to export. They also require administration support to navigate through the regulations of the countries they are planning to export to. SMEs requested a greater level of support for their export efforts. Specifically,

Government bodies could be better at providing SMEs with more effective guidance and advice on the technical, administration and logistics processes associated with exporting to specific countries

– During interviews, FDM executives mentioned that other countries are better at supporting their manufacturers to participate in international trade fairs. In contrast, they perceive that the UK Government is not providing sufficient marketing support. As a result, there is a perceived lack of enthusiasm in the UK stands and the UK is under-represented at international food fairs compared to other EU countries such as Germany, Italy or even smaller countries such as Greece

Education and training•

– Education reform (focused on improving the quality of primary and secondary education and making courses more relevant for the business world) is of major importance to the FDM sector as a means of gaining improved and appropriate access to skills. Businesses would also like to receive Government support to revitalise apprenticeship schemes which they perceive as essential for securing a future workforce with industry-specific skills. In this context, the Government pledge to increase apprenticeships across industries by 250,000 until 2015 and FDF’s initiative of doubling food and drink manufacturing apprenticeships in England and Scotland will contribute towards securing some of the pipeline of new recruits necessary to replace the ageing workforce

R&D and innovation•

– 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. SMEs find the process of claiming R&D tax credits burdensome and have to bring in external consultants to help them submit applications. Moreover, FDM companies may not qualify for R&D tax credits or tax breaks as authorities do not recognise the type of innovation specific to food and drink manufacturing

– Therefore, FDM businesses have expressed their desire for support from the Government to widen the definition of R&D activities to include improvements in products, technology, packaging, not just blue sky research which is rare in food and drink manufacturing

– In addition, they believe that Her Majesty’s Revenue and Customs (HMRC) staff would benefit from specialist training to understand the type of innovation taking place in the food and drink industry and, therefore handle claims more effectively

Trade barriers and food security•

– FDM businesses highlighted the need for the Government to re-engage in discussions with international organisations for the removal of trade barriers to help grow exports and reduce the cost of raw materials imported. Moreover, they expressed the need for a food policy that clearly addresses long-term issues such as food security and measures to shield the UK FDM from commodity price volatility

Balance of power in the supply chain•

– Businesses would welcome Government support in the enforcement of a UK Grocery Supply Code of Practice. They believe that in order to ensure fairness and competition, the Government should monitor not only the food price paid by the

consumer, but also take into account unfair trading practices

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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

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

Section 2

Methodology & survey population

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2.1.1 Primary and secondary research approach

This report has been prepared based on extensive primary research supported by secondary research to build a robust picture of the FDM industry in the UK. The methodology includes:

Online survey – Following consultations with FDF, Grant Thornton developed •

a questionnaire that was sent out to members of the UK FDM industry via

an online survey. The questions asked were directly linked with the topics

presented in the project issues objectives section

The survey was addressed primarily to executives and other senior members of •

FDM (SME’s and Corporates) in the UK. The survey was sent out to

– FDF members (166 members);

– The Regional Food Group Alliance members; and

– Grant Thornton’s FDM contacts

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.

corporates)

Parallel to the survey, Grant Thornton conducted 25 telephone/face-to-•

face interviews with executives and senior staff of UK FDM businesses. The

interviews were designed to gain in-depth views around some of the topics

addressed by the survey questionnaire and included some additional questions

In addition, we conducted further interviews with five food federations from •

emerging and developed markets to gain a better understanding of their

markets’ historic performance and outlook, strengths and weaknesses and the

role of Government in their countries. These interviews were conducted with the

federations of: Brazil (ABIA), Canada (FCPC), France (ANIA), Ireland (FDII) and

Spain (FIAB)

Our study is also supported by desktop research and analysis. The breadth of •

our sources (please see the bibliography on Page 110) were complemented

by the UK FDF and the foreign food federations who provided us with further

information and market data

Primary research completed

Online survey UK FDM interviewsInternational federation interviews

Corporates 35 13 Not applicable

SMEs 42 12 Not applicable

Total 77 255 (Brazil, Canada, France, Ireland, Spain)

2.1.2 Research limitations

Our analysis was constrained by the following desktop research limitations:•

- Inconsistent time series in the statistical data collected with

lack of recent data for some countries or gaps in information

across a number of countries during certain years

- Wherever food and soft drinks specific data was not available, it

was substituted for food, beverage and tobacco data. However,

wherever this is the case, it has been clearly indicated

- The surveys included 25 questions for SMEs and 22 questions

for corporates covering a wide range of issues (e.g. market

performance, growth drivers, exports, M&A etc.). Therefore, this

report does not attempt to analyse in great detail a specific issue/

area, instead it considers all of the above issues in the context of

addressing and supporting FDF’s key strategic objectives

2.1 Methodology 2.2 Survey population

Number of companies surveyed by business turnover and number of employees specific to UK FDM

0-4915

50-24925

250-49912

500-99910

1,000-1,9996

Over 2,0009

£0-5m10

£5-10m6

£10-25m16

£25-50m8

£50-100m10

£100-250m11

£250-500m8

Over £500m8

Sources: 1. Grant Thornton survey analysis

Number of companies surveyed by manufacturing sub-sector (SIC 2007)

FDM manufacturing sub-sector Number of businesses

Processing and preserving of meat and production of meat products Processing and preserving of fish, crustaceans and molluscs Processing and preserving of fruit and vegetables Manufacture of vegetable and animal oils and fats Manufacture of dairy products Manufacture of grain mill products, starches and starch products Manufacture of bakery and farinaceous products Manufacture of other food products Manufacture of prepared animal feeds Manufacture of soft drinks; production of mineral waters and other bottled waters Wholesale of other food, including fish, crustaceans and molluscs Other (please specify)

10 3 7 5 4 8 17 30 213 3 2

Note: a. Some of the 77 companies surveyed are active across more than one sub-sector Sources: 1. Grant Thornton survey analysis

2.2.1 Business size and sub-sector representation

The survey and interview sample represents more than 29% of the UK food & soft drinks manufacturing market in turnover terms and covers all sub-sectors of the industry

The businesses that completed the survey and took part in our interviews •

represent c.29% of the total FDM industry by turnover value

In terms of the business size distribution across our survey population, it is •

almost equally split amongst micro, small, medium and large enterprises. Our

analysis covers a wide range of businesses from 10 micro companies with

turnover below £5 million to 9 large corporates that each employ more than

2,000 people

Out of the 35 corporates, 12 did not have FDM facilities abroad and the rest •

were multinationals producing in a number of markets, most of which were

based in developed markets. Out of 42 SMEs, only 10 manufactured FDM

products abroad

By categorising each FDM sub-sector using the SIC 2007 codes, the •

businesses that completed the survey represent the whole FDM spectrum

(excluding alcoholic beverages) with some businesses operating in more than

one sector. Meat, bakery products and soft drinks are strongly represented

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By business turnover By number of employees

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UK

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Exporting activities by category

77% 81%

23% 19%

0%

20%

40%

60%

80%

100%

Corp

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SMEs

% o

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No exporting

Exporting


UK R&D facilities by category

77%

52%

23%

48%

0%

20%

40%

60%

80%

100%

Corp

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SMEs

% o

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No UK facility

UK facility in place


2.2.2 Export and R&D profile of businesses surveyed

Most of the companies surveyed are active both with exporting and R&D Activities

The majority of the companies (61 out of 77) that took part in the survey export •

their goods. Only 19% of the SME participants do not export. Overall, out of

the companies that do not export, one third were large businesses, one third

medium sized and the rest small businesses

In terms of exporting activities, SMEs are focused on the near Western EU •

countries. Overall, companies are primarily exporting to the EU and Russia. In

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 •

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.

However, through the interviews, a few SMEs noted that their R&D facilities are

not focused so much on research and development of brand new products and

packaging formats but are more concentrated on investigating and improving

existing products

Moreover, half of the corporates also have R&D facilities abroad, based in •

mainly developed countries across Western Europe and North America

2.2 Survey population

Section 3

UK FDM sector overview

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The UK food and soft drink manufacturing sector is the largest of all UK •

manufacturing sectors with a 2009 turnover of £72.7bn

The sector also contributed £19.7bn in gross value added and employed •

377,000 people incurring £10.1bn in labour costs both in salaries and tax

contributions

In nominal terms, UK FDM’s exports have been rising in 2007-2010 period with •

EU accounting for 77% of total exports. However, exports to non-EU regions

have been growing twice as fast (34% vs. 66%)

Unlike other manufacturing sectors, FDM maintained its performance during the •

economic downturn due to its non-cyclical nature (as food is a necessity good)

The FDM industry’s margins have been affected by the downturn with small •

and medium-sized businesses registering lower profit margins compared to

corporates

By number of businesses, the UK FDM sector appears to be smaller than •

international comparison markets. In the UK, out of a total 6,505 companies in

2011, 13% were medium sized businesses and larger corporates

During the last five years, more than 520 M&A deals took place in the UK FDM •

sector. M&A activity reached its peak in 2007 but, since then, activity has

stabilized at approximately 80-90 deals per year. Amongst foreign companies

that acquired UK FDM businesses, Irish and American companies were the

most active

UK manufacturing sector turnover size by segment

70,445 72,672

50,553 38,56441,858 33,79636,932 31,343

39,32031,192

34,26629,015

218,353211,935

491,727448,517

0

100,000

200,000

300,000

400,000

500,000

600,000

2008

2009

£m

Other

Fabricated metal products (exceptmachinery and equipment)

Coke and refined petroleum

Machinery and equipment

Chemicals

Automotive

Food and soft drinks

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 Sources: 1. ONS (2011), Annual Business Survey

UK turnover food and soft drinks vs. other manufacturing

55 56 57 59 61 61 60 62 70 73

414 406 393 389 399 411 423 441 430376

1%3% 3% 3%

(0)% (1)%

3%

13%

3%

(2)%(3)%

(1)%3%

3% 3%

4%

(3)%

(13)%

(15)%

(10)%

(5)%

0%

5%

10%

15%

0

100

200

300

400

500

600

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Grow

th, %

Turn

over

, £bn

Othermanufacturingturnover

Food and softdrinks turnover

Food and softdrinks growth (%)

Othermanufacturinggrowth (%)

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

3.1.1 Turnover

The UK FDM sector is the largest manufacturing sector in the UK, followed •

by the automotive and chemicals sectors accounting for 9% and 8% of total

manufacturing turnover respectively. The UK FDM sector generated £72.7bn in

turnover in 2009

Moreover, the sector is non-cyclical and maintained its stability during the recent •

economic downturn. Although there has been a shift in consumer demand

towards more value products, the sector has performed better than the wider

manufacturing sector and continued to grow as demonstrated in the tables

However, the 2008 spike in food and soft-drinks revenues is due to the changes •

made in the SIC code classification from the SIC 2003 system to the SIC 2007

system. More specifically, some companies with food manufacturing activities were

classified elsewhere under the SIC 2003 code and were brought into the food SIC

2007 code in 2008, creating an artificial increase in revenue in 2008 compared to

the years before. According to the Office for National Statistics (ONS) one major

category responsible for this were companies in the chemicals sector

The 2007-2009 FDM performance is in contrast to the 3% and 13% decline •

experienced by other manufacturing sectors

– over the same period, the sectors with the largest decline

were basic metals (26%) and automotive (24%)

3.0 Section summary 3.1 The UK FDM contribution

Page 23

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UK

FD

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iew

UK gross value added at basic prices

16 17 17 18 19 18 18 19 19 20

133 129 127 124 130 129 134 139 130 110

4%1%

7%

3%

(1)%

(3)%

5%

3% 2%

(3)%(1)%

(2)%

5%

(1)%

4%

4%

(7)% (15)%

(20)%

(15)%

(10)%

(5)%

0%

5%

10%

0

20

40

60

80

100

120

140

160

180

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Grow

th, %

GVA,

£bn

OthermanufacturingGVA

Food and softdrinks GVA




UK employment levels (average during the year)

484 464 449 446 436 431 411 409 392 377

3,65

9

3,50

5

3,31

3

3,08

7

2,97

3

2,82

1

2,73

5

2,66

5

2,40

3

2,20

4

(4)% (3)%

(1)%

(2)%(1)%

(5)%

(0)%

(4)% (4)%

(4)%(5)%

(7)%(4)%

(5)%

(3)%

(3)%

(10)%(8)%

(12)%

(10)%

(8)%

(6)%

(4)%

(2)%

0%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Grow

th, %

Empl

oym

ent,

'000

s

Othermanufacturingemployment

Food and softdrinksemployment




3.1.2 Gross value added and employment

The food and non-alcoholic drinks sector also contributes 15.2% of the total •

gross value added (GVA) of the manufacturing sector

The sector has increased GVA during the economic downturn in contrast •

with the rest of the manufacturing sector, which experienced a 7% decline

in 2008 and a further 15% in 2009. FDM’s growth combined with the decline

experienced by other manufacturing sectors have allowed for the sector to

increase its contribution to total manufacturing GVA from 12% in 2005 to 15%

in 2009

The sector’s value to the economy can also be measured through employment •

levels. In comparison with other manufacturing sectors, the food and non-

alcoholic drinks sector comes across as a relatively stable employer as it has

experienced a lower decline in employment

UK employment costs, £bn

8.6 8.7 8.9 9.1 9.2 9.6 9.7 9.7 10.1 10.178

.9

78.9

77.8

75.5

76.1

75.9

77.4

78.1

71.1

66.1

1%3% 2%

1%

4%

1%0%

4%

1%0% -1%-3%

1%0%

2%1%

-9%-7%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

0102030405060708090

100

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Grow

th, %

Labo

ur c

osts

, £bn

OthermanufacturingcostsFood and softdrinks costs

Food and softdrinks growth

Othermanufacturinggrowth


– 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

to a 44% decline for other manufacturing sectors, who reduced

their workforce from 3.6 million in 2000 to 2.2 million in 2009

– according to FDF, the employment levels fluctuate during the year, with

the sector employing up to 400,000 people during the course of the year

Employment contributions for the industry reflect a similar picture with GVA. •

Despite the fact that FDM employment levels have been reduced by 22%

from 2000 to 2009, total FDM employment costs have risen by 17% reaching

£10.1bn in 2009. On the contrary, the rest of the manufacturing sectors

maintained their labour costs almost constant around £78bn until 2007. But,

during the downturn, other manufacturing sectors were not able to maintain

their employment contributions, which got reduced by £12bn, reaching £66bn in

total in 2009

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

also that it has sustained its National Insurance and tax contributions to the

Government, supporting the economic recovery at a time when other sectors

were unable to do so

3.1 The UK FDM contribution 3.1 The UK FDM contribution

Page 25

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UK exports of food and non-alcoholic drinks – by receiving region (£m)

0

2,000

4,000

6,000

8,000

10,000

12,000

2007

2008

2009

2010

£'m

Other

Australia & New Zealand

Latin America

Africa

Middle East

Asia

North America

EU

Sources: 1. UK Trade Info (2011), Trade Data

3.2.1 Exports

The UK export statistics indicate that the UK food and non-alcoholic drinks manufacturing sector operates mainly in the large, but mature EU market

UK exports of food and non-alcoholic drinks have grown nominally by 40% •

between 2007 and 2010. However, taking into account inflation and the export

performance of other countries (as will be shown in section 4), it appears that

the UK has not been growing fast enough and, as a consequence, has been

losing market share

Non-EU regions outpaced EU countries with a combined growth of 66% vs. •

34%. However, non-EU only accounts for 23% of UK exports, having increased

its share of UK exports from 19% in 2007

The regions that experienced the highest growth were Africa and Asia, however •

these account for only 6% of UK exports

UK exports to the top 15 countries accounted for 80% of total food and non-•

alcoholic drinks exports in 2010, with Ireland being the biggest export market.

The only non-EU countries in the top 15 are US, Canada and Russia

Growth of UK exports of food and non-alcoholic drinks

CAGR 2007-2010

Total growth 2007-2010

Share of UK exports 2007

Share of UKexports 2010

EU 10% 34% 81% 77%

Non-EU 18% 66% 19% 23%

North America 16% 56% 4% 5%

Asia 21% 75% 4% 5%

Middle East 18% 62% 3% 3%

Africa 28% 111% 2% 4%

Latin America 16% 54% 1% 1%

Australia & New Zealand 16% 56% 1% 1%

Other 14% 50% 4% 4%

Sources: 1. UK Trade Info (2011), Trade Data

Top 15 export countries of food and non-alcoholic drinks (£m)Rank Country 2007 Rank Country 2010

1 Ireland 2,167 1 Ireland 2,687

2 France 931 2 France 1,341

3 Germany 671 3 Netherlands 907

4 Netherlands 574 4 Germany 902

5 Spain 499 5 Spain 607

6 Italy 366 6 Italy 433

7 Belgium 312 7 Belgium 433

8 United States 238 8 United States 391

9 Denmark 130 9 Denmark 179

10 Sweden 106 10 Portugal 152

11 Canada 102 11 Norway 149

12 Russia 97 12 Sweden 142

13 Portugal 85 13 Canada 139

14 Greece 76 14 Poland 131

15 Poland 76 15 Russia 115

Top 15 countries as % oftotal UK exports

83%

Top 15 countries as % oftotal UK exports

80%

SMEs vs. corporates margin (profit before tax/net turnover)

4.6% 4.5%

5.4%

1.5%

0.6%

3.1%

6.7%5.9%

6.8%6.2%

5.9%

7.6%

0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

2005

2006

2007

2008

2009

2010

PBT

mar

gin

Companies with lessthan £50m turnover($80m in 2009 terms)

Companies with turnover above £50m turnover ($80m in 2009 terms)

Notes: a. Calculations based on financial results reported by food and soft drinks manufacturers listed under the food and soft drinks NICE codes b. 2010 results are based on a smaller number of companies as not all companies have reported 2010 results yet Sources: 1. Bureau Van Dijk – Orbis (2011), Grant Thornton Analysis

Operating profit margin for top 150 FDM UK companies, 2006-2010

8.3%9.0%

7.6% 7.7%

8.9%

4.9% 4.6%3.7% 3.5%

4.5%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

2006

2007

2008

2009

2010

Oper

atin

g m

argi

n

Brands

Private label

Sources: 1. OC&C (2011, 2010, 2009, 2008), The Grocer

3.3.1 UK FDM margins

The high labour costs combined with raw material price increases and retailer •

pressure have resulted in a squeeze on margins. However, SMEs have been

more severely affected by the economic and supply chain pressures compared

to corporates

SMEs enjoyed profit before tax (PBT) margins of 5.4% in 2007, but these •

decreased dramatically in 2008 and 2009 (0.6% in 2009) before showing

recovery in 2010. This may be due to price increases taking time to be

transferred to and be accepted by customers

Lower margins create a circle of decline for SMEs, as the lower margins they •

achieve cannot support financing of R&D and technology, whilst the lack of R&D

and technology investments do not allow SMEs to grow and, therefore, improve

their margins

Larger companies also suffered in the past few years. However, economies •

of scale and financial strength have given them better bargaining power with

retailers and allowed them to cut costs in order to protect margins whilst

maintaining focus on new product development (NPD), which is one of the main

growth drivers in the industry

Moreover, the analysis of the financial performance of the Top 150 UK FDM •

businesses clearly indicates the differences in operating margins between

corporates with branded products and corporates that produce for private labels.

Whilst the two types of businesses have followed a similar performance •

throughout the downturn, brands have historically maintained c.4% difference

in operating margins. This brand advantage can be mainly attributed to higher

retail prices driven by customer reassurance and loyalty as well as higher

bargaining power of the producers with the retailers. The reasons will be

discussed in greater detail in the following sections

3.2 The UK FDM exports 3.3 The UK FDM margins

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UK food, beverage and tobacco enterprises by employee size

3,590

1,273922 858

364

4,740

895 755 650220

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

1-9

10-1

9

20-4

9

50-2

49

250+

Num

ber o

f ent

erpr

ises 2005

2011

Notes: a. Because of SIC code changes a comparison of food and soft drinks companies was not possible, therefore food, beverage and tobacco was used as a proxy Sources: 1. ONS (2011), UK Business Activity, 2. Eurostat (2011), Structural Analysis Database

Number of food, beverages and tobacco enterprises by employee size 2007

60,442

16,300

63,777

11,941 22,612

3,590

31,095

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Fran

ce

Germ

any

Italy

Pola

nd

Spai

n

UK

Braz

il

% o

f tot

al c

ompa

nies

250+

50-249

20-49

10-19

1-9

67,995 32,742 70,911 17,018 29,414 7,007 37,638

Notes: a. The statistics refer to the number of enterprises in 2007, b. Data for Canada was not available. Sources: 1. Eurostat (2011), Structural Analysis Database, 2. Brazilian Food Industry Association (ABIA)

3.4.1 Business structure

The UK food and non-alcoholic beverage industry structure is fragmented with 87% of enterprises qualifying as small (with under 50 employees)

Comparing the UK food, beverage and tobacco data from 2005 and 2011, it •

is apparent that although the total number of companies has increased, this

was due to a 32% increase in micro-companies (one to nine employees), as

all other categories have seen a decrease, with the large companies (over 250

employees) experiencing the most significant decline (42% due to M&A activity;

M&A is explored in more detail in the following pages)

In 2007, the latest year for which Eurostat statistics across EU countries are •

available, the UK food, beverage and tobacco industry was composed of

7,007 enterprises. In order to show the scale/structure of the UK FDM, we have

compared it to a variety of European countries (with which the UK trades and

competes) outside of the immediate comparison markets

In terms of number of companies, the UK FDM represents c. 10% of the sector •

size in France or Italy. According to our interviews, this may be attributed to the

fact that other countries, such as France, Italy and Spain, have a bigger food

culture than the UK

However, the UK industry is more consolidated. France and Italy have the most •

fragmented industry structure, with c. 98-99% of companies employing up to

49 people. Brazil is also fragmented with 82.2% of the companies classified

as micro enterprises (up to 9 employees). Although 84% of UK companies are

micro and small (up to 49 employees), the UK has a larger share of medium and

large companies

– 11% of UK companies are medium sized (50-250 employees)

compared to 1% in Italy and 2% in France

– 5% are large companies (with over 250 employees),

compared to 0.2% for Italy and 0.5% for France

Poland and Germany lie in between the UK and France/Italy, with 9% of •

medium and large enterprises

The UK food and non-alcoholic beverage industry structure is fragmented with •

87% of enterprises qualifying as small (with under 50 employees)

UK food and soft drinks enterprises by employment size 2011

2,955

1,175845 715

355 255 205

0

500

1,000

1,500

2,000

2,500

3,000

3,500

0 -

4

5 -

9

10 -

19

20 -

49

50 -

99

100

- 24

9

250

+

Num

ber o

f ent

erpr

ises

Number of employees

Sources: 1. ONS (2011), UK Business Activity

M&A activity in the UK FDM by sector, 2006-2011

Wholesale & Distribution97

Meat Fish & Poultry78

Dry Grocery68Bakery

53

Dairy38

Soft Drinks30

Fruit & Veg22

Confectionery20

Frozen Foods20

Functional13

Other81

Sources: 1. Thomson Reuters Deal Analytics (2011), M&A Database, 2. BvD Zephyr (2011), M&A Database, 3. Press releases

The impact of M&A activity on SMEs (findings from FDF / Grant Thornton survey)

41%

54%

5%

0

10%

20%

30%

40%

50%

60%

Negatively affected Not affected Positively affected

# of

SM

Es

Sources: Grant Thornton survey results

3.4.2 M&A activity

During the last five years, more than 520 M&A deals have taken place in the •

UK FDM sector, indicating a larger number of UK-based FDM businesses have

been acquired either by other UK businesses or by foreign companies. Outside

wholesale & distribution, the FDM sub-sectors that have attracted the most

interest: are meat, fish, poultry and dry grocery. Bakery and dairy products and

soft drinks also account for 23% of the total M&A activity

M&A activity reached its peak in 2007 when c.124 deals were completed. Since •

then, an average of 80-90 deals took place each year, whilst 78 deals have been

completed to October 2011

3.4 The UK FDM business structure 3.4 The UK FDM business structure

Page 29

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41% of the SMEs that responded to the Grant Thornton survey stated they had •

been affected by the consolidation in the industry across the FDM supply chain.

Across the supply chain, from suppliers to FDM and retailers, consolidation

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

of the supply chain

Approximately 27% of the total UK FDM acquisitions were realised by non-UK •

based companies. Irish and American companies together have acquired the

most UK companies accounting for 29% of total foreign activity. Interestingly

Thai companies follow next with 17 acquisitions. Overall, European companies

realised 75 out of the 140 total foreign acquisitions

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

for UK manufacturers accounting for 63% of the total number of

foreign acquisitions

“Post consolidation, both the supplies and outlets have become more difficult markets to

trade in and manufacturers have to deal with reduced margins.”

SME (anonymous survey response)

“We have lost our customers who have been taken over by major retailers.”

SME # 2

“Consolidation on the retail side means they can use combined strength to buy at lower price

from FDM.”

SME # 3

“Raw material suppliers as well as packaging suppliers are fewer due to

industry consolidation.”


M&A activity in the UK FDM by foreign acquirers by country, 2006-2011

Ireland21

USA20

Thailand17

France12Netherlands

8

Germany6

Canada5

Brazil3

India1

Other European nations28

Other 19


M&A activity abroad by UK FDM acquirers by target country, 2006-2011

6

4 43 3 3 3 3

2 2

10

8

0

2

4

6

8

10

12

Fran

ce

Irela

nd

Turk

ey

Germ

any

Italy

Neth

erla

nds

Sout

h Af

rica

Spai

n

Braz

il

USA

Othe

r Eur

opea

n

Othe

r

# of

acq

uisi

tions


3.4 The UK FDM business structure

Section 4

Growth drivers & exporting

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The section relies on feedback from the FDF / Grant Thornton survey and •

interviews supported by desktop research

Both in the UK and globally, population growth will help grow the food and •

soft drink market whilst an ageing population in most regions is likely to shift

consumer spending towards health and wellness products

Specifically in the UK, the shape and pace of economic recovery may •

impact consumer expenditure which in turn may affect consumer purchasing

patterns and therefore the growth of the food and drink industry

Globalisation, fast economic growth and rising income levels in the emerging •

markets are expected to drive a shift in their populations’ diet, specifically

increasing consumption of proteins and converging towards western diets

Survey results indicate that 36% of the UK FDM future growth will be driven •

by exports. Whilst manufacturers agree that emerging markets offered many

opportunities for UK FDM, they believe that Western and Eastern Europe

will remain the main markets due to geographic proximity and stronger

purchasing power

Growth drivers for the UK market in the next 5-10 years (1 – least important, 5 – most important; findings from FDF / Grant Thornton survey)

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Appetite for CSR related products

Demand for own label products

Demand for branded products

Demand for premium products

Demand for value products

Health & Wellness products

% of responses

1 2 3 4 5

Average score

3.41

3.40

3.31

3.23

3.14

2.72


“Health & Wellness has got to be top of the list. There is still place for indulgence products,

but the public perception is that we should avoid them.”

Corporate # 4

“Irrespective of the downturn, consumer expenditure on food in Western economies

reflects a smaller amount of income compared to our predecessors. As such, the premium

manufacturers have the most opportunities to penetrate more effectively new marketplaces

and sell volume and value.”

Corporate # 5

4.1.1 Growth drivers (from survey output)

During the next 5-10 years within the UK, the companies responded that growth will be driven by a mix of Health & Wellness (H&W) and value products addressing different needs and market segments

The companies surveyed were asked to comment on key drivers for FDM •

growth during the next 5-10 years across three different axes, namely price (i.e.

premium vs. value products), brand (i.e. branded vs. private label products) and

purpose served (e.g. Health & Wellness, CSR related or other products)

The majority of the companies expect the UK FDM market to stay relatively •

flat during the coming years. Despite these conditions, H&W products ranked

at the top of growth drivers. This is being facilitated by the fact that the food

health agenda is being increasingly promoted to the public by Government and

media. However, during the interviews, a few companies stated that H&W will

be able to drive the market as a whole once economic recovery has taken place

and when consumers will be willing and able to spend more for these types of

products that in many cases may be at a price premium

With regards to price, businesses believe that value products are more likely •

to drive growth. Companies thought that consumers have become very price

aware and, as their disposable income is being squeezed, they will continue to

look for the best offers and value in the market. However, demand for premium

products will not necessarily recede as consumers in the UK will aim to maintain

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

4.0 Section summary 4.1 FDM growth drivers for the UK consumer market

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In terms of other parameters that will help drive growth, a few businesses stated •

that the UK population, which is forecast to grow to 70 million by 2030, will

certainly act as a significant driver in growing the market volume. Also, they

stated that UK growth will be largely dependent upon the industry’s ability to

innovate and introduce new products to the market

“Branded products are well positioned as consumers are seeking for reassurance and value.

Moreover, health issues will increasingly shape branded goods’ agendas. However, consumers

are seeking value for money at the same time.”

SME # 4

“I think that whether there is a real product difference or not, you will see growth at the top

and bottom end and I think mass market brands will get lost in between. The majority of

brands will struggle to keep their price premium.”

Corporate # 7

“I think that premium remains a growth opportunity. If you think of the premium segment’s

performance at the moment it is outperforming the everyday and value segments in food and

that is in the current climate. ”

Corporate # 6

UK GDP forecasts, £bn

1,297 1,314 1,329 1,3501,382

1,4181,456

1.4%1.1%

1.6%

2.4%2.6% 2.7%

0%

1%

1%

2%

2%

3%

3%

1,200

1,250

1,300

1,350

1,400

1,450

1,500

2009

2010

2011

2012

2013

2014

2015

£'bn GDP

GDP growth (%)

Notes: a. GDP at constant pricesSources: 1. IMF (2011), World Economic Outlook Database

UK population forecasts

17% 18% 18% 18% 17%

20% 19% 18% 18% 18%

20% 19% 20% 20% 20%

26% 25% 25% 24% 23%

17% 18% 19% 20% 22%62,261 64,776 67,173 69,403 71,393

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

2010 2015 2020 2025 2030

Popu

latio

n 0

00's UK - Over 65

UK - 45-64

UK - 30-44

UK - 15-29

UK - 0-14

Sources: 1. ONS (2010), National Population Projections

4.1.2 Growth drivers (supporting evidence from desktop research)

According to the IMF and United Nations forecasts, the UK is forecast to enjoy more positive economic outlook and population growth compared to main Western European countries. But low consumer confidence and the shape/pace of the economic recovery may impact consumer purchasing patterns and, therefore, the growth of the food and drink industry

In the latest IMF data, the UK GDP is forecast to grow by 1.1% in 2011 and •show positive, yet still low digit growth up to 2015. The latest Bank of England forecasts from the 15th of November are more pessimistic, expecting the the UK economy to stagnate until the middle of 2012 and only reach 1% for the year as a whole

Private consumption is forecast to grow by 3.6% annually between 2010-2015, •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 as the VAT rise from 17.5% to 20% in January 2011)

These positive developments should support the domestic growth of the UK •food and drink manufacturing industry. However, uncertainty persists and recent consumer data is less upbeat. Both recent consumer confidence and spending on food show declines. The GfK consumer confidence index fell to -32 in October as consumers feared unemployment and income growth lagged behind inflation. Commentators pointed out that this low level has only been previously reached three times since the survey began in 1974. On both previous occasions (June 2008 and March 1990) the UK economy entered into recession

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 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

4.1 FDM growth drivers for the UK consumer market 4.1 FDM growth drivers for the UK consumer market

Sources: Factiva (Guardian, 13 September 2011, UK inflation: what the economists say)

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The UK population is forecast to grow from 62.3 million in 2010 to 71.3 million •

in 2030. Growth will be mainly driven by the older age groups; over 65s are

forecast to grow the fastest and reach 15.5 million in 2030. This is expected to

have a two-fold impact on the food and drink industry:

– First, the overall market that manufacturers can serve is increasing and

as more people may benefit from higher levels of disposable income,

it could create further opportunities for manufacturers. However, it is

worth noting that some over 65s may rely on basic state pensions

– Secondly, IGD research shows that diet and consumption patterns

vary with age. Specifically, over 65s are looking for smaller portions,

convenience and locally sourced products and, therefore, a population

increase in this age group is expected to increase demand for these types

of products. Moreover, medical conditions and the desire to improve

wellbeing through diet may influence their demand for healthy products

The companies surveyed/interviewed believe that, in the UK, growth is more •

likely to come from branded products compared to private label products.

This seems plausible according to desktop research conducted by Mintel,

which shows that, historically, branded products have outperformed private

labels products. In addition, the gap in performance between the two types of

products has got wider during the last few years of the economic downturn

UK food and drink vs. private label market

95

100

105

110

115

120

125

130

135

2005

2006

2007

2008

2009

2010

(est

)

Inde

x (2

005=

100)

Private label food and drink

Total food and drink

The difference in the totalmarket's performance is dueto the stronger growth ofbranded food and drinkproducts compared to private labels

Sources: 1. Mintel (2011), Private Label Food and Drink-UK

“I think you need to be in brands. I cannot see an easy path ahead for private labels in the

current environment. ”

Corporate # 5

“I expect 10% growth. It also depends on inflation, which has been going up, since quantities

sold are unlikely to change.”

Corporate # 1

World population forecasts by region, 2010 & 2030

419 350 358599

1,027

4,211

449 337 423720

1,572

4,968

0

1,000

2,000

3,000

4,000

5,000

6,000

Wes

tern

Euro

pe

East

ern

Euro

pe

North

Amer

ica

Cent

ral &

Sout

h Am

eric

a

Afric

a

Asia

Popu

latio

n, m

illio

ns

2010

2030

Sources: 1. United Nations, Department of Economic and Social Affairs, Population Division (2011), World Population Prospects: The 2010 Revision

World population forecasts by age group, 2010 – 2030

26% 25% 24% 23% 22%

25% 24% 23% 22% 22%

21% 21% 21% 21% 21%

19% 20% 21% 21% 22%9%10% 11% 12% 14%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2010

2015

2020

2025

2030

Wor

ld p

opul

atio

n, m

illio

ns Over 65

45-64

30-44

15-29

0-14

Sources: 1. United Nations, Department of Economic and Social Affairs, Population Division (2011), World Population Prospects: The 2010 Revision

4.2.1 Growth drivers (from survey output and supporting evidence from desktop research)

The worldwide population growth, growing middle class and income growth in emerging markets offer opportunities for expansion across most FDM categories

With world population having just reached 7bn, it is forecast that by 2025 it will •reach 8bn. Population growth will help the expansion of the FDM market both within the UK and abroad. Within Europe, the population will only increase by 2% between 2010 and 2030. This is due to a shrinking population in Eastern Europe and a slow growing population in Western Europe. However, in other areas, such as North America, Latin America and Asia, population is expected to grow by 18-20%. At the same time, Africa’s population will grow by more than 50%

Moreover, the increasingly ageing population across the world is expected to •have a significant impact on the demand for H&W products. Whilst in 2010 the over 45’s accounted for 28% of the world population, in 2030 they will account for 36%. At the same time, with obesity growing in the Western countries and people becoming increasing aware on the importance for healthier diets, demand for H&W products is expected to be further boosted

Disposable income growth may be a critical parameter in driving spend for •food and drinks in the context of this larger market and in defining which products are better positioned in each region. Therefore, in the medium term, mature economies are forecast to grow at rather slower rates. Western Europe in particular has been very badly hit by the financial crisis and is expected to be the worst performing with an average GDP growth of 1.7% by 2016, whilst USA and Canada are expected to grow at 2.1%. Even the fast growing emerging markets have been affected by the downturn and have lost some of 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, South America and Africa are expected to grow at rates between 4-5%, whilst African nations are expected to surpass every other region

Sources: 1. World Bank (2008). Is the Developing World Catching Up?

4.1 FDM growth drivers for the UK consumer market 4.2 FDM growth drivers for the global market

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Real GDP growth forecasts by region, 2010-2016

0%

1%

2%

3%

4%

5%

6%

7%

2010

2011

2012

2013

2014

2015

2016

Real

GDP

gro

wth

, %

World

North America

Western Europe

Transition economies

Asia & Australasia (inclJapan)Latin America

Middle East & NorthAfricaSub-Saharan Africa

Sources: 1. Economist Intelligence Unit (2011), Views Wire

Private consumption per capita, $ at current prices

CAGR

2010 2015 2010-2015

Brazil 6,630 10,220 9.0%

Canada 26,829 33,573 4.6%

China 1,500 3,550 18.8%

Australia & NZ 51,651 59,705 2.9%

India 830 1,380 10.7%

Poland 7,550 11,160 8.1%

United Kingdom 23,731 28,287 3.6%

Sources: 1. Economist Intelligence Unit (2011), Views Wire

“In the BRIC market, as the GDP grows, the wealth grows and there seems to be demand for

Western types of products.”

Corporate # 7

As such, Western markets are not expected to grow in income terms significantly •

in the medium term and therefore the opportunities for UK FDM lie primarily in

attracting larger local market share. Nevertheless, premium and niche value-

added products may be better positioned because of their perceived quality,

which helps justify the higher end price that exported products tend to have

(associated with the higher costs due to transport and/or duties)

According to World Bank, the income growth across emerging markets will •

help generate a larger middle class that will reach 1,150 million in 2030 up from

430 million in 2010. At this rate, middle class will account for 17% of the total

population in 2030 versus 8% in 2000 (and as a result shrinking the low income

class’ share from 82% to 62% of the total population). Asian countries are

understood to be the largest contributors to this middle class growth. China and

India specifically are meant to contribute about two thirds of the total growth in

the global middle class

This growing middle class with a higher disposable income is expected to shift •

diets and upgrade to Western products. In this context, it is important for UK

FDM companies to customise their strategies when targeting these markets.

Businesses will not necessarily be able to sell the same types of products they

sell in the West.

According to our interviews, many people from Asia and the BRICs, who are •

increasingly travelling to the west and the UK, are developing a growing appetite

for Western premium products. In addition, according to OECD and FAO,

consumer demand on a global scale will continue shifting from staple foods

towards more processed and prepared food products that contain a higher

amount of protein driven by the growing middle class

“Global population is a significant driver… especially combined with higher GDP on a

global scale.”

Corporate # 4

China and India are expected to grow their average private consumption per •

capita the fastest by 2015, followed by Brazil. Even at those rates, China’s and

India’s average consumption will remain at low levels by western standards and

the market will continue to be dominated by value products. Within Europe,

which is UK’s key trading partner, Poland presents opportunities for growth with

consumption forecast to grow at 8%, a significant rate above EU average

The specific opportunities for each FDM area will be better defined by •

analysing the consumer demographics in each region (e.g. urbanisation, single

households, etc) as well as consumers’ purchasing patterns and tastes

Sources: 1. OECD & FAO (2011). OECD-FAO Agricultural Outlook 2011-2020 2. World Bank (2008). Is the Developing World Catching Up?

Where industry growth will come from (findings from FDF / Grant Thornton survey)

63% 65%

37% 35%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Corp

orat

es

SMEs

% s

hare

of i

ndus

try g

row

th

From exports

From the UK


“I think the opportunity for the UK will be in premium products. I think we are a fairly high cost

place to be manufacturing basic food products and we cannot compete with the emerging

markets. Therefore, if we want to export to these fast growing regions and attract market

share, we need to do more than just produce basic, non-differentiated products.”

SME # 6

“In terms of an ageing population and in terms of a broader obese population, there will be an

increased demand for healthier food.”

FDII (Food and Drink Industry Ireland)

“UK growth will be driven by a rise in global demand and a shortage in global supply.”

Corporate #2

4.2 FDM growth drivers for the global market 4.2 FDM growth drivers for the global market

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4.3.1 Export driven growth and opportunities (from survey output)

Both SMEs and corporates view a significant potential in exporting as a growth driver for the FDM industry

Interestingly, both corporates and SMEs have a similar view of where the growth •will come from. The companies surveyed believe that domestic market demand will remain the key industry growth driver but exporting will drive approximately 36% of the growth

Companies expect that the UK market will remain relatively flat over the next five •years as the consumers’ disposable income is under increasing pressure and therefore any value increases will mainly reflect inflation. As such, companies indicate that they will need to look abroad to both developed and emerging markets to grow their business in the medium term. This is the case with Spain where, according to the Spanish food federation (FIAB), exports have helped Spanish FDM to weather the crisis and is considered the industry’s growth driver in the medium term

Given the economic conditions currently prevailing in the Western markets •(presented in the sections above), it is important for UK manufacturers to diversify their activities abroad and into the emerging markets, where both disposable income and population figures are growing much faster. However, penetrating these markets is expected to be difficult given the increasing local and

international competition

Export potential for UK FDM manufacturers (findings from FDF / Grant Thornton survey)

Key: Over 25 responses20-24 responses15-19 responses10-14 responses1-9 responses


Grant Thornton’s survey results show that 18% of the companies see no •significant export potential. The rest of the companies have selected the areas where they see the most export potential for UK FDM according to the map above

China and other Asian markets rank at the top because of the fast growing •populations, the growing middle class, increasing income levels and the growing appetite for western, premium products. Similarly, Eastern European countries 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 exports, and USA ranked as important export targets for the UK because of their

market size and value

“In terms of soft drinks exports, there are big opportunities in Europe as well as Middle East

and Africa. China is a market everyone wants to enter but it’s very difficult to penetrate.”

SME # 4

“While in the USA and the rest of the Western world demand has been declining, countries in

the Far-East have an increasing appetite for premium European food products.”

SME # 5

“The Commonwealth countries present good opportunities because they are familiar with

brands that originated in the UK.”

Corporate # 7

“We see opportunities in the emerging Central and Eastern European markets where there

is a demand for premium imported brands alongside strong local brands. There are also

increasingly sophisticated and disciplined customer channels which were difficult to penetrate

in the past as they were very fragmented.”

Corporate # 5

4.3.2 UK historic export performance

UK’s main trade partners have historically been Western developed nations, but FDM exporters have also been targeting emerging markets especially in Eastern Europe

Considering the evolution of UK exports of food & soft drinks over the years, •

it appears that the UK exporters have managed to increase their exports

significantly to large European markets like France, Spain, Germany and Ireland

(which is UK’s largest export market but has been excluded from the chart for

scaling purposes). Despite the relatively low export values, UK has been steadily

increasing its exports to Russia, Poland and China as well

However, with large non-EU developed markets like USA and Japan, UK has •

had a volatile performance over the past decade, whilst the value of output

towards the fast growing markets of Brazil and India is at particularly low levels

(even though exports to India have been growing strongly)

By examining the trade value growth and market penetration, amongst countries •

that have increased their food, beverage and tobacco imports at double digit

growth, the UK exports to these countries have only outpaced imports in Poland

– it should be noted that this comparison is made in US$, but, in

terms of £, 2010 UK exports show a more positive picture as

the exchange rate has reduced the $ value of UK exports

Similarly, amongst the largest importers of food, beverages and tobacco, the •

UK is only tapping into the demand for France and Netherlands where it has a

relatively high share of the country’s imports

Based on 2010 data, the main untapped markets for the UK appear to be •

Russia, Japan and China who are large importers, but account only for a small

percentage of UK exports

4.3 Exporting opportunities 4.3 Exporting opportunities

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UK exports of food & soft drinks, 2000, 2005 & 2010

0100200300400500600700800900

1,000

Fran

ce*

Germ

any

Spai

n

USA

Japa

n

Aust

ralia

Russ

ia

Pola

nd

Chin

aUK F

ood

& So

ft Dr

inks

Exp

orts

,£m

2000

2005

2010

Notes: a. UK exports to France in 2010 reached £1.3bn, but for viewing purposes they have been scaled down. Similarly, Ireland that is UK’s largest export market has been excluded from the graph even though exports to Ireland have been growing strongly Sources: 1. UK Trade Info (2011), Trade Data

Global export of food, beverages & tobacco 2000-2010

Region CAGR 2000-2010 Region CAGR 2000-2010

Australia 5.7% Japan 8.2%

Brazil 6.9% Poland 21.0%

Canada 7.7% Russia 11.8%

China 12.5% Spain 8.9%

France 6.5% United Kingdom 5.4%

Germany 10.7% USA 7.5%

Ireland 5.1% European Union 27 9.0%

Italy 9.1% World 10.0%

UK exports of food, beverages and tobacco

CAGR of UK exports toeach country,2005-2010

CAGR of countryimports,2005-2010

% share of UK exportsto country’s imports,2010

Share of country’simports as a % of world imports, 2010

Australia 6.1% 12.2% 3.2% 0.8%

Brazil 16.0% 21.1% 1.5% 0.7%

Canada 7.0% 9.7% 1.4% 2.4%

China 2.8% 22.5% 0.3% 5.0%

France 7.3% 6.7% 6.1% 4.4%

Germany 11.1% 7.6% 2.0% 6.9%

India 9.3% 20.7% 0.8% 1.0%

Ireland 6.8% 5.4% 63.1% 0.6%

Italy 5.1% 5.5% 1.8% 3.8%

Japan (0.3)% 3.6% 0.4% 5.4%

Mexico 14.9% 7.9% 0.6% 1.7%

Netherlands 13.4% 8.5% 2.8% 4.4%

New Zealand 3.0% 9.8% 1.4% 0.3%

Poland 22.6% 15.9% 2.0% 1.1%

Russia 6.8% 13.9% 0.7% 2.9%

Spain (0.3)% 4.3% 4.9% 2.8%

USA 4.5% 6.0% 2.0% 8.2%

Sources: 1. World Trade Organisation (2011), Statistics Database

“What we have learned from our experience in China is that if you want to enter similar mega-

markets, you have got to treat them as many small markets and win in each one of them

before replicating the model in other regions.”

Corporate # 5

Historic and forecast private consumption, US $

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

US $

Brazil

Canada

China

France

Germany

India

Ireland

Poland

United Kingdom

Notes: a. Based on EIUs estimates and forecasts Sources: 1. Economist Intelligence Unit (2011), Views Wire

Global exports of food, beverages and tobacco

European Union 27*22%

USA13%

France8%

Germany6%

Canada4%

Spain4%

United Kingdom3%

China3%

Brazil3%

Australia3%

Ireland1%

Other30%

Notes: a. EU 27 excludes France, Germany, Spain, UK and Ireland which are shown separately Sources: 1. UK Trade Info (2011), Trade Data

4.3.3 Export potential and barriers to export

Whilst the UK is seeking to penetrate the fast growing markets, it has lost global market share from other rival nations who have been more successful in growing their exports

Private consumption forecasts suggest that during the coming years the UK •may need to divert its export focus outside its established Western European markets. Consumption in markets like Ireland, France and Germany is expected to grow at slow pace, whilst BRIC countries and Poland present significant opportunities with an average annual growth in private consumption expected to exceed 8%. Consumption in Canada is also expected to grow at 4.6%

During the surveys, businesses stated what countries are expected to drive UK •FDM growth in the future (presented above and highlighting both Europe and emerging markets). However, during the follow-up interviews, we specifically inquired if British companies are able to take advantage of the growth forecasts in developing markets. The answers were mixed and some companies pointed out that food is not easily transportable and exports should be focused in the near regions to the UK. Others thought that the only way to effectively penetrate these markets is by setting up a local/regional manufacturing facility. After accounting for these parameters, interviewees expressed that Western and Eastern Europe appeared to be better targets for FDM manufacturers looking to export and ship their products abroad

Whilst the UK is seeking to remain globally competitive and maintain or grow its •market share in global exports of food & soft drinks, the global market shares have been redistributed over the last decade

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 significant loss in global market share (approximately 35% each)

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

4.3 Exporting opportunities 4.3 Exporting opportunities

European Union 27*22%

USA10%

Germany6%

France6%Brazil

6%China4%

Spain3%

Canada3%

United Kingdom2%

Australia2%

Ireland1%

Other35%

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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 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 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.”


“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)

4.3 Exporting opportunities

Section 5 Competitive advantages & areas for improvement

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In this section, we present the areas of competitive advantages and •

opportunities for improvement of UK FDM as scored by businesses in the

FDF / Grant Thornton survey. The areas that were highlighted as the strongest

advantages or disadvantages were separately analysed and benchmarked with

other comparison countries, supported by desktop research and discussions

from the follow-up interviews with FDM businesses

Survey participants rated product quality as giving FDM businesses the •

strongest competitive advantage. Most people interviewed believe that ‘Made

in Britain’ products stand out internationally and particularly in Commonwealth

countries who are more familiar with UK products

New product development and brand loyalty were the second strongest areas •

for the UK FDM as rated by FDM businesses. As desktop research indicates,

during the past five years, on a global scale, Britain has developed the most

product variants after the USA

Businesses rated UK R&D and technology investments as satisfactory. The •

supporting research pointed out that UK FDM has been investing in both

R&D and technology more than a few comparison countries although capital

expenditures have remained stagnant over the past decade. In addition, the

majority of the businesses surveyed had a positive outlook, planning to maintain

or increase their level of investments during the next five years

Businesses rated UK productivity and labour skills in the FDM sector as •

average. However, desktop research indicates FDM productivity has been

higher in the UK than in comparison countries

UK labour costs, Government support and regulation were ranked the weakest •

in our survey. A comparison with rival nations proved that UK labour costs were

above other countries’. Businesses also stated that they operate in a highly

regulated environment and Government does not adequately support them in

areas such as taxation, advice provision and cutting ‘red tape’

World Economic Forum 2011 IMD Business School 2011 World

World Competitive ranking Competitiveness Yearbook

Ranking Country Ranking Country

1 Switzerland 1 Hong Kong

2 Singapore 2 US

3 Sweden 3 Singapore

4 Finland 4 Sweden

5 US 5 Switzerland

6 Germany 6 Taiwan

7 Netherlands 7 Canada

8 Denmark 8 Qatar

9 Japan 9 Australia

10 UK 10 Germany

12 Canada 19 China

18 France 20 UK

26 China 24 Ireland

29 Ireland 29 France

36 Spain 32 India

41 Poland 34 Poland

53 Brazil 35 Spain

56 India 44 Brazil

66 Russia 49 Russia

Sources: 1. World Economic Forum(2011), World Competitive Ranking, 2. IMD (2011), World Competitiveness Yearbook

5.1.1 UK world competitiveness ranking

Between 2007 and 2011, the UK has improved its ranking in competitiveness indices, but is facing increasing competition from a range of developed and developing countries which investors/businesses may consider more attractive

The World Economic Forum (WEF) and the Institute for Management •

Development (IMD) Business School compile recognised country competitiveness

ranking. They assess a country’s attractiveness as a place to invest and rely

heavily on the views of business executives. But the rankings are the result of

different methodologies and, therefore may not be directly comparable

According to the WEF ranking, the UK has moved back in the top 10 for the •

first time since 2007. The UK achieved major improvements in areas that are

considered as productivity enhancements such as the efficiency of its labour

market (ranked 7th out of 142), in sharp contrast to the rigidity of those of many

other European countries. Moreover, the UK has sophisticated (ranked 8th out

of 142) and innovative (ranked 13th out of 142) businesses that are able to use

the latest technologies for productivity improvement. However, the UK appears

to lose its edge when it comes to macro-economic indicators because of high

fiscal deficit, public debt and lower national savings rate

The IMD scores on individual factors are not publicly available, therefore, we •

are unable to comment on UK’s performance on individual areas. However, the

UK is relatively low in the ranking being overtaken by US, Canada, Australia,

Germany, as well as China, Singapore and Qatar

Although these ranking are not FDM specific, they are useful indicators of •

how the UK performs vs. other countries in creating positive conditions for

businesses to grow. Therefore, they can be used for benchmarking purposes

and partially address the views expressed by FDM executives regarding the

state of the UK industry

5.0 Section summary 5.1 The attractiveness of the UK as a place to invest

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UK’s competitive advantages – ranked by average score (1-weakest, 5-strongest; findings from FDF / Grant Thornton survey)

0% 10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

RegulationGovernment support

Labour costForeign partnerships/trade agreements

Exchange rateLabour skillsProductivityTechnology

R&DBrand loyalty

New product developmentProduct quality

% of responses1 2 3 4 5

1.92.12.42.82.83.13.23.33.4

3.93.53.5

Average score


How the UK FDM compares with other countries (1-UK is much less developed, 3-UK is equally developed, 5-UK is much more developed; findings from FDF / Grant Thornton survey)

2.0

2.5

3.0

3.5

4.0

4.5

Aust

ralia

and

NZ

Braz

il

Cana

da

Chin

a

East

ern

Euro

pe

Fran

ce

Germ

any

Indi

a

Irela

nd

Rest

of A

sia

Rest

of

Wes

tern

Eur

ope

Spai

n

USA

Aver

age

scor

e R&D

NPD

Technology

Countries above the line were deemed to be less developed than the UK in the chosen areas


5.2.1 FDM competitive advantages (from survey output)

According to the survey conducted, UK FDM is distinguished by strong product quality and NPD capabilities but a number of important areas, such as labour skills and Government support, seem to have been overlooked

In the efforts of UK FDM to become a strong and competitive global player, both •

corporates and SMEs agree that product quality, NPD and brand strength are

the top competitive advantages for UK FDM. In the context of our report, NPD

reflects new products launched including line extensions/product variants (e.g.

existing with a new flavour or different size). Companies stated that ‘Made in

Britain’ goods are very well regarded internationally in terms of their quality in

the manufacturing process, packaging and ingredients, whilst Britain is amongst

the world’s leaders in developing new (or improved) packaged food and soft

drinks or new packaging formats. Overall, most companies deemed that only

Canada and USA have better NPD capabilities than the UK

However, a few global players interviewed expressed strong disagreement with •

the above statement pointing out that the UK does not have such a strong

brand abroad and that there are very few renowned UK global brands

Moreover, companies thought that ‘Made in Britain’ is not very strongly •

represented abroad and that the Government and the industry together can

do a lot more to promote British products and the image of the industry. Some

businesses brought up international trade fairs as an example where the UK

is normally underrepresented compared to other countries, even smaller ones

such as Greece

R&D and technology were ranked relatively highly but lagging behind a few •

developed countries. Businesses thought that Germany and USA are leading in

the technology field, whilst the UK was also deemed to be less developed than

France and Canada in R&D. In the context of this project, R&D is broader than

NPD and includes areas such as new product formulations, packaging research,

developing new processes and innovating new aromas and ingredients

In addition, businesses surveyed believe that the UK is distinguished by high •

efficiency and low wastage in the production process and exemplary conditions

in the production facilities compared to some other developed nations

Labour skills were ranked as average with businesses stating that they are •

in need of specialised food engineers and better quality graduates across

all levels. In most cases, companies stated they recruit part of their factory

floor staff and even some skilled labour from Eastern Europe. Nevertheless,

companies were overall happy with the quality level of general engineers

and services staff (e.g. sales, marketing) but stated that the sector needs an

improved profile to attract high calibre individuals who would otherwise choose

a career in other industries

Even though exchange rates were not ranked by the survey respondents as a •

significant competitive advantage, the Irish food federation thought that it has

been very helpful for the UK FDM market during the downturn when Sterling

was depreciated at the expense of the Irish FDM market

Both corporates and SMEs agree improvement is required around labour •

costs, the role of Government in providing a positive business environment

and regulation. Companies feel that the ‘red tape’ and regulation around labour

has turned the UK labour market, which is supposed to be one of the most

flexible ones on a global scale, into a rather inflexible one which incurs high

costs on businesses unnecessarily. This pressure is even larger for SMEs

that do not have the scale, margins and resources needed to deal with all the

paperwork and the additional costs incurred. Moreover, there is a range of

Government support measures where companies feel we are lagging behind.

Whilst corporates suggested that taxation is too high and there are not sufficient

tax breaks available, SMEs proposed further grants to be made available to the

industry and a more effective system supporting them

“We have good innovation and R&D capabilities and a strong food science expertise. That,

combined with the strength of our creative industries, such as branding and advertising,

allows for the continued development of our products and brands.”

Corporate # 5

“Our technology, food safety record and quality and innovation are good. The question is how

easy it is to export these strengths.”

Corporate # 7

“SMEs don’t have the know-how to export and the Government could offer them a lot of

support in doing so in terms of contacts. UKTI should help.”

Corporate # 4

5.2 UK FDM competitive advantages 5.2 UK FDM competitive advantages

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Regions the UK FDM is facing competition from (findings from FDF / Grant Thornton survey)

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%Eu

rope

Asia

Sout

h Am

eric

a

North

Am

eric

a

Ocea

nia

% s

hare

of r

espo

nses

Corporates

SMEs


Main markets the UK FDM is facing competition from (findings from FDF / Grant Thornton survey)

Key: Over 13 votes9-12 votes5-8 votes1-4 votes


5.3.1 Competition

Because of the nature of the industry, European nations continue to be viewed as the biggest competitors to UK FDM

In terms of the international competition for the UK FDM, European nations are •

seen to be the largest threat by both SMEs and corporates. France, Germany

as well as Poland were considered to be the largest European rivals for the

UK. Businesses surveyed stated that Germany had better technology and R&D

capabilities and France had many rival, good quality food and soft drinks as

well as less stringent regulations, whilst Poland had an educated and skilled

labour force at a lower cost and better access to raw materials. Moreover,

corporates saw a significant threat from Ireland primarily due to its favourable

corporate tax environment

Whilst SMEs thought that Asia as a region may be a bigger threat than Western •

Europe to the UK, corporates believed that Western Europe remains the number

one threat to the UK. Corporates believe it would be hard for Chinese and

other Asian manufacturers to penetrate many key UK FDM markets without

establishing a local FDM facility due to the difficulties associated with shipping

many FDM products across long distances

Overall, emerging markets such as Brazil, China, India and other Asian nations •

are considered to pose a significant threat to the UK mainly due to their cheap

labour, access to raw materials as well as R&D capabilities. China in particular

gathered the most votes and was considered as being the number one global

threat to UK FDM. Corporates however believe that France and Germany are

larger threats to the UK than China

“The BRICs can be viewed both as opportunities and threats. They are developing fast, they

are cheaper today, with good education systems and eager middle classes.”

Corporate # 4

“A lot of manufacturing went to Poland 15 or 20 years ago. And as more Eastern European

countries join the EU, they are becoming potential targets for manufacturing there.”

Corporate # 7

“France has an easier red tape and is more flexible in terms of planning regulations.”

Corporate # 9

“We see a lot of competition coming from Continental Europe, particularly those countries

that have a good traditional heritage like Netherlands, Italy and Germany. Also, we see a lot

of Commonwealth competition, particularly Australia, who have built good brands and their

Government has a very export oriented mindset.”

Corporate # 5

Top 100 food and soft drink companies in the world by turnover, 2003

33

17

6 5 5 4 3 2 2 2 2 2

0

5

10

15

20

25

30

35

USA

Japa

n

Neth

erla

nds

UK

Fran

ce

Cana

da

Germ

any

Denm

ark

Irela

nd

Italy

Aust

ralia

Mex

ico

# of

com

pani

es

Top 51-100

Top 50

Sources: 1. Leatherhead Food Research (2004), Top 100 Food & Beverage Companies

Top 100 food and soft drink companies in the world by turnover, 2010

30

12

5 5 4 43 3 3 2 2 2 2 2

0

5

10

15

20

25

30

35

USA

Japa

n

Fran

ce

Germ

any

UK

Neth

erla

nds

Italy

Cana

da

Braz

il

Denm

ark

Irela

nd

Switz

erla

nd

Mex

ico

Chin

a

# of

com

pani

es

Top 51-100

Top 50

Notes: a. The UK ‘loss’ from 2003 reflects the buy-out of Cadbury’s by Kraft. However, Cadbury’s remains a separate brand with a UK identitySources: 1. Leatherhead Food Research (2011), Top 100 Food & Beverage Companies

5.3 Competing markets

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“Asian countries are developing their own brands and pushing them in Europe slowly and they

can take market away from UK manufacturers.”

Corporate # 4

“UK has strong brands in confectionery. Moreover, a range of Anglicized products sold to

Commonwealth countries enjoy strong brand recognition.”

Corporate # 4

5.4.1 Brand loyalty and awareness

The UK has maintained its influence in the global sales of food and soft drinks, but the Government can help more with promoting the image of the UK brand and UK products abroad

The UK brand and that of its products was ranked by the survey respondents as •

a strong competitive advantage that differentiates the UK from its competition.

Some respondents thought that ‘Made in Britain’ carries significant weight

abroad and that Commonwealth countries in particular may be more aware of

British brands than others

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.

Some respondents also stated that the British brand could be regarded more

highly if the manufacturers adopted a common strategy and promoted their

products abroad as British rather than exclusively Scottish or English for

example. They thought that the lack of a common approach dilutes the UK

brand to the eyes of foreign consumers

In addition, a few respondents thought that the Government could better •

support the industry’s efforts to promote British products abroad through food

trade exhibitions

According to the businesses interviewed, the UK Government does not offer •

any financial incentives for UK companies to take part in exhibitions and it is too

financially strenuous for SMEs to participate at their own expense. As a result,

there is normally a perceived lack of enthusiasm at those exhibitions from the

UK side, which is underrepresented compared to other European missions such

as Germany, Greece or Italy

In an effort to calculate the international reach and reputation of UK brands, •

Grant Thornton considered the Top 100 food & soft drink manufacturers by

global turnover in 2003 and 2010. Whilst the industry is being dominated by

American and Japanese brands, the UK is currently following at a distance with

four companies (following Cadbury’s takeover). In addition, France maintained

its 2003 position and Germany managed to increase its dominance. However,

four Brazilian and Chinese companies entered the global ranks in 2010

New product variants by country, 2005-2011

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

USA UK

Germ

any

Fran

ce

Chin

a

Japa

n

Braz

il

Cana

da Italy

Spai

n

Indi

a

Neth

erla

nds

Irela

nd

# of

new

pro

duct

var

iant

s

Notes: a. The variants above may refer either to brand new product launches or to product refurbishments or to the same products but with varied properties (e.g. different taste, packaging, etc)Sources: 1. Mintel (2011), NPD Database

Approximation of NPD activity by type of product, 2005 & 2010

2,932

5,570

3,503

5,168

3,769

6,734

744 710

2,842

4,255

6,742

7,988

01,0002,0003,0004,0005,0006,0007,0008,0009,000

Braz

il 20

05

Braz

il 20

10

Cana

da 2

005

Cana

da 2

010

Fran

ce 2

005

Fran

ce 2

010

Irela

nd 2

005

Irela

nd 2

010

Spai

n 20

05

Spai

n 20

10

UK 2

005

UK 2

010

# of

new

pro

duct

var

iant

s

Branded

Private label

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 country and accounting for the total NPD activity in each case.Sources: 1. Mintel (2011), NPD Database

5.5.1 NPD activity

FDM has been very active in new product development with private labels accounting for a significant share of growth in this space

The UK appears to be one of the most innovative markets in terms of NPD. •

Judging by the total number of product variants launched between 2005-

2011, the UK lies ahead of other European rivals such as France, Germany

and Spain. The UK surpasses innovative nations such as Japan and large

FDM markets such as Brazil and China. However, the UK remains second

at a distance from USA that is leading with more than double the number of

product variants introduced

Within the UK, private labels seem very active in driving innovation growth in •

terms of NPD. Despite the large concentration in the retail market across most

of the countries taken into consideration (Brazil is the only country from our

five comparison markets where the Top 5 retailers account for less than 50%

of the total retail market) and despite the relatively high penetration of private

label products, private labels abroad do not seem equally active in launching

new product variants. For example, in 2010 in France, private labels had 30%

share of the total FDM market, but accounted for c.17% of the total product

variants launched

Private label penetration

2010

Brazil 7%

Canada 22%

France 30%

Ireland* 29%

Spain 32%

UK 41%

Notes: a. Ireland’s penetration refers to 2007

Sources: 1. Planet Retail data reported in the Food and Drink Europe Data Trends 2011

5.4 Brand loyalty and awareness 5.5 New product development

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New product variants in the UK by category

4,8076,164

6,967 6,3137,482 7,901

486

824638

542

507622

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2006 2007 2008 2009 2010 2011

# of

new

pro

duct

var

iant

s

Soft drinks

Food

Notes: a. The variants above may refer either to brand new product launches or to product refurbishments or to the same products but with varied properties (e.g. different taste, packaging, etc)Sources: 1. Mintel (2011), NPD Database

“NPD in the UK is much stronger than in Germany. If you look into retailers for example, the

products they have in Germany are cheaper, but at the same time more basic than the ones

available in the UK.”

Corporate # 11

On the contrary, within the UK, private labels were responsible for 44% of the •

total NPD in 2010, which is above their total market penetration. The private label

NPD share has increased from c.37% in 2005 to 44% in 2010 showing a growing

contribution to innovation. This reflects to a positive extent the commentary we

received from businesses that retailers are driving the FDM market

Historically, UK NPD for food products has been steadily increasing with •

soft drinks being rather volatile. There was an overall decrease in activity in

2009 due to the economic downturn that obliged activities to cut back in

spending. Since then, NPD has continued increasing to levels above 2007 and

2008, which confirms the businesses’ statements that innovation and NPD to

address changing and new consumer demands are required in order to drive

growth in the marketplace

GVA per employee at current prices for food and beverage, in £

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2003

2004

2005

2006

2007

2008

2009

GVA

per e

mpl

oyee

at c

urre

nt p

rices

, £

France

Germany

Italy

Japan

Spain

UnitedKingdom

USA

Sources: 1. OECD (2011). OECD Structural Analysis Statistics (STAN), 2. ONS (2011), Annual Business Survey

Growth in GVA per employee at current prices for food & beverage, calculated in national currency

Country CAGR 2003-2008

France 3.5%

Germany (0.5)%

Italy (0.4)%

Japan (1.7)%

Spain 3.5%

United Kingdom 4.7%

USA 1.8%

Sources: 1. OECD (2011). OECD Structural Analysis Statistics (STAN), 2. ONS (2011), Annual Business Survey

5.6.1 Productivity

UK’s food and beverage sector is characterised by high productivity above the average manufacturing level and has been steadily growing over the years

UK’s FDM productivity has been steadily growing at an annual rate of 4.7%. If •

compared in Sterling terms, UK ranks above Japan and Germany, both of which

have substantial manufacturing sectors and are traditionally considered to

invest heavily in technology as a means of improving their productivity

Overall, the UK sector’s productivity has been growing faster than the •

developed nations covered by this research. In fact, the productivity of

Germany, Italy and Japan has slightly decreased over the years (when measured

in their national currencies)

From 2003 until 2008, USA has been maintaining higher levels of productivity •

than the UK although it has been growing at a slower pace. Moreover, in

2008, UK’s FDM productivity was overtaken by France and Italy, which were

previously below the UK. This is due to Sterling’s depreciation that took place at

the beginning of the economic downturn

“Some of the biggest processing plants in Europe are built by Germans and have high

productivity. UK has been a follower to these steps and not the pioneer. UK has no particular

advantage against Western European nations.”

SME # 5

“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.”

Corporate # 6

5.5 New product development 5.6 Productivity comparison

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GVA per employee for manufacturing sector vs. food & beverage, 200860

,525

39,9

66

66,4

33

8,62

2

44,7

17 56,9

53

99,1

62

69,0

53

68,6

11

60,0

22

9,96

1

50,7

81

56,4

55

125,

306

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000Fr

ance

Germ

any

Italy

Japa

n*

Spai

n

Unite

d Ki

ngdo

m

USA

GVA

per e

mpl

oyee

at c

urre

nt p

rices

,na

tiona

l cur

renc

y

Total food & beverageproductivity

Total manufacturingproductivity

Notes: a. Japan’s figures are in 1,000’s YenSources: 1. OECD (2011). OECD Structural Analysis Statistics (STAN); 2. ONS (2011), Annual Business Survey

The UK FDM sector stands out for being one of the most productive sectors for •

the UK manufacturing industry overall. According to data from 2003 and 2008,

FDM has maintained a higher level of productivity than the overall manufacturing

sector even though the gap narrowed by 2008

The UK along with Italy are the only developed countries covered by this •

comparison where FDM achieves a higher productivity rate. In competing

markets, such as Germany and France, that have managed to outpace UK

in global food and drink exports, the FDM sector falls far behind the overall

manufacturing industry

From our interview with the Irish food federation (FDII), Ireland believes that it •

has the capacity to significantly increase production output by 2020 to respond

to the higher commodity prices and the higher demand for new diets coming

from emerging markets. According to FDII, their dairy output (which accounts

for c.25% of their total FDM production) could be increased by 40% by 2020

and they could also significantly increase their meat products output (which also

accounts for c.25% of the total production) if needed

Food, beverage and tobacco R&D expenditure as % of output

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

% o

f out

put

Canada

France

Germany

Ireland

Japan

Netherlands

Poland

Spain

United Kingdom

United States

Notes: a. R&D expenditure as % of industry output expressed in national currencySources: 1. OECD (2011), OECD Structural Analysis Statistics (STAN)

UK Food producers R&D investment/ Net sales vs. EU and non-EU average 2010

1.3%1.6%

3.0%

2.1%

1.1%0.8% 0.7% 0.6% 0.6% 0.5%

0.2%0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

EU a

vera

ge

Non-

EUav

erag

e

Devr

o

Unile

ver

BEIG

Top

co

Tate

& L

yle

Prem

ier F

oods

Dairy

Cre

st

North

ern

Food

s

Unite

d Bi

scui

ts

Witt

ingt

onIn

vest

men

ts

%

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 & MasonSources: 1. EU (2011), The 2011 EU Industrial R&D scoreboard

5.7.1 R&D

The UK food, beverage and tobacco industry has one of the highest R&D spendings among EU countries, but lags behind Switzerland and Japan who invest two to three times more as a percentage of output

Although the food, beverage and tobacco sector has a much lower R&D •

intensity compared to sectors such as pharmaceuticals, biotech, technology

or healthcare, the success of businesses depends on the introduction

of new products and constant improvement of recipes, packaging and

manufacturing processes. This drives the need for significant investment in

technology and R&D

Based on the OECD database of food, beverage and tobacco expenditure on •

R&D, the UK has the highest spending in the EU together with the Netherlands

at around 0.48% of output. Moreover, the UK maintained the R&D investment

relatively constant since 2000, whilst the Netherlands declined from 0.57% in

2000 to 0.47% in 2008

However, the UK lags behind Japan which maintained a double level of •

investment compared to the UK. The clear leader is Switzerland which invested

1.54% of output in 2009 (not shown in the graph due to data available only for

2009, but not time series 2000-2009)

Although not statistically representative, as it only includes 33 EU and 22 •

non-EU food producers, the EU industrial scoreboard shows a similar trend

of EU companies lagging behind non-EU countries with an average R&D net

sales ratio of 1.3% vs. 1.6 respectively. Moreover, the impact of the economic

downturn is reflected in the growth figures, with EU and UK companies

displaying negative growth

5.6 Productivity comparison 5.7 R&D and technology investment

CAGR 3 y(2008-2010)

EU average (0.1)%

Non-EU average

1.4%

Devro (1.7)%

Unilever (1.9)%

BEIG Topco (5.4)%

Tate & Lyle (13.1)%

Premier Foods (6.7)%

Dairy Crest (7.8)%

Northern Foods

(17.3)%

United Biscuits (1.6)%

Wittington Investments

4.6%

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Capital expenditure vs. industry turnover for food & soft drinks

0

500

1,000

1,500

2,000

2,500

3,000

60,000

62,000

64,000

66,000

68,000

70,000

72,000

74,000

76,000

78,000

2000 2001 2002 2003 2004 2005 2006 2007 2008

Net c

apita

l exp

endi

ture

, £m

Turn

over

, £m

Total turnover

Net capitalexpenditure

Sources: ONS (2011), Annual Business Survey

Investments in the food & beverage industry as a % of the industry’s turnover, %

1.9%2.4%

4.9%

1.8% 1.8%

5.8%

4.9%

0%

1%

2%

3%

4%

5%

6%

7%

Germ

any

-Ca

pex

UK -

Cape

x

Braz

il -

Tota

lin

vest

men

ts

Indu

stry

inve

stm

ents

as

a %

of tu

rnov

er

2008

2009

2010

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

5.7.2 Capital expenditure

Although the UK’s capital investments have remained stagnant over the past decade, they appear to be on par with rival nations’

As a measure of technology and machinery investment, we examined the net •capital expenditure of UK FDM businesses and compared it with the turnover growth in the industry. Whilst the industry has been steadily but slowly growing, net capital expenditure has been growing at a slower pace. Moreover, capital expenditure has been volatile through the years, following a decline until 2004 and a slow increase until 2008

This picture reflects some of the views expressed by businesses, namely that •the industry is characterised by an ageing stock of manufacturing facilities and equipment

When comparing the food & beverage industry investments in the UK and •Germany, the UK seems to be following a similar approach to Germany, which has traditionally invested heavily in technology. However, the economic 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 1.8%. However, in absolute terms, Germany’s FDM investment in fixed assets was 28% higher in 2009 than in the UK

Moreover, in 2009, Brazil’s total investments (including both tangible and •intangible assets) reached 5.8% of the industry’s turnover at £5.4bn, but, in 2010, they returned to the 2008 levels of 4.9%

“A lot of the companies in the UK are old companies even if they are part of new conglomerates. So, there are a lot of legacy assets and the cost of closing them or upgrading them is very high.”

Corporate # 5

Technology investment intention in the next five years (Findings from the FDF/Grant Thornton survey)

25%

49%

60%

52%

75%

51%

40%

48%

100%

0 5 10 15 20 25 30 35 40 45

No internal capabilities

In line with current level

Lower than current level

Higher than current level

Don't know

Number of responses

Corporates

SMEs


Investment intentions in R&D in the next five years

(Findings from the FDF/Grant Thornton survey)

75%

50%

100%

44%

25%

50%

56%

100%

0 5 10 15 20 25 30 35 40

No internal capabilities

In line with current level

Lower than current level

Higher than current level

Don't know

Number of responses

Corporates

SMEs


5.7.3 Intentions to invest in R&D and technology (from survey output)

Most businesses surveyed intend to maintain or increase investments in R&D and technology

52% of the companies surveyed stated they will maintain the current level of •investment in technology, whilst 31% of companies plan to increase investment in technology. Similarly, 52% of businesses intend to maintain their R&D spend, whilst 39% plan to increase investment

The main reasons quoted for maintaining/growing the level of investment were:•

– the belief that growth will be driven by new product development that will help companies to differentiate their products

– the need to be innovative and consistently take cost out of the business in order to maintain competitiveness vs. British and international competitors

– the ability to respond to changing consumer demands

– growth in exports, especially in emerging markets will require both investment in technology for additional output as well as investment in R&D to adapt Western recipes to local tastes

However, SMEs pointed out that margin declines have resulted in less financial •resources available for capital allowances. Moreover, financing constraints have put pressures on companies and resulted in investments either being reduced or focused on key growth areas. Some companies surveyed also mentioned that R&D is concentrated on product reformulation to replace traditional commodities such as sugar or cocoa in order to mitigate for volatility and future scarcity of raw materials

As a comparison, a French Institute of Statistics (INSEE) survey, revealed that •French food and beverage businesses predict a 7% increase in their technology investments in 2011 compared to 2010. However this follows 2009 and 2010

levels when they reduced investments by an estimated 14% and 9% respectively

5.7 R&D and technology investment 5.7 R&D and technology investment

CAGR2000-2008

Industry turnover

1.9%

Net capital expenditure

0.7%

Sources: 1.ANIA (2011), Bilan et Perspectives Economiques Conférence de presse 29 Mars 2011

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“Growth in emerging markets will drive greater requirements of investment in R&D

and technology.”

SME # 9

“New products are driving growth for us and we also see a lot more work on managing cost

inflation on raw materials, therefore our investment in R&D will have to grow.”

SME # 9

“Financing constraints have put huge pressure on our business so investments will be

minimised or focused on key growth areas.”

SME # 10

“I think there is a lack of investment which is due to the lack of confidence by manufacturers.

I don’t think it’s a short term versus long term issue. FDM companies abroad have better tax

breaks (e.g. Ireland) and have been able to heavily invest in technology.”

SME # 6

“We will continue to invest in R&D at the current level, but the technology investment will be

lower compared to previous years because of lower capital allowance.”


“Technology investment will be driven by our green agenda, while R&D will be driven by the

need to invigorate the market with NPD to make a point of differentiation with own label.”

SME # 3

QS 2011 World

University Ranking Comparative ranking in reading

556533

524508

501500500497496496495494

481459

412

300 350 400 450 500 550 600

Shanghai (China)Hong Kong (China)

CanadaNetherlandsSwitzerland

US

PolandGermany

FranceIreland

Taipei (China)

SpainUK

RussiaBrazil

Reading score

Comparative ranking in maths

600555

543534

527526

513497495492

487487

483468

386

300 350 400 450 500 550 600

Shanghai (China)Hong Kong (China)

Taipei (China)Switzerland

CanadaNetherlands

GermanyFrancePoland

UKUS

IrelandSpain

RussiaBrazil

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 worldwideSources: 1. QS Intelligence Unit (2011) QS World University Ranking; 2. OECD (2011) Programme for International Student Assessment (PISA)

5.8.1 Skills

The UK performs well in higher education league tables, but lags behind competitors in basic skills such as reading and numeracy of 15 year old pupils

The UK ranks highly in higher education league tables with four universities in •

the top 10. The quality of the higher education system is also visible in the top

100 where the UK is the best represented country outside the US. A comparison

on food science/technology/processing courses is not available, but only one of

the UK universities in the top 100 ranking offers food science courses

However, UK only achieves an average OECD scores in the PISA ranking •

for both reading (ranked 25th out of 65 countries) and maths (28th out of 65

countries).The scores are based on tests taken by students aged 15 across 60

countries. The ranking is dominated by China, Singapore, Korea and Finland.

Canada features in the top 10 countries for both reading and maths whilst

Netherlands is 10th in reading and 11th in numeracy. Similarly Switzerland ranks

8th in maths and 14th in reading. Germany, France and Poland are outside the

top 10, but they outrank the UK in both reading and maths (although not by

much as in general they fit within the OECD average score)

This is in line with the comments collected during the interviews conducted for •

this study, where businesses have expressed a concern that the people coming

into the workforce are not properly equipped with literacy and numeracy skills.

Moreover, businesses feel that the school and university systems are very

theoretical and do not equip graduates with practical and business skills which

make them more employable and ready to perform in their workplace

5.7 R&D and technology investment 5.8 Labour skills

Country Top 10

Top 100

Brazil 0 0

Canada 0 5

China & HK 0 6

France 0 2

Germany 0 4

India 0 0

Ireland 0 1

Netherlands 0 3

Poland 0 0

Russia 0 0

Spain 0 0

Switzerland 0 3

UK 4 19

US 6 32

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Manufacturing and processing graduates as % of total graduates

0%

0.5%

1.0%

1.5%

2.0%

2.5%Po

land

Fran

ce

Italy

Spai

n

Unite

dKi

ngdo

m

Braz

il

Irela

nd

Germ

any

Unite

d St

ates

Neth

erla

nds

Switz

erla

nd

Cana

da

% o

f tot

a gr

adua

tes

2005

2009

Notes: a. Based on ISC code 54 Manufacturing and ProcessingSources: 1. OECD (2011), OECD Structural Analysis Statistics (STAN)

Engineering graduates as % of total graduates

0%

5%

10%

15%

20%

25%

30%

Spai

n

Italy

Germ

any

Switz

erla

nd

Fran

ce

Japa

n

Cana

da

Unite

dKi

ngdo

m

Pola

nd

Neth

erla

nds

Irela

nd

Unite

d St

ates

Braz

il

% o

f tot

al g

radu

ates

2005

2009

Notes: a. This table includes ISC codes 50 Engineering, Manufacture and Construction and ISC code 52 Engineering and Engineering Trades Sources: 1. OECD (2011), OECD Structural Analysis Statistics (STAN)

5.8.2 Manufacturing and engineering graduates

From 2005 to 2009, the number of UK manufacturing and engineering graduates has not declined, however, they still represent a very small proportion of the total student population

The companies interviewed believe that in the UK, less students study towards •

an engineering or technical degree. They also wanted the Government to

subsidise these courses and advertise together with the industry the choice of

options available for a career in food and drink manufacturing

The statistics across manufacturing and engineering, show that although the •

number of graduates has not declined, these degrees are not very popular

UK manufacturing and processing students accounted for 0.8% of total •

graduates in 2009, a slight increase compared to 2005 when they accounted for

0.7% of the total graduate population. However, this is very small compared to

business studies which accounted for 16% of the graduates in 2009

Poland has the highest percentage of manufacturing and processing students •

(2.2%) followed by France (1.1%) and Italy (1%)

“I’ve been saying this for years, we need our manufacturing engineers to be competitive and

be able to produce and develop things and customise technology.”

Corporate # 12

Labour costs per employee for food, beverage & tobacco, £’s

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

2003

2004

2005

2006

2007

2008

2009

Labo

ur c

osts

per

em

ploy

ee, £

France

Germany

Ireland

Italy

Japan

Netherlands

Poland

Spain

United Kingdom

United States

Sources: 1. OECD (2011). OECD Structural Analysis Statistics (STAN)

Unit labour cost growth forecasts, 2008 – 2011

(10)%

(8)%

(6)%

(4)%

(2)%

0%

2%

4%

6%

%

Ireland

UK

Eurozone

Sources: 1. European Commission (2010), Forecasts

Growth of labour costs vs. production output in food, beverage and tobacco, calculated in national currency

CountryLabour cost per employee,CAGR 2003-2008

Production output per employee, CAGR 2003-2008

France 2.9%* 4.2%

Germany 0.2% 3.7%

Ireland 4.3% 4.3%*

Italy 2.3% 1.6%

Japan -0.4% 0.5%

Netherlands 2.8% 6.7%

Poland 2.4%* 7.8%*

Spain 3.5% 4.0%*

United Kingdom 4.9% 4.5%*

USA 2.3% 5.9%

Notes: a. The figures with an * sign reflect the 2003-2007 period Sources: 1. OECD (2011), OECD Structural Analysis Statistics (STAN)

5.9.1 Labour costs

Despite being regarded internationally as a flexible labour market, the UK’s labour costs are amongst the highest compared to other countries and have been growing at a fast pace over the years

According to OECD, the UK has one of the most flexible labour markets globally and •the most flexible along with Sweden, Denmark and Ireland within Europe. However, if compared in Sterling terms, UK’s FDM labour costs have historically been the highest. The 2008 jump in labour costs for many Eurozone countries can be attributed to the depreciation of Sterling at the start of the economic downturn

UK’s labour cost per employee has been increasing at an average annual rate of 6% •until 2007, which is above any other country covered in this research. Interestingly, in 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 UK. UK FDM labour costs rose 25% faster than production output in the 2003-2007 period. At the same time, in Germany, production output grew 3.7% annually whilst labour costs remained at the same level

5.8 Labour skills 5.9 Labour costs

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Labour costs per employee for food, beverage and tobacco vs. manufacturing, 2009 in national currency

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

Fran

ce*

Germ

any*

Irela

nd

Italy

Japa

n*

Neth

erla

nds

Pola

nd*

Spai

n

Unite

d Ki

ngdo

m

Unite

d St

ates

Labo

ur c

ost p

er e

mpl

oyee

, na

tiona

l cur

renc

y

Food, drink & tobacco

Manufacturing

Notes: a. Japan is quoted in 1,000 Yen; b. The figures for France and Poland are from 2007 while for Germany from 2008 c. UK’s 2009 labour costs were sourced from ONS and differ substantially from the OECD 2003-2007 figures quoted above because they account for different parametersSources: 1. OECD (2011). OECD Structural Analysis Statistics (STAN); 2. ONS (2011), Annual Business Survey

Minimum monthly wage by country, 2011

234 €

1,207 €1,365 €

1,499 €1,424 €

371 €

113 €

641 €

£1,027

0200

400600800

1,0001,2001,400

1,600

Braz

il

Cana

da*

Fran

ce

Irela

nd

Neth

erla

nds

Pola

nd*

Russ

ia

Spai

n

UK

Min

imum

wag

e

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

Margin growth for food and soft drinks as measured by PBT divided by Turnover


Canada (9.2)%

France (1.6)%

Germany (8.6)%

Poland 2.7%

Spain (8.3)%

UK (2.3)%

Notes: a. The figures above were extracted by aggregating the information available for each FDM business on the Orbis 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 •

Eurozone are projected to increase by almost 4% for the 2008-2011 period,

whilst Ireland’s labour costs are expected to go down by more than 8%.

During the same period, UK’s cost growth is expected to surpass the Eurozone

reaching c.5%

When comparing labour costs per employee for the food & beverage sector •

with those for the overall manufacturing sector, UK along with Ireland, Italy and

Netherlands are the countries where these costs are very closely aligned (when

calculated in each country’s national currency). Whilst in countries like Germany

and USA the FDM costs lie 40% and 29% below the overall manufacturing

sector respectively, the UK FDM costs are only 7% below

This highlights the need to better control the labour costs in a sector whose •

margins are rather tight and have been getting increasingly squeezed over the

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

In 2011, UK’s minimum wage was at £1,027. A direct comparison with other •

markets by making use of 2011 exchange rates would demonstrate a more

‘flexible’ picture for the UK labour market given the historical lows of the Sterling-

euro exchange rate. At a high level, the UK lies above Spain (which is considered

to have a more rigid labour market), appears to be on par with France and

Canada and ranks below Ireland. Any deeper analysis requires the consideration

of a number of parameters such as costs of living, state benefits, etc

“We had to switch to overseas manufacturing because of cheaper labour. Whilst a decade ago

all our manufacturing was based in the UK, today we only manufacture a fraction of our total

output in the UK for branding purposes.”

SME # 11

“Our country has become more competitive in labour costs, but there were big increases in

the past that put it at a less competitive position; during the boom years when the wages were

increased to attract employees.”


5.9 Labour costs 5.9 Labour costs

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Margin (profit before tax/ net turnover) comparison across FDM

0%

2%

4%

6%

8%

10%

12%

14%

2005

2006

2007

2008

2009

2010

Gros

s m

argi

n, %

Canada

France

Germany

Poland

Spain

UK

Notes: a. Calculations based on financial results reported by food and soft drinks manufacturers 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 1300Sources: 1. Bureau Van Dijk – Orbis (2011), Grant Thornton analysis

Profit before tax margin growth for FDM


Canada (9.2)%

France (1.6)%

Germany (8.6)%

Poland 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 1300Sources: 1. Bureau Van Dijk – Orbis (2011), Grant Thornton analysis

5.10.1 Profitability comparison

UK FDMs have maintained higher margins compared to most rival nations even during the economic downturn

Competitiveness is a relative notion when applied to companies and can •

be measured in terms of the cost of producing a finished product as well as

through non-financial terms as the ability to bring to market products that are

different and appeal to customers and consumers. These require investment

and, therefore, profitable companies are able to invest

UK food and soft drinks manufacturers have had higher profit before tax •

margins compared to many comparison countries. These figures support the

points made by businesses during the survey and interviews, namely that the

UK businesses distinguishes itself from other developed countries by high

efficiency and low waste in the production process

However, UK businesses lag behind German companies. The high degree of •

automation in German factories coupled with lower labour costs per employee

due to the lack of minimum wages may explain the higher margins that German

companies enjoy

Moreover, the margin growth over 2005-2009 has been declining in most •

countries with the exception of Poland which has shown a greater resilience to

the downturn, with a CAGR of 2.7%

5.10 FDM profit margin

Section 6 Growth barriers & risks

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This section discusses the growth barriers and risks within the UK FDM •

industry as identified by businesses participating in the FDF/Grant Thornton

survey and interviews

Wherever possible, these issues are analysed with supporting evidence from •

desktop research

The businesses surveyed perceived labour cost/legislation and the tax system •

as the biggest risks the industry has to deal with at present, while access to raw

materials is expected to be the major risk in the future

Food and drink manufacturers emphasised corporation tax is much more •

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

skilled labour

FDM businesses are affected by the volatility in commodity prices and believe •

that the UK should have a national food policy to address food security

FDM businesses stated that access to finance is currently an issue, in particular •

for SMEs, as banks have tightened lending criteria and are more risk-averse.

This is affecting companies’ ability to invest in order to drive future growth

Retailer consolidation has skewed the balance of power in the industry’s supply •

chain and, to an extent, has acted as a growth barrier for the sector, despite

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

Current and future risks for the UK FDM manufacturing (Findings from the FDF/Grant Thornton survey)

4.0 3.8 3.6 3.4

2.8 2.6

3.2 3.33.0

3.43.7

2.9

0

1

2

3

4

5

Gove

rnm

ent

ince

ntiv

es

& su

ppor

t

Labo

urco

st/le

gisl

atio

n

Tax

syst

em

Educ

atio

nsy

stem

& tr

aini

ng

Acce

ss to

raw

mat

eria

ls

Trac

k re

cord

of in

nova

tion

Risk

(1 lo

wes

t, 5

high

est)

Current

Future


“Our high corporate and employment taxes and low accessibility to good UK workforce will

push production overseas.”

SME # 12

“The biggest single issue currently is dealing with raw materials and energy price inflation

which are pushing up the costs of production. ”


6.1.1 Risks (from survey output)

The businesses surveyed perceive access to raw materials and education as the major issues that the industry will be confronted with in the future. These are issues that are difficult to change in a short timeframe and require long-term action plans

Both corporates as well as SMEs surveyed view the role of Government in •

providing a positive business environment as the key issue the UK food and

soft drinks manufacturing industry is confronted with at present. This may be

because the industry feels the Government does not give FDM the level of

attention and incentives that is in line with the contribution the sector makes to

the UK GDP

This is followed by labour cost/legislation, which is not surprising given the •

labour cost increases seen in recent years combined with regulatory changes

such as the Agency Workers Directive

The strong future risk identified is access to raw materials because of increased •

demand from emerging markets. Companies believe that this may be an area

where the UK is particularly disadvantaged compared to both developing and

developed markets. Moreover, the issue of food security and reliance on imports

will become more important in the future as global population grows. Therefore,

the UK should harness greater innovation to maximise the output derived form

locally sourced raw materials

6.0 Section summary 6.1 Current and future risks

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However, the access to raw materials has been scored highest by SMEs (4.08/5) •

whilst corporates have given it a score of 3.17/5. This is because multinationals

have the capacity to source raw materials centrally which can lead to better

access and lower prices

The other major risks identified are education, training and labour •

cost/legislation. Corporates view labour cost and legislation as a higher risk

compared to SMEs who scored education and training as the second major risk.

SMEs are concerned about having access to a skilled and qualified workforce

and considered it as a major risk, whilst corporates have concerns around

access to competitive labour cost abroad which may put UK manufacturers in a

less favourable position

UK’s performance vs. multinationals investment criteria (Findings from the FDF/Grant Thornton survey)

3.9 3.8 3.7 3.53.1 3.0

2.2 2.02.4

3.2

2.6

3.4

0

1

2

3

4

5

Labo

ur c

ost/l

egis

latio

n

Gove

rnm

ent i

ncen

tives

and

supp

ort Ta

x sy

stem

Acce

ss to

raw

mat

eria

ls

Educ

atio

n sy

stem

and

acc

ess

to w

orkf

orce

Trac

k re

cord

of i

nnov

atio

n

Scor

e (1

low

est,

5 hi

ghes

t)

Mutinationals investment criteria

Current UK performance


6.2.1 Multinationals’ investment criteria (from survey output)

When measured against some of the investment criteria multinationals use

to decide about where to place their production facilities, the UK’s current

performance is low, suggesting a risk that some companies may move

manufacturing facilities in countries where these parameters are better met

In the FDF/Grant Thornton survey, food and soft drink manufacturers •

mentioned labour cost and legislation, Government incentives and tax

systems as the most important parameters for investment decisions and

they believe that the UK scores low on these. The low labour score may

be surprising given that in the World Economic Forum ranking the UK is

perceived as having a flexible labour market which provides it with an

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

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

6.1 Current and future risks 6.2 UK performance vs. multinationals’ investment criteria

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UK commodities’ imports as a % of domestic use

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Whe

at

Barle

y

Oats

Suga

r bee

tan

d su

gar

Beef

and

vea

l

Pork

Poul

try

Impo

rts o

f com

mod

ities

as

a %

of

dom

estic

use

or s

uppl

y fo

r dom

estic

us

2006

2007

2008

2009

2010

Sources: 1. Defra (2010), Agriculture in the United Kingdom

UK average historic commodities’ prices, £ per tonne

1.5%2.5%

4.5%

9.1%

5.6%

3.4%

5.8%

0%

2%

4%

6%

8%

10%

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2005

2006

2007

2008

2009

2010

2011

*

Food & Drink inflation

Com

mod

ity p

rice

per t

onne

, £

Wheat

Barley

Oats

Beef

Pork

Poultry

Food & DrinkInflation

Notes: a. 2011 prices reflect averages from January until August. Sources: 1. Defra (2011), Agricultural Price Index; 2. ONS (2011), Consumer Price Indices

CAGR in prices of raw materials

Commodity 2005-2008 2008-2011(a)

Wheat 26.9% 10.4%

Barley 26.8% 6.6%

Oats 18.4% 18.3%

Beef 12.3% 4.2%

Pork 6.7% 5.0%

Poultry 10.4% 3.3%

Cheese 10.6% 1.3%

Notes: a. 2011 prices reflect averages from January until August.

6.3.1 UK self-sufficiency and raw material prices

Even for commodities where the UK is relatively self-sufficient, we are price takers rather than price makers in the global market. This means that FDM businesses are particularly exposed to volatility in raw material prices and availability. One way of mitigating this risk is to seek to develop more resilient supply chains as well as seeking greater trade liberalisation

Successive rounds of Common Agricultural Policy reform have decoupled •

subsidy payments from production in the EU and seen a progressive alignment

of prices to global market rates. This and a combination of increased demand

and more variable weather patterns has seen increasing volatility in many

commodity prices. Traditionally the UK has had a relatively low levels of self-

sufficiency even in foods which could be produced here because it tended to

rely on its extensive trade networks to import at lower costs. Joining the EU

changed the position significantly in the 1970s and 1980s, pre-reform. More

recently UK self-sufficiency has been increasing again (60% self-sufficient in

all foods and 74% in foods that can be produced in the UK), both as result of

investment in supply chains here and the competitiveness of UK farming

Sources: 1. Defra (2010), UK Food Security Assessment: Detailed Analysis 2. Defra (2008), Ensuring the UK’s Food Security in a Changing World

2010 average commodities’ prices across the world, € per tonne

159 155480

3,038

1,686

171 119460

2,531

779

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Whe

at

Barle

y

Suga

r

Beef

Poul

try

2010

pric

e pe

r ton

ne, €

EU

World

Sources: 1. European Commission (2011), AGRIVIEW; 2. World Bank (2011), Commodity Markets; 3. FAO (2011), International Commodity Prices

OECD 2011-2019 forecasts on average commodities’ prices, $ per tonne

0

1,000

2,000

3,000

4,000

5,000

6,000

Whe

at

Raw

sug

ar

Beef

EU

Beef

Bra

zil

Pork

EU

Pork

Bra

zil

Poul

try E

U

Poul

try B

razi

l

Fore

cast

pric

es p

er to

nne,

$

2008-2011

2011/2013

2013/2015

2015/2017

2017/2019

Sources: 1. OECD & FAO (2011), OECD-FAO Agricultural Outlook 2011-2020

This trend is likely to continue, but we still rely on imports to provide diversity •

and choice. In 2008, 25 countries accounted for 90% of UK food supply, up

from 20 countries in 1993. European Union continues being the UK’s largest

supplier and is considered to be a secure source given the stable political

environment, the history of collaboration with the UK and the trade agreements

in place

Nevertheless, many interviewees regarded access to raw materials a large future •

risk for the UK and a competitive disadvantage compared to other rival nations

who are more self-sufficient and have more raw materials sourced locally.

There is no doubt that the UK remains particularly dependent on importing

certain commodities. The UK imports more than 60% of the total sugar and

pork quantities used domestically. And whilst dependency on sugar imports

appeared to be declining from 2006 to 2009, in 2010 the levels of dependency

exceeded the 2007 levels. However, pork has remained rigid throughout the

2006-2010 period. The UK also imports substantial quantities of other meat

products such as beef and poultry. On the contrary, imports on wheat, barley

and oats lie at low levels

The prices for all key commodities imported by the UK, have significantly •

increased in the 2005-2011 period. This demonstrates the importance of

improved risk management and greater resilience in supply chains to ensure

future food security

According to OECD world sugar stocks in particular fell to their lowest levels •

in 20 years in 2010-2011 supporting higher as well as more volatile prices

before soaring to a 30-year high in Feb 2011. Since 2008, the meat sector

was adjusting to the supply and demand imbalances in the feed sector which

brought along high volatility in food prices, but they started to recover as

economies started pulling out of recession. All along, UK food inflation has been

rather volatile reaching very high levels and thus affecting UK consumers

6.3 Access to raw materials 6.3 Access to raw materials

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By comparing global commodities prices from 2010, the EU seems to have •

set very heavy duties across some raw materials resulting in significant price

variances. Poultry imports for example appear to have been 116% more

expensive for the EU than the rest of the world. Additionally, the Food and

Agricultural Organisation of the United Nations (FAO) forecasts that global

commodities prices over the next decade are going to be higher than the last

decade’s prices although in many cases they are forecast to be lower than the

peak levels experienced in the 2008-2010 period. FAO expects that, during the

next decade, in real terms, prices for cereals and meats will go up by 20% and

30% respectively compared to the previous decade

FAO along with OECD project that a slow growing supply set against high •

expected demand underlies the projection of high and volatile commodity

prices. The high cost pressures associated with production mean that

agriculture will continue to grow but at a slower rate. Sugar stocks should

rebuild in the near term but the stock-to-use ratio is expected to average

lower over the coming decade than in the previous 10 years providing support

for higher prices. The meat market outlook reflects the response to high

feed costs along with firm demand especially from developing markets. High

commodity prices in the first half of the decade are expected to result in the

expansion of livestock inventories and a subsequent expansion in trade during

the second half

The bulk of the growth in meat exports is expected to come from North and •

South America which together account for 84% of the world increase in

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

“One of the differences is that our country has raw materials available locally, while the UK

does not.”

International food federation # 5

“Commodities are by far the biggest driver of input cost at about 70%. As we have moved

from a fundamentals driven market (ie driven by the fundamentals of supply and demand) into

commodities markets driven by financial speculation, pricing has been significantly distorted.”

Corporate # 5

“I think that commodities are becoming scarce and for the food industry access to raw

materials is going to be reduced. Other countries will feel similar dynamics and our geographic

nature doesn’t help. I don’t know what the solution is, but that is the single biggest challenge

as I look out into the future.”

Corporate # 6

SME access to finance to fund current business requirement (Findings from the FDF/Grant Thornton survey)

87.5%

12.5%0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Yes No

% o

f res

pons

es

Sources: 1. Grant Thornton analysis

“I think the biggest barrier to growth at the moment is the banks’ failure to lend money and

that has happened during the last two years or so and I don’t see any end to it. We have had

£800 billion fed back in the economy but very little of it has flown to the real economy. As

such, the industry is not being helped and cannot create jobs.”

SME # 13

“Banks do not lend as much as needed for expansion and development.”

Corporate # 10

6.4.1 Access to finance (from survey output)

Even if funding is overall available to fund current operations, SMEs acknowledge they have difficulties in accessing bank loans for investment

87.5% of SMEs surveyed mentioned they have access to financing in order •

to support their current operational requirements. However, in the follow-up

interviews many emphasised that bank financing is not available as lending

terms are stricter, more expensive and banks are overall much more risk

averse compared to the pre-credit crunch time. In addition, SMEs struggle to

get access to bank financing for investment in technology and R&D as banks

expect projects to have a low risk and a quick pay back time. Therefore, SMEs

have had to find alternative financing sources such as personal finance or family

and friends

As some of the businesses pointed out, there seem to be two contradictory •

versions regarding access to finance. On the one hand, banks point out that

there has been a lack of demand, whilst businesses believe that there was

not necessarily a significant drop in demand, but they are discouraged from

applying. This is mainly due to the fact that banks have tightened lending criteria

or are more risk averse and, therefore, charge high rates

However, despite the importance of financing for the future survival and •

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 future economic growth, volatility in raw material prices, competition and a

joined up policy on food

6.3 Access to raw materials 6.4 Access to finance

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% of businesses across industries successful in getting loan finance from banks

94%89% 89% 86%

72% 79% 91%86%

97%84% 82%77% 75% 74% 72%

65% 64% 63%

0%

20%

40%

60%

80%

100%

120%

Fran

ce

Pola

nd Italy

Germ

any

Swed

en

Neth

erla

nds

Unite

d

King

dom

Spai

n

Irela

nd

succ

ess

rate

%

Banks (2007)

Banks (2010)

Notes: a. Based on a 2010 survey coordinated by Eurostat which included 25,000 SME businesses (10-250 employees) across 20 EU countries ; b. The graph is based on the responses of SMEs active in industry (excluding construction) looking for loan financing Sources: 1. Eurostat (2011), Structural Business Statistics

Credit Conditions Survey: availability and demand for credit across firm sizes reported in the Q3 survey a b

Decr

ease

Availability Demand

Incr

ease

20

15

10

5

0

(20)

(15)

(10)

(5)

Net percentage balances

Notes: a. Net percentages are calculated by weighting together the responses of those lenders who answered the question. The bars in the chart show the net percentage balance reported over the three months to early September. The diamonds show the associated expectations for the next three months. ; b. In the first panel, a positive balance indicates that more credit is available. In the second panel, a positive balance indicates an increase in demand. Sources: 1. Bank of England Trends in Lending, October 2011

6.4.2 Access to finance (supporting evidence from desktop research)

The UK appears to be one of the hardest places for bank loan financing in Europe

Access to bank loan financing has been reduced across European countries as •a consequence of the financial crisis. Banks have tightened lending criteria in order to meet capital requirements and avoid future losses. Countries such as Ireland, Spain and the UK, where the credit crunch hit hard have experienced the largest decline. As a result, in the UK, the success rate of bank loan applications has dropped from 91% in 2007 to 65% in 2010

Therefore, over the same period, UK businesses have relied on other sources •to finance their operations and expansion/investment plans. This is visible from the increase of successful loans from other sources, in particular the owners/directors of the business (successful application increased from 81% to 92%), but also family and friends (successful applications increased from 51% to 58%). UK businesses appear more successful at obtaining finance from alternative sources, with the highest success rate of getting financing from owners/directors among the comparison countries

Although, according to the Bank of England (BoE), in Q3 2011, larger firms •with strong balance sheets were generally able to access bank lending, smaller companies still reported difficulties in obtaining finance. The survey on credit conditions undertaken by the BoE revealed that there has been an increase in demand from medium businesses, whilst the demand from corporates and smaller companies was lower due to the lack of confidence in future macroeconomic conditions. Moreover, lenders noted that deposits from businesses had increased over the recent past as some businesses sought to deleverage or postpone investment due to current economic conditions

These results highlight the need for new and more flexible ways of providing •access to financing for SMEs. For the UK, one proposed solution was Project Merlin, agreed in February 2011, under which the top five mainstream banks agreed to lend £76 billion in 2011. However, in the first quarter they only lent £16.8 billion, £2.2 billion short of the £19 billion target. Another solution that has been suggested was that the Government could use its leverage with nationalised banks as a vehicle to trickle down funds towards the real economy

6.5.1 Corporate tax

In the recent years, the UK has reduced its main corporation tax rate, however, some EU and low cost countries are still more competitive

Following the Government’s decision to cut the main corporation tax to •26% from 28% (currently awaiting enactment), the UK has one of the lowest tax rates in the world. The Government plans to further reduce the tax rate to 23% by 2015, which would increase the country’s attractiveness for investment, assuming competitors such as Germany and Netherlands do not reduce theirs further

Having said this, the UK’s current rate is in line with the OECD average and still •higher compared to EU countries such as Ireland, Romania or Poland

“The £150,000 threshold with the 50% taxation is not good for senior/middle managers and

that is a real obstacle to attracting talent.” SME # 9

Comparison of highest personal tax rate

This contrasts with the personal tax rate, the UK has one of the highest marginal rates of personal taxation, which may act as an inhibitor in attracting talent

Following the Government’s decision to increase the highest personal tax rate •

to 50%, the UK is one of the least attractive in the world, with only Netherlands,

Denmark and Sweden having higher rates

This can restrict businesses’ ability to attract talented and skilled people across •

managerial and scientific roles

“Ireland has just delivered a quarter of 1.6% growth. It has happened so because it has very

low corporation tax. The big businesses are there not because of the domestic market but

because of the low tax. That is why the corporations did not move out of the country during

Ireland’s crisis.” Corporate # 8

Comparison of main rate of corporation tax Comparison of highest personal tax rate

6.4 Access to finance 6.5 International tax comparison

Sources: 1. Bank of England. (2001) Trends in Lending, October 2011, 2. Factiva, 3. Financial Times

Country Rate

Sweden 56.6%

Denmark 55.4%

Netherlands 52%

UK 50%

Japan 50%

Ireland 47%

Germany 45%

China 45%

France 41%

USA 35%

Poland 32%

Brazil 27.3%

12.5%

16.0% 16.5% 17.0%19.0% 20.0% 21.2%

23.0% 24.0% 25.0% 25.0% 25.0%25.6%

26.0%28.3% 29.4% 30.0%

31.4%33.2% 33.3% 34.0%

40.0%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Irela

nd

Rom

ania

Hong

Kon

g

Sing

apor

e

Pola

nd

Russ

ia

Switz

erla

nd

Wor

ld a

vera

ge

Sout

h Ko

rea

Chin

a

Mal

aysi

a

Neth

erla

nds

OECD

ave

rage UK

Cana

da

Germ

any

Spai

n

Italy

Indi

a

Fran

ce

Braz

il

US

Sources: 1. KPMG (2011), Corporate and Indirect Tax Survey 2011

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Balance of power shift in the supply chain over the past five years

13%

77%

10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

In favour of FDM In favour of retailers No change

% o

f res

pons

es


Impact of balance of power shift on your company

(19)%

(68)%

(17)%(48)%

(67)%

22% 11%37% 48%

24%

58%

22%

46% 3%10%

(80)%

(60)%

(40)%

(20)%

0%

20%

40%

60%

80%

100%

Turnover Profit margin Technologyinvestment

Contractterms

Paymentterms

% o

f res

pons

es Positive

Neutral

Negative


6.6.1 Balance of power shift (from survey output)

The businesses surveyed stated that in the past 5 years the bargaining power has shifted in favour of retailers

Both corporates and SMEs surveyed agree that the balance of power has •

shifted gradually towards retailers over the past decades. Therefore, in the

supply chain the power now lies with the retailers because of the sheer

scale they achieved through consolidation. (see annex for details of grocers’

market share)

“Without a doubt the retailers have the power and even large companies find it tough to

negotiate with them.”

Corporate # 13

“Most of the times retailers are pretty reasonable. It’s when they are under pressure that you

see what I would call unacceptable behaviour because they need to improve their results and

then everybody has to participate in their promotions.”

Corporate # 13

6.6.2 Impact on FDM (from survey output)

The consolidation of retailers has both negative as well as positive implications for manufacturers

In some cases, the companies interviewed mentioned retailers trying to impose •

contractual arrangements to their advantage by demanding retrospective claims,

reducing prices in store (and then asking food and soft drink manufacturers to fund

these promotions), upfront fees as entry fees to negotiations and late payments.

66% of the companies interviewed stated that the unequal bargaining power

resulted in lower margins

This asymmetry in bargaining power may lead to unfair trading practices, as larger •

and more powerful organisations seek to impose contractual arrangements to their

advantage. Such practices may occur in the supply chain and include, for example,

late payments, unilateral changes in contracts, ad-hoc changes to contractual

terms, upfront payments as entry fees to negotiations

As a result, smaller companies may be obliged to operate under reduced •

profitability, limiting their ability to invest in improved product quality and innovation

Interviewees also emphasised the positive aspects of their relationship with •

retailers, namely the discipline and efficiency that retailers have imposed, which

has pushed out cost and waste from the supply chain and resulted in better

performances in terms of innovation, quality and prices. This has also improved

their international competitiveness

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

drive rapid turnover growth

“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.”

Corporate # 5

“I am keen to stress out that we as a supplier, may see supermarkets as difficult to deal with,

but there is no doubt that some of the reasons why UK manufacturers are enjoying good

margins is because of the discipline that retailers have imposed on them.”

Corporate # 7

6.6 Balance of power in the supply chain 6.6 Balance of power in the supply chain

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6.6.3 FDM bargaining power

Companies with a strong, innovative brand portfolio are more able to negotiate

with retailers

Larger companies are better placed to negotiate with retailers, whilst SMEs •

are more vulnerable. Manufacturers of branded products can somewhat

insulate themselves as they have a relationship with the consumer and, thus,

retailers are more willing to focus the relationship on other aspects beyond

price. However, the brand needs to be differentiated, innovative and constantly

engaging consumers in order to be an effective bargaining tool. Producers of

undifferentiated products, for which brand awareness is lower, are likely to be in

a much weaker position

In contrast, manufacturers of own label products do not have the brand cushion •

and are often put in competition with each other in tenders with the aim to drive

down price. This significantly reduces their margins

The UK FDM is not the only one facing pressures from retailers. In Australia, •

where the retail market is largely concentrated in the Top 5 grocer chains,

the retailers have announced plans for expansion of their FDM market share

through their private label products. However, the Industry Minister recently

announced an attack against the large retailers because he considers that the

retailers’ plans would hurt incentives to innovate among supplier firms and

would eventually restrict consumer choice and hurt suppliers. The Minister also

pointed out the fact that suppliers had privately complained about supermarkets

misconduct for fear of speaking out publicly against their biggest buyers

“It’s all about building brands, value-add and bringing innovations/new product development

that cannot be easily copied by the retailer.”

Corporate # 6

“If you have brands in your portfolio that retailers think will drive their business, then they will

work cooperatively with you. And our job is to make it very clear that our brands can help drive

their business and if we do that properly we get a great reaction.”

Corporate # 5

“In private label it is much more difficult. Brands can give you something proprietary that you

can build on and convince the retailer that you can drive their business.”

Corporate # 5

Access to skills (findings from the FDF/Grant Thornton survey)

75%64%

25%36%

0%

20%

40%

60%

80%

100%

120%

sEMSsetaroproC

% o

f rep

onse

s

No

Yes

Sources: 1. Grant Thornton analysis

“We are always looking for good food engineers and among those that want to work in

the industry there are not many that are very good. Food technology degrees are not

highly regarded, which makes it difficult for food technologists to rise to senior roles in the

organisation.”

Corporate # 3

“It is often the posts requiring relatively high level technical skills that are the hardest to fill.”

BMG Research, quoted by Improve

“Even with relatively high levels of unemployment, we’ve been surprised how difficult it is to

find expertise in certain areas such as engineering, particularly food technologists.”

Corporate # 5

6.7.1 Skill shortages

Although the businesses surveyed stated that in general they have access to people with the right skills, qualitative interviews revealed gaps in engineering and food science

A larger pool of labour is currently available as a result of the recent economic •downturn given higher unemployment and the availability of migrant workers

Qualitative evidence from interviews with FDM executives suggests that •companies have access to sufficient candidates with adequate skills for creative positions (sales, marketing), but struggle to find suitable candidates for engineering and science positions. In particular, companies face issues in recruiting food scientists, food nutritionists as well as technologists and engineers with the ability to adapt complex bespoke automated systems

This is consistent with data showing that there is a shortage of qualified •food scientists and technologists. As a result, one in five food scientist and food technologist vacancies in the UK are hard to fill. According to research conducted by various organisations across the UK, hard to fill vacancies have dropped compared to pre-recession levels. For example in England, vacancies have dropped from 6% in 2007 to 2% in 2010. In England, the highest shortage of skills is in process, plant and machine operatives (47%), in skilled trade (25%) and in technical staff (25%). In Scotland, companies expressed concern about the shortage of qualified engineers and technicians with sector experience, whilst in Wales, the main skills required were bakery and butchery

“The industry has difficulty recruiting in technical and R&D areas, which requires people with

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)

6.6 Balance of power in the supply chain 6.7 Access to skills

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6.7.2 Reasons for skill shortages (from survey output)

The industry’s outdated image leads to a small number of students pursuing food and drink related degrees or apprenticeships and an inability for manufacturers to attract high calibre talent

The main reasons stated for the reduced access to personnel with the relevant •skills and qualifications were a shortage of engineering and food science graduates, but more importantly the industry’s inability to attract the higher calibre graduates, apprentices and experienced workers. Potential employees do not find a career in the food industry attractive enough because they view the food industry less prestigious and innovative compared to sectors such as automotive, engineering, pharmaceutical. Moreover, executives mentioned that the industry cannot afford to pay the same salaries as professional services industries which also hinders the ability to attract the right calibre of candidates. These arguments combined with the low level of apprenticeships and on-the-job training programmes lead to many positions being filled by people with insufficient qualifications and skills

However, the companies interviewed stated that the food and soft drinks •industry is a more stable employer compared to other industries and has a range of roles that need to be advertised so that potential employees, especially young people, understand the wide range of long-term career options available to them in creative, science and engineering areas

In this context, the FDF has launched a campaign called “Taste Success •– A Future in Food” to raise public awareness about the FDM industry contribution to society. The campaign aims to promote the food and soft drink manufacturing sector as a career of choice for new recruits, hoping to engage young people and change the outdated image of the industry. At the 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 the industry in the next few years

However, it is unlikely the industry image will change overnight, and will most •likely require a combination of actions from the FDF, manufacturers and the Government (particularly around the reform of the education system and

support for apprenticeships) in order to improve the industry perception, solve the skills gap and attract higher calibre candidates

Moreover, interviewees pointed out that, in order to remain competitive the •industry needs to upskill its workforce across all levels. Skills needed vary from leadership and operational managerial skills all the way to basic literacy and numeracy for workers on the production floor

However, this is in contrast with the fact that in order to control labour costs, •on the factory floor, the industry relies on migrant workers, especially Polish, as they are willing to work for lower wages. The industry needs to understand and expect higher costs in return for a more upskilled and productive workforce

“Since I joined the industry 20 years ago, we’ve dropped as a sector in attracting young

people. It is hard to make the industry attractive overnight when we compete with sectors

such as IT, finance or creative industries, but we just have to project the right image.”

Corporate # 5

“I think food science used to be bigger in the school curriculum, but it has dropped and the

number for GCSEs in science has also dropped because the public perception of the industry

is low.”

Corporate # 7

“We need a long-term reform of the primary and secondary education system. As a country,

we do not produce sufficiently literate and numerate students going into industry. We’re good

at identifying top performers and giving them the right education and career opportunities but

at the expense of the rest.”

SME # 15

UK food and beverage HE students vs. total HE student numbers

2,650 2,6953,065 3,380

2,362,815

2,306,105

2,396,050

2,547,470

2,150,000

2,200,000

2,250,000

2,300,000

2,350,000

2,400,000

2,450,000

2,500,000

2,550,000

2,600,000

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2006

/07

2007

/08

2008

/09

2009

/10

Total HE studentsNum

ber o

f stu

dent

s

Food andbeverageHE students

Total HEstudents

Sources: 1. HESA (2011), Students in Higher Education

UK food and beverage manufacturing and processing FE

39,401

36,025

34,000

35,000

36,000

37,000

38,000

39,000

40,000

2006

/7

2008

/9

Num

ber o

f stu

dent

s

Notes: a. The definition has changed, therefore the numbers for 2006/7, 2008/9 may not be directly comparableSources: 1. Improve (2010), FDM UK Sector Skills Assessment (quoting ILR, LSC, 2006/07 – 2008/09; SSC Summary Reports (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)

6.7.3 UK food and drink course enrolments (supporting evidence from desktop research)

FDM manufacturers believe that there are not enough students taking food and beverage specific degrees

Over the past decade, the number of students enrolled in higher education (HE) •food and beverage courses has been experiencing ups and downs, with the latest years seeing an increase of c. 27% between 2006/7-2009/10. However, students studying towards a degree in food and beverages still represent only 0.1% of the total student population

According to the website UK Complete Guide to Education, over a quarter of HE •institutions, 44 HE out of the total of 165 offer over 120 university and foundation degree courses related to food and beverages. However, many are not directly relevant for the manufacturing and processing industry as they are related to hospitality, nutrition or are combined degrees with a wide range of subjects from philosophy to drama. In the 2011/12 academic year there are 17 pure Food Science and 7 Food Technology courses offered across British universities

The primary research conducted with FDM executives uncovered the need for •the food and beverage programmes to be less theoretical and more focused on the practical needs of the food and beverage industry

“University degrees are not such a big advantage when hiring someone as graduates tend to

lack the essential practical knowledge.”

SME # 16

“I would like the Government to work with the industry to set accredited courses, but the

industry would get to tailor the curriculum to its needs. This way students would get to build

industry specific knowledge.”

Corporate # 6

An example of how the industry dealt with the need for more specialised skills is •Project Eden; a dairy industry initiative that aims to educate at the college level, train and prepare industry specialists (please see case study overleaf)

During 2006/7-2008/9, enrolments in the 240 further education (FE) institutions •

providing FDM specific qualifications have experienced a decline

6.7 Access to skills 6.7 Access to skills

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Project Eden – case study

Project Eden is the name of a programme led by the dairy industry, supported by the National Skills Academy for Food and Drink and Dairy UK, which aims to enable UK based companies to train their staff and prepare industry specialists and tomorrow’s dairy leaders. The project was initiated by six dairy companies, namely Arla, Robert Wiseman, Müller Dairy, First Milk, Dairy Crest and Milk Link.

Following extensive development by an industry steering group, a dedicated state of the art dairy training facility has been developed at Reaseheath College along with a new curriculum designed to provide employees with a broad education in dairy over three years with a combination of on and off the job training.

The training programme covers all aspects of dairy technology including practical hands-on craft skills, key science principles associated with dairy and process improvement techniques required to run an efficient modern dairy operation. The curriculum has been designed by the dairy industry to reflect what is needed by the industry currently and in the future.

The programme is about more than just learning the skills to work in dairy – it is about developing employees with a passion for dairy who see the industry as a career of choice and who will develop both expertise and a real commitment to the industry.

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 from leading equipment suppliers, and now has the appropriate equipment to support learning.

Employees will qualify from the programme with a Foundation Degree that will ensure they both value the quality of the learning and are more committed to complete the programme.

The programme has already been running for the past three years and participating companies state they have already seen returns on their investment.

Sources: 1. The case study above has been compiled based on the information available on the website of the National Skills Academy for Food & Drink

“We decided to come together and develop the programme after we researched and

identified the skills gap in the industry, and the fact that none of the six dairy companies could

effectively afford to run the depth of quality course needed.”

Müller Dairy

“Even though the course is focused on food science and engineering, students also develop a

commercial understanding of the dairy market and products.”

Müller Dairy

UK food and soft drink apprenticeships starts

387 400 417

552 378 262

5932 35

2435 117

2,5001,022

845 831

2,500

0

500

1,000

1,500

2,000

2,500

2006

/7

2007

/8

2008

/9

Num

ber o

f app

rent

ices

hip

star

ts

UK

Northern Ireland

Scotland

Wales

England

Notes: a. According to the FDFSources: 1. Improve (2010), FDM UK Sector Skills Assessment (quoting ILR, LSC, 2006/07 – 2008/09; SSC Summary Reports (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)

Comparison of total apprenticeship starts (across industries not food specific)

224,800 239,900

1,594,167 1,611,000

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

2007

2008

Num

ber o

f app

rent

ices

hip

star

ts

England

Germany

Notes: a. England figures are for fiscal years 2007/8, 2008/9 Sources: 1. Department of Business, Innovation and Skills, 2. Statistisches Bundesamt Deutschland

6.7.4 Apprenticeships

The concerns expressed by the businesses surveyed around the decline of apprenticeships can be supported by recent statistics. But recent Government and industry pledges are expected to double apprenticeship numbers and put a greater emphasis on learning skills on the job

The number of UK food and soft drinks apprenticeships declined from 1,022 to •

831 (a 19% decline) between 2006/07 and 2008/09. However, during this period,

England and Northern Ireland increased their intake whilst Wales and Scotland

declined. In Wales apprenticeships went down from 552 to 262 (a 53% decline),

while in Scotland they declined from 59 to 35 (a 41% drop). Although England

experienced a more modest increase of 8% over this period, its share of the

total apprenticeships has increased from 38% in 2006/07 to 50% in 2008/09.

This declining trend has been reversed in 2009/10 when the total number of

apprenticeships doubled to 2500 (according to Improve) driven by among

other things the Scottish initiatives such as the Level 2 Modern Apprenticeship

framework and funding made available for learners over the age of 20

The companies interviewed as part of this study pointed out the strong need for •

apprenticeship programmes to educate people on practical business issues and

develop a workforce with deep knowledge for specific food sectors (e.g. dairy)

We were unable to obtain the total UK apprenticeship numbers across industries. •

However, whilst Germany offered more than 1.6 million apprenticeships in 200

England only offered 15% of that with c.240,000 apprenticeships

The UK government has announced its commitment to deliver an extra •

250,000 apprenticeship places by 2015 across industries. Although, this may

significantly increase the number of apprenticeships compared to recent levels,

the UK would still lag behind Germany where apprenticeships are one of the

pillars of the economy

6.7 Access to skills 6.7 Access to skills

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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

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

“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

6.7 Access to skills

Section 7 The role of Government in optimising growth

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During the FDF/Grant Thornton survey and follow up interviews, businesses •

mentioned several main areas where the industry requires the Government to

provide a positive business environment in order to maintain its performance

and encourage sustainable growth. Our analysis also includes existing or

proposed Government initiatives which address some of the issues expressed

during the surveys/interviews

Food and drink manufacturers identified the tax system as the main area in •

which the Government can provide support. Despite Government plans to

reduce corporate tax rates, businesses believe the UK is not competitive and

faces strong competition from both developed and emerging markets

Businesses view labour legislation as costly and have emphasised the •

importance of flexible and streamlined employment regulations in order to help

manufacturers grow

Some Government imposed regulations and the ‘red tape’ associated are •

considered cumbersome especially for SMEs who do not have the resources to

deal with the administration required

Education reform is of major importance to the FDM sector as a means of •

gaining improved and appropriate access to skills. In addition, businesses

would like to receive Government support to revitalise apprenticeship schemes

which they perceive as essential for securing a future workforce with industry-

specific skills

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

FDM businesses highlighted the need for the Government to re-engage in •

discussions with international organisations for the removal of trade barriers as

well as the need for a food policy that clearly addresses long-term issues such

as food security

SMEs in particular requested more support for their export efforts. Specifically, •

Government bodies could be better utilised to provide them with more effective

guidance and advice on the technical, administration and logistics processes

associated with exporting to specific markets

Businesses would welcome Government support in the enforcement of the UK •

Grocery Code of Practice

Areas of Government support (multiple choice survey question)

3.83.4

3.6

3.13.4

3.8

3.0

3.6 3.6 3.7

0

1

2

3

4

5

Taxa

tion

R&D

Labo

ur la

w

Educ

atio

nre

form

Trai

ningSu

ppor

t nee

ded

scor

e (1

low

est,

5 hi

ghes

t)

Corporates

SMEs


The single most important area of Government support

(open ended survey question)

50%

25%

0% 0%

13% 13%

23% 23%27%

19%

8%0%

0%

10%

20%

30%

40%

50%

60%

Tax

brea

ks/in

cent

ives

Cutti

ng re

d ta

pe

Empl

oym

ent l

awfle

xibi

lity

Educ

atio

n &

train

ing

Rem

ove

trade

bar

riers

&in

cent

ivis

e ex

ports

Focu

s on

inno

vatio

n% o

f men

tions

Corporates

SMEs


7.1.1 Areas where support is needed (from survey output)

Businesses surveyed look for lower taxes, flexible labour markets, excellence in education, incentives for training as well as an overall reduction in the regulatory burden

Taxation is cost to businesses, limiting the resources available for investment. •

Therefore, the food and soft drinks manufacturing sector and UK businesses

overall cannot achieve sustainable growth if the tax system does not encourage

investments and allows businesses enough margin to reinvest

In this context, it is not surprising that the FDF/Grant Thornton business survey •

identified taxation as the most important area where businesses would like to

see change. Tax was rated as the most important area of Government support

both in the closed-ended multiple choice questions as well as in an open ended

questions in the survey

Labour law was also seen as an area of change, with businesses pointing out •

that the law is both complex and inflexible and recent changes such as the

minimum wage increases and the Agency Workers Directive will drive costs up.

The businesses surveyed see the ‘hire & fire’ procedures as too cumbersome,

making it difficult to replace underperforming employees

The reform of the education system and training giving access to more qualified •

and skilled workers are also important. But these are areas which are more

important for smaller companies, possibly because larger businesses can more

easily attract higher calibre workers and have the resources to upskill them

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

operations. Businesses mentioned the vast amount of compliance regulation as

well as cumbersome procedures that increase administration, impact cost and

prevent them from focusing on their core activities

7.0 Section summary 7.1 The role of Government in optimising growth

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Companies point out that the legislation is becoming more complex and is •

proliferating rapidly. Moreover, there is no level playing field within the EU,

as the UK is an early adopter and implements regulations, whilst some EU

Member States do not necessarily enforce regulations in a timely manner

allowing them to operate at lower costs

This is consistent with the low ranking (89th out of 139) that the UK achieved •

in the World Economic Forum competitiveness ranking for regulatory burden

on businesses

Other areas identified during the qualitative interviews were the development •

of a joined up food policy. The recognised priority in this area are for the

industry to be under the clear responsibility of a ministry, rather than falling

between DEFRA and BIS to enable funding and coherent strategies on food

security and Exports

“A tax regime that incentivises capital investment and does not penalise consumer purchases

(e.g. “fat tax”) and a low corporate tax.”

Corporate # 15

“Cut the red tape and the cost of doing business.”

SME # 17

“If we have to compete within the EU and globally, we need similar tax systems, such as

corporation tax. In this field, Ireland is a real competitor and they have a FOOD HARVEST

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

training and efficiency.”

Corporate # 2

“What we want is minimal government i.e. no false subsidies, no punitive taxes and no tax

advantages for large companies who are highly geared.”

SME # 18

“Simplify legislation for tax and employment rights.”

SME # 19

“Encourage companies to export with grants and advice.”

SME # 18

“The Government should focus on the wider global economy rather than being focused on the

UK. Further reduction of trade barriers and focus on free trade is the best way to see growth

on a global basis.”

Corporate # 4

“The best thing the Government could do is a bonfire of regulations and reduction in the

size of the Government at central and local level, which currently create additional

adminisrative burdens.”

SME # 14

“Better quality school leavers or relaxed immigration controls i.e. adequate longterm supply of

skilled workers.”

SME # 20

“Reduce labour red tape in hiring and firing staff and increase opportunity to recruit from non-

EC labour.”

SME # 12

Feedback from primary research on the role of Government

7.1 The role of Government in optimising growth 7.2 Education and training

Topic Issue Government actions based on FDM feedbackBasic education Workers (including native UK workforce) do •

not have basic numeracy and literacy skills which makes it difficult for manufacturers to upskill workers and improve productivity

The businesses surveyed emphasised the need to reform the primary and secondary education system to improve •overall literacy and numeracy

Education linked to business needs

The companies surveyed view the current •education system as too theoretical and removed from business realities

Moreover science and engineering degrees •are vital for the FDM industry, but the number of students pursuing them is relatively low

The Government has announced it plans to strengthen its strategy for promoting science, technology, engineering •and mathematics (STEM) skills. In this context, the FDM industry should explore how it can engage with universities to develop/reform existing food and drink manufacturing degrees to reflect industry needs

The Government has also set up investment funds for skills (e.g. the Growth and Innovation Fund (GIF), Employer •Investment Fund (EIF)) and needs to ensure that they are allocated effectively to reflect needs of FDM as a key contributor to the UK economy

The Government should also encourage collaboration between universities and businesses. Moreover, the •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 exposed to sector specific issues

Incentivise apprenticeships Historically the number of apprenticeships •was low as businesses were not incentivised to invest in them. Moreover, modern British society views the university path a pre-requisite for a successful career

However, businesses believe •apprenticeships can add real value for both employees and businesses

The Government has launched a new £75 million programme of targeted support to help smaller employers access •Advanced Level and Higher Apprenticeships. This is likely to support FDF members who want to contribute towards FDF’s Apprenticeship Pledge to double the number of apprenticeships in England and Scotland by the end of 2012

However, a more encompassing programme is needed to incentivise the take on of apprentices•

Apprenticeships need to be reintroduced as an alternative education path and must be effectively marketed by the •industry and the Government to attract high calibre candidates

Promote the industry as a career choice and help recruit people across the value chain

The food and drink manufacturing industry •has an outdated image and therefore the industry finds it difficult to attract high calibre people

Young people do not consider it a career of •first choice

Shortage of engineers and food •technologists

BIS has launched a new initiative: See Inside Manufacturing. This is being piloted by the automotive sector whereby •companies are opening their doors to young people to help change the perception of careers in the sector. This programme will extended to the whole manufacturing sector in 2012. The Government and industry must ensure that the programme:

– Promotes FDM as a long-term career choice with more job security compared to other sectors

– Publicises the varied spectrum of professions available from food scientists to marketers

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“Companies can carry out training and apprenticeships better than the Government. What

they need is an incentive such as three years payback of the tax and national insurance for

each trainee. That way companies can have the cash to accelerate training.”

Corporate # 8

“We need a reform of the primary and secondary education system. As a country, we are not

producing literate and numerate students going into industry. Plus our standards are below

other European countries’.”

SME # 15

“We still have people that actually do not know how to compose a sentence, verbally or

written. Because of the changing population base, these people are often using English as

their second language but not always. Some of the English native speakers still use poorly

constructed sentences. They cannot communicate verbally and cannot add simple sums.”

SME # 9

“If schools could put emphasis on reading, writing, arithmetic, concentration, verbal

communication skills, written communication skills, basic hygiene and looking after yourself

and cooking, I think it would make a difference to us.”

SME # 9

“The Government needs to do more on tying up education to business .”

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

“I am a strong supporter of the German education system with the apprentices working with

the company for many years, getting hands-on experience. I would like to go back to the

education system and train 18-19 year old school leavers with the promise of building strong

skills in 2-3 years time and at the same time have a qualification degree. However, for the

companies to do so, they will need some Government support to help with the investment

needed. Some of the businesses will not be able to afford this and will need to be subsidised

by the Government (like in Germany).”

Corporate # 10

“In order to develop more food specific skills, you need to start at the education level. The

children need to start thinking of food as a career in school. Over the last 20 years, FDM has

been undermined compared to other manufacturing sectors and obviously other services

sectors (e.g. banking) but FDM remained the biggest manufacturing sector and is in a good

position to become more attractive in the future with the uncertain times under way.”

Corporate # 11


7.2 Education and training 7.3 Food security

Topic Issue Government actions based on FDM feedbackRaw material supply As food demand is growing on a global •

scale and production costs are rising, it is important for the UK to develop more resilient supply chains

The Government should develop a clear understanding of UK’s long term needs in terms of commodities and food •supplies and the potential for sustainable increases in domestic production to contribute to greater security and resilience in the supply chain

In light of this, the Government should consider putting in place a strategy which prioritises sustainable food •production including the development and adoption of new technologies (e.g. genetically modified foods) and measures which incentivise productivity and resource efficiency

The Government should consider putting an agenda in place now that sets clear goals over the coming decades•

Commodity price volatility Commodities prices have been rather •volatile over the last years. According to our interviews, the volatility is not driven only by market fundamentals but also by speculators. As a consequence, FDM businesses as well as consumers have been affected by sudden price increases

According to BIAC, OECD’s business committee, enhancing transparency in derivatives markets will benefit investors •and allow them to make informed decisions. The potential publication of positions held by commercial and non-commercial investors, setting limits on price movements and stock positions may be amongst measures that will help with price fluctuations and that the Government should carefully review

However, commodities prices are an international affair and the Government should lobby for an effective resolution •alongside other Governments

Public education There is a public perception that the •industry must remain ‘traditional’, make use of conventional agricultural resources and that the use of new technologies such as genetically modified foods or nanotechnology might be harmful

The Government should openly acknowledge and promote the wealth of independent and peer-reviewed studies, •including extensive work done by the European Food Safety Authority (EFSA) on the safety and benefits of biotechnology applications in food

Government organisations such as the Food Standards Agency should launch an information campaign to dispel •myths amongst consumers

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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

produce increased output and crops that are more disease resistant.”

Corporate # 7

“The Food Standards Agency, which looks after consumers’ interests in terms of food and

drink, have declared genetic modifications are safe, but they haven’t declared it in a way that

you and I as a consumer would ever hear that...”

Corporate # 7

“In terms of sustainability and food security, the Government should take the lead and correct

any misconceptions around genetic modifications. The industry, both manufacturers and

retailers, cannot convince consumers about it, but the Government can. Consumers trust the

Government on these issues. People tend to think genetically engineered food is unhealthy

but USA has been consuming it for 20 years without any negative effects.”

Corporate # 1

“We need a joined up policy from farming to biotech all in one body.”

SME # 7

“In terms of raw materials, there is a need for a food policy. A long term view of the food is

needed; what’s being produced, what needs to be imported and whether it’s been secured.

Need to understand the nature of the supply chain. Many companies like ours depend on

materials that come from emerging markets. EU, through subsidies, supports biofuels that

divert raw materials that can be used for food to fuels. It makes sense to have clean energy,

but a clear food security agenda needs to get in place.”

Corporate # 1

“The Government needs to resolve the miscommunication between the Defra and BIS and

design joined up policies that will help improve the industry profile, help with the skills agenda

and R&D investment… Last but not least, food security and sustainability are not currently

being clearly addressed by Government policy. ”

Corporate # 1

“Our ability to manage the price of raw materials will be based on our ability to fundamentally

produce more and fulfil the demand. GM Crops have massively increased their output in

South America yet, at the same time in Europe we have this absolute paranoia.”

Corporate # 8

“In the US, the Government has taken action to address the imbalance in the commodities

industries. But in the UK there is no Government action; it is a completely free market. I do not

know how the Government can fix it because they can’t control the market, but they must do

something because it is an area that the industry is grappling with.”

Corporate # 5

“There is a big challenge in consumer acceptance of nanotechnology and biotechnology.”

Corporate # 15

Topic Issue Government actions based on FDM feedbackCorporate taxation UK’s corporate taxation remains at high •

levels compared to the world average and is less competitive than other rival FDM countries, such as Netherlands, Poland and Ireland

Moreover, through advancements in •technology and an increasing degree of globalisation, larger companies that wish to trade within the UK do not have to be based in the UK any longer and can remotely manage their UK business from tax-friendlier locations

The Government is already planning to lower the tax to 23% by 2015. However, it needs to ensure the UK remains •competitive with other countries that could potentially attract FDM businesses away from the UK if other cost bases keep increasing disproportionately in the UK (e.g. raw materials, labour costs, etc)

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 up to a minimum threshold of profits similar to that introduced for personal income tax. Such a tax would give SMEs more room for re-investments and more cashflow available for their daily operations during this period when access to finance has been restrained

Import tariffs Many companies who need to import •their raw materials state they are being less competitive to their international counterparts who source their raw materials without any state taxes added on them. Moreover, following the spike and volatility in commodities prices during 2007-2010, companies cannot afford being burdened by additional costs on commodities

The UK Government, which generally acts as an advocate for free trade, ought to review the tariffs applied across •some key commodities that are widely used in the UK and lobby for their reduction by the European Commission

Moreover, discussions around these topics have long stalled at the WTO level and the Government should seek to •accelerate them. Tariff reductions across certain commodities will help improve business performance, lower the products’ prices at the consumers’ benefit and make UK products more competitive internationally

Personal income taxation Companies expect that it will become •increasingly difficult to attract talent in the UK both in the managerial and science fields due to the high income taxes having been introduced

Through the introduction of the 50% tax for wealthy individuals, the UK stands out as one of the highest tax nations •in the world. Even at the lower incomes, the NI contributions are further squeezing individuals’ incomes beyond their regular tax payments. At these rates, the UK risks losing its status of attracting international talent to other developed countries with more favourable tax conditions or by emerging markets that offer new opportunities and potentially better future prospects

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7.4 Taxation

“There is no real incentive to be based here with the 50% tax rate. In fact, it’s not 50%; it’s

significantly more than that because you need to add national insurance contributions on top

of taxes. It’s world leading tax rates that discourage decision makers from moving to the UK

and who can do the same job whether based in the UK, China or India. Our offices around the

world are full of telepresence, the next stage of teleconferencing.”

Corporate # 8

“We shouldn’t have to pay tariffs to get basic raw material; it’s crazy especially when my

competitors don’t have to pay any tax and that is where I would like the British Government to

support us in Europe.”

Corporate # 13

“Taxes are too heavy for small businesses. The previous Government had tax exemptions for

below threshold revenues/profits.”

SME # 1


7.5 Incentivising exports

Topic Issue Government actions based on FDM feedbackRemoving trade barriers According to our interviews, there are still a •

number of trade barriers internationally that increase costs and complicate business for export oriented FDMs

BIS is currently planning to press in EU negotiations for the opening of market access overseas, however, the •focus may be in the service sector rather than manufacturing and FDM in particular. Moreover, UKTI will identify opportunities and barriers faced by UK companies operating in high growth markets and ensure that these barriers are eliminated in negotiations with each market separately

In addition to the reduction of import tariffs (which were already mentioned in the previous section), the Government •should consider becoming more proactive with freeing trade barriers in place by other countries. Certain countries require imported food products to consist of domestic raw materials, whilst others do not accept foreign products at all unless they are manufactured domestically

By bringing the food agenda back to the Government’s attention, better negotiations and more effective lobbying, •the Government may be able to negotiate better trading terms with these nations

Export advice and support In many cases, FDM businesses and SMEs •in particular are not aware of the beginning-to-end actions they need to take in order to export and also need administration support to navigate around the rules of the country they are planning to export to

Furthermore, SMEs are currently lacking •the access to finance needed to fund their export goals

At the moment, UKTI has announced its plans to deliver a new package of support to help SMEs that aim to enter •overseas market without much further detail released. Also, the Agri-Food and Drink Export Forum that was recently established including an involvement of UKTI and industry representatives is a good example of collaborative action to support growth

In addition, support can be given in a number of areas:•

– advising and validating the plans of a company to enter a new market

– putting the businesses in touch with UK consulates who should be trained to provide them with greater details and a better picture of the market. Moreover, the consulate’s websites and databases should be better utilised to provide local information and general advice

– directing them to the right local and foreign bodies in charge of administration

– potentially connecting them with foreign distributors and retailers and assisting them with the logistics of exporting

The Government will need to energise UKTI to lead the delivery of services particularly to SMEs. An injection of •funding needs to be ensured to support the increased output and other investments associated with exporting and entering new markets

Marketing support Within the context of a globalised market •with intense competition, SMEs’ products as well as British food as a whole need to be better profiled and marketed more effectively abroad

A few businesses interviewed mentioned the co-sponsoring of international food exhibitions as a good example •of promoting the image of UK food. Currently, the UK is lagging behind in these food fairs compared to some of its direct European rivals. By partially funding such missions, the Government will allow more UK companies to participate and will give them more opportunities to demonstrate their products in new markets, whilst showing a stronger UK presence in the food field

Sources: Food and Drink Federation (2011), Research conducted by FDF

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7.5 Incentivising exports

“We just want the Government to help break down barriers and make introductions as we

enter into new markets.”

Corporate # 5

“There are still barriers and the Government needs to address them. For example in Canada, if

you sell products that contain wheat, they have to contain Canadian wheat only. We don’t use

Canadian wheat anywhere else, so we make special products for the Canadian market and

that drives up costs.”

Corporate # 5

“Global companies shouldn’t need Government help to export. Spending public money should

take place where the market needs it such as for SMEs and less mature businesses.”

Corporate # 4

“An area where Government support is needed is incentivising exports. However, since there

is no direct benefit for the Government from exports, it’s moved down to the low priority list.”

Corporate # 10

“Help is needed with administration and shipping process. Some sort of advising body

providing information and advice.”

Corporate # 11

“One of the sad things which happened with the last Government is that Food From Britain,

which was a sort of quango that assisted British food companies with exporting, has pretty

much been dismantled and that’s a shame particularly for non-multinationals and SMEs.”

Corporate # 3

“The administration, regulation and paper work associated with exporting are causing

difficulties in exporting. I know that 5-6 years ago, the Canadian Government had

appropriately designed its consulates’ websites across South America so that the Canadian

companies could assess in detail the market and opportunities and could easily identify where

to go for detailed advice on exporting goods to South America. I found that much more useful

than anything I could find from the UK Government.”

SME # 21

“The Government should offer grant to market products abroad; direct funding on marketing

material or a contribution towards store tasting.”

SME # 5

“In an international exhibition abroad, there were only two companies from England. The

German section was huge, which must have cost £0.5 million to set up with chefs cooking,

two floors, etc... The Australian Government pays 50% of the costs for the exhibitors and the

UK nothing.”

SME # 5


7.6 Regulations

Topic Issue Government actions based on FDM feedbackLabour law flexibility Labour law is cumbersome with over 160 •

employment regulations that businesses need to comply with

Businesses understand that some regulations are EU driven and it may be hard for the Government to make •quick changes

However, businesses have emphasised the importance of flexible and streamlined employment regulations in order •to help manufacturers grow and by extension create further jobs

‘red tape’ The costs associated with regulation •compliance are cumbersome especially for SMEs who may not have the infrastructure to deal with the required paperwork and administration

This problem is exacerbated by frequent •regulation changes and the need to go through the same complex and sometimes overlapping implementation procedures, resulting in companies being crippled by paperwork

Moreover, the UK is an early adopter •of EU regulations, but that puts the UK manufacturers at a cost disadvantage because some countries, particularly in Southern Europe do not necessarily enforce the new EU regulations

The complexity of procedures is an •issue also at the local level, where some businesses emphasised their plans have been blocked or delayed by local councils especially around building regulations

As part of the ‘Red Tape Challenge’, the Government has undertaken a review of all legislation in the food, beverage •and hospitality sector whereby 68 food safety and labelling regulations were reduced to 28. However, in the food safety area, the pieces of legislation that are listed to be scrapped are rather obsolete and/or already covered in more recent pieces of European legislation

Therefore, the Government should consider:

– proving it is serious about the ‘Red Tape Challenge’ by showing concrete changes on the ground around the issues addressed in the first phase of the ‘Red Tape Challenge’ (e.g. employment law, pensions, health & safety, environmental regulations, equalities legislation, company law)

– halting the tide of new regulation with a one-in-one-out policy for all domestic rules (note this does not apply to EU Directives)

– increasing the pressure on the EU to focus on reducing regulation

– increasing the pressure at EU level to ensure a level playing field and enforce regulations uniformly across Member States

– making the Department of Communities and Local Government part of the ‘red tape’ challenge and review rules such as building regulations

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7.6 Regulations

“I think the whole labour market place in the UK does not make it easy for us to be flexible.

For example, we’ve got the Agency Workers Directive now, which is a real issue for us. I really

think it disadvantages us. As we try and staff up and recruit, we don’t want to be constrained

by having to keep people until we know that a particular initiative has taken off.”

Corporate # 6

“Also, easing the red tape would help as a Government project. In the HR field, there are a lot

of time consuming non-value adding activities.”

Corporate # 14

“The Government keeps changing pension contribution regulations which just add cost.”

Corporate # 14

“Make sure there is a level playing field in terms of the impact of EU regulations. We’ve

got compliance of 80-90% in the UK France, Germany and compliance of around 40% in

Mediterranean countries such as Spain and Italy. You’ve got huge gaps in compliance costs,

so the German, French and UK agricultural ministers should fine the countries that don’t adopt

regulation because at the moment we’re all competing with deregulated supply in Europe.”

Corporate # 3

“For SMEs under 100 employees, freeing up employment and Health & Safety regulation are

the biggest area where the Government could support them. They are crippled by paperwork,

legislation. The system started out with the right intention of protecting employment rights

but when relationships within a company have broken it’s very difficult to fire somebody (e.g.

long notice periods and costs associated, bookkeeping, paperwork which are all expensive for

small companies and have an effect on growth).”

SME # 7

“Local Government rules must be simplified as they make life too complex for people trying to

build a factory in the UK.”

SME # 11


7.7 R&D and innovation

Topic Issue Government actions based on FDM feedbackTax relief and tax credits Food and drink manufacturers need to •

innovate in order to compete internally and internationally, but the cost of capital is sometimes prohibitive because of the risk associated

Across industries, the majority of intermural •R&D expenditure is made by larger companies. SMEs’ desire to invest is held back by the very high costs associated with R&D and their lower margins

SMEs find the process of claiming R&D tax •credits very burdensome and have to bring in external consultants to help them submit applications

Companies may not qualify for R&D tax •credits relief or tax credits as authorities do not recognise the type of innovation specific to food and drink manufacturing

The progressive reduction of corporate •tax (to reach 23% by 2014) is a welcome measure, but it will also lead to lower R&D tax credits which will become les competitive

The Government has put in place R&D tax relief and tax credit programmes, which give more generous terms to •SMEs in order to incentivise their R&D investments. SMEs may claim R&D tax relief for 200% of the qualifying expenditure, increasing to 225% for expenditures incurred on or after the 1st of April 2012. Large companies may claim R&D tax relief for 130% of the qualifying expenditure. Moreover, SMEs who have made a loss and would not benefit immediately from tax relief can receive a cash payment or tax credit

However, the Government should clearly define and widen the definition of R&D activities to include improvements in •products, technology, packaging, not just blue sky research which is rare in food and drink manufacturing

Also, HMRC staff could benefit from specialist training to understand the type of innovation taking place in the food •and drink industry and, therefore handle claims effectively

The R&D tax credit claims process should be simplified as the costs currently involved reduce the value of the incentive•

Companies investing in R&D should be compensated for the risks taken and not suffer a reduction in tax credits due •to the drop in corporate tax

R&D grants Companies interviewed would like to •have access to R&D grants, but even when these are available the procedures to access grants are cumbersome and discourage them

Empirical studies show that R&D tax incentives increase long-term R&D investments whilst subsidies only benefit •a limited number of companies , therefore the Government should use them as the main method to incentivise innovation investment. However, grants are also necessary for smaller companies who may not have the resources to conduct R&D otherwise

In this context, the Government should streamline the procedures to access R&D grants and ensure that these are •available across industries not just for those considered R&D intensive

Research and innovation strategy

BIS will publish a food and agriculture •Research and Innovation Strategy the content of which is unknown. But the previous Government activity in the sector has been focused on the agriculture part of the value chain

The Government should consider developing a food policy from farm to fork. In this context, its research and •innovation policy should also touch on the manufacturing and processing of food, in particular around channelling funds and encouraging knowledge transfer

Sources: 1. KPMG (2011) Tax Incentives for R&D in Switzerland

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7.7 R&D and innovation

“Encouraging knowledge transfer from higher education institutions would help drive NPD.

Businesses should work with institutions to apply technological learnings and innovate. I don’t

really have any suggestions on how to accomplish this, but I know it is not a quick win.”

Corporate # 4

“Getting grants from the Government for R&D projects would help because you’re obviously

taking a risk, but in reality we’ve tried it and it is very difficult. If there is any funding available, it

is so bureaucratic it’s hardly worth pursuing.”

Corporate # 12

“Taxation can be quite conducive to entrepreneurship and innovation. The Government could

help by making more tax credits available for R&D.”

Corporate # 10

“There is a scheme out for tax allowances for R&D and we are pursuing that at the minute but,

as far as we understand, it’s just for ground breaking ideas which don’t apply in our case.”

SME # 13


7.8 Balance of power

Topic Issue Government actions based on FDM feedbackBalance of power Businesses have argued that the •

Government and the EU have acknowledged that the lack of rules governing commercial relations, or their poor application, can affect the balance of power between farmers, ingredient suppliers, manufacturers and retailers. However, the Government/EU take a more holistic view and are also preoccupied with the final price consumers pay for food and soft drinks. Therefore, they have not taken prescriptive actions against parties across the value chain that use unfair trade practices

The Government is looking to reform and further invigorate the UK’s competition framework•

FDF is urging the Government to implement an effective Groceries Code Adjudicator to monitor and enforce the •Grocery Supply Code of Practice – one which will initiate investigations on the basis of credible information from trade associations which exist to represent companies and has the ability to impose financial penalties from the start of its operation

“We just have to be as competitive as we can, that is all we can do. I don’t think anything will

change the power of the supermarkets. Why would the Government want to change the good

deal that the British consumer has had in the past 10 years by having access to cheap food?”

SME # 8

“Free and fair competition is the key to a healthy market and it is right that there should be an

enforcement body to make sure that consumers are getting the best value for money.”

Consumer Minister Kevin Brennan quoted by the BBC on the 4th of February 2010

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Section 8 Feedback from international federations

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Brazil Canada France Ireland Spain

Performance of FDM in the country over the past few years

Growth drivers

The Brazilian FDM sector •is growning consistently

The sector has •experienced average growth of 3.6% y-o-y between 2005-2010

Production rose by 4.4% •and sales by 2.8% during the same period

The growth is primarily •driven by immigration and ageing population. The manufacturers are responding to these changes in demographics by introducing new products (e.g. smaller portions, H&W products for the ageing population, ethnic products for immigrants)

Moreover, given the •immigrants’ high education levels, many attain well-rewarded jobs which translates in higher demand for better quality products and helps drive FDM value

The sector returned to •growth in 2010 after a 7% decline in 2009

The French manufacturers •see the export market as a main growth driver as globalisation transformed EU into a local market

Moreover, innovation •within niche high-value added products is an area that FDM can exploit in order to compete in international markets

The FDM sector had a •mixed performance

Population growth was •the main driver of internal market growth, but migration and consumer focus on value following the recession have resulted in a decline

Exports also suffered •given the decrease in demand and less favourable exchange rate, but show signs of recovery

Asian markets are seen as •a significant growth region with demand for protein and Western products

Health agenda is also •expected to drive growth given ageing population

Another driver is expected •to be the strive to reduce dependence on imports which should increase the domestic market demand

However, given the less •favourable exchange rate, the industry’s priority is to reduce its cost base to remain competitive

The sector has had a •positive evolution and is the largest manufacturing sector in the country

Additionally, it is the only •sector that maintained its performance during the recession

Historically, exports in •developing countries and the US were supported by the mix of price, quality and innovation which made Spanish products competitive

Going forward, exports •are the main instrument FDM can use to support the country’s economic recovery

The domestic market is •the biggest share of the industry and is growing driven by increased income levels

The country has not •fully exploited export opportunities

8.1 International comparison based on interviews with trade associations

Sources: 1. Primary research with trade federations in Brazil, Canada, France, Ireland and Spain; 2. Research sources available on the websites of the food federations above (individual sources quoted in bibliography)

8.0 Section summary

This section provides an overview of the issues discussed with international •

food federations in the comparison countries: Brazil, Canada, France, Ireland

and Spain

The topics approached were: •

– An overview of the FDM sector in each country;

– The main growth drivers;

– The competitive advantages of the FDM sector in each country;

– A high-level comparison of the FDM sector in

the UK and the respective countries;

– Challenges the FDM sector is confronted with in each country; and

– The role of Government in optimising growth

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8.1 International comparison based on interviews with trade associations 8.1 International comparison based on interviews with trade associations


Competitive advantage

Comparison with the UK


Challenges / barriers of FDM in the country

The role of Government in optimising growth

Brazil is relatively self-•sufficient having access to locally sourced raw materials at better prices and quality in comparison to other markets

This gives the country a •cost advantage

The country’s lack of •adequate infrastructure is a barrier to growth

Education and access •to technical skills as new recruits are not well equipped for doing the job and need six months of training to get them ready for work

Canada has all the •ingredients for a successful agro-food sector such as vast areas of arable land, water reserves and an educated workforce

However, that has •not materialised in a competitive advantage at least against the US, its neighbour and biggest trading partner

The biggest barrier to the •sector’s growth is the outdated regulatory system

For example, there is no •acceptance of mutually recognised science which means that innovative products that make health claims recognised by the EU or FDA are not necessarily accepted in Canada and manufacturers need to invest in R&D to prove the point in Canada. This results in significant approval delays and increased costs

Canada’s population is •half that of the UK, but it is spread over the 2nd largest land mass in the world and as a result the business is very different in terms of distribution of goods. Plus it needs to deal with the requirements of bilingual labelling

Similarly concentrated •retail market (5 players with 80% market share), thus facing similar pressures from the trade

More regulation enforced •on manufacturers compared to the US which bring Canada closer to the UK in terms of regulatory environment

The Government should •modernise the regulatory environment and work towards eliminating ‘red tape’ at the US border

The second largest issue •is the balance of power in the supply chain, where there is a need to ensure that relationships between retailers and manufacturers are fair and reasonable trading practices

Canada does not have a •long-term food policy which the Government can drive to generate growth for the processing sector

Historically the main EU •exporter with a strong agricultural sector, but losing its competitiveness to Germany. This is due to the fact that medium-sized companies are not financially strong enough to pursue export markets

The industry is very •fragmented, with medium size businesses not financially strong enough to invest in innovation and access export market. However this is not just a FDM issue, as it is reflected in the structure of the total French industry

France has traditionally •had a strong agricultural sector and better availability of raw materials

France has a strong food •culture

The Government put •industrial policy back on the agenda. In this context, it created a strategic committee, in which eleven industrial sectors participate including FDM. The objective of this committee is to consider about the future model of the industry, the opportunities and solutions which can add value. The committee will present its recommendations to the Ministry of Industry and Agriculture at the end of 2011

Product quality is high •as manufacturers invest in technology, R&D and health standards

EU statistics suggest •GVA per employee is high

Strong R&D driven by •significant investment was made in human resource capability and lab equipment

FDM need to control •domestic costs and increase innovation to improve productivity and generate export led growth given the appreciation of the euro and the fact that two thirds of Irish exports are exposed to currency risk (exports to the UK and non-eurozone countries)

UK stronger in branding •and packaging

Ireland was traditionally •more focused on the primary sector, but is moving up the value chain

The Government has •a strong focus on the industry and is generally supportive, but the support is constrained as financial aid is small This translate in little capital investment

The main priority is •reducing the cost base to increase competitiveness/exports

Driving innovation •

Underpinned by a •sustainable food chain

Strong technology levels •due to high level of investment in previous years

Strong productivity driven •by technology

High product quality given •the use of high quality local ingredients

At a macroeconomic level, •the challenges are rigid labour market, access to credit, consumer confidence

As for industry specific •challenges, FDM needs to grow its exports, implement an innovation strategy for SMEs and address the balance of power in the relationship with retailers

Spain has raw materials •available locally and a strong food culture which is not replicated in the UK

In the UK, consumers •eat a lot more processed and convenience products, whilst in Spain convenience and processed food account for a much smaller part of the industry because of the Spanish food culture which is promoting fresh food

The whole environment •in which the food industry operates is more restrictive in the UK. FDM is under strong pressure from media/society on issues such as waste and environmental issues

Exports are an area of •successful collaboration with the authorities, leading to a joint export promotion programme

There is a need for a •vision that includes the whole agri-food value chain

Labour law is not flexible •enough to encourage employment and education needs to be reformed to promote excellence

Brazil has access to home •grown raw materials at competitive prices

Brazil is self-sufficient •in raw materials due to its strong and large agriculture sector

The Government is •expected to maintain its current support of the industry, build infrastructure and improve the education system

Outside of these areas, •the industry prefers less Government intervention



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8.1 Quotes from international federation interviews

“The UK is dominated by processed foods, the UK consumer eats a lot of processed

products, a lot of convenience products. The extent of processing and convenience food is

much lower in Spain.”

FIAB (Spanish Federation of Food and Drinks Industries)

“The UK food sector experiences a strong pressure from the media & society on issues

around food waste, environmental issues, tax. The whole environment in which the food

industry operates is more restrictive.”


“It depends what country we compare ourselves to, but generally, I would rate Spain’s

capabilities as follows: R&D 3, technology & productivity 5 due to high level of investment,

brand 4 as the “made in Spain” brand image has improved, product quality 5 because of high

quality raw materials, labour costs and skills 3 like any EU country.”


“The drivers of export growth have been the competitiveness of our products, by which I

mean the mix between price, the quality and the innovation.”


“Without a doubt exports are the only way to get us out of the crisis.”


“The evolution of the Spanish FDM sector has been very positive. Given the economic and

financial crisis we are going through, we are the only sector that maintained its performance.”


“Asia requires more westernised products, more protein, more dairy products and have

boosted demand. The on-going upward trend in commodity pricing presents an opportunity

to exploit part of it. The other one is the removal of dairy quotas by 2015 as the industry can

grow dairy output by 50%.”


“Historically the French exports were stronger compared to EU countries, but since 2003 we

lost the first place and became 4th exporter. Germany overtook us. We didn’t know how to

keep this advantage and benefit from the fact that we have a strong agricultural sector.”


“I would rate product quality 5 as a lot of investment goes into technology and research for

production systems and health standards. R&D is also strong, I would rate it 4 as not only do

we have R&D tax credits in place, but significant investment was made in human resource

capability and lab equipment. Also numbers suggest we are at the upper end of GVA per

employee in European terms so productivity is another competitive advantage.”


“The main impression is that UK would be stronger in terms of packaging, brands etc due

to the large domestic market. While in Ireland, the tradition has been to have a more primary

focus (such as in dairy products) but slowly we’re moving upwards along the value chain.”


“The growth is primarily driven by immigration and there are a couple of demographic drivers

within i.e. ageing population and ethnic/national diversity.”

FCPC (Food and Consumer Products Canada)

“Exports would be one growth driver if companies manage to penetrate the export markets

and have the right level of operational support. Another driver is the innovation, the niche

products with high value-add in which France has a important know-how and on which it is

important to be able to capitalise.”


“Up to 2009, there was a y-o-y growth in the domestic market of a couple of percentage

points driven by population growth driven by immigration. Since the crisis, the consumers

have put emphasis on value. Also, migration has stopped and adults are actually leaving the

country and so consumer base has decreased and domestic growth has been reduced by

1-2% over the last year.”


“Middle income class has been growing exponentially and consumers have more money to

spend. It’s been driving the sector growth.”

ABIA (Brazilian Association of Food Industries)

“The most important challenge is the economic and financial crisis we are living in and the

solutions come from a macroeconomic policy and there are some factors without which the

sector cannot develop further. The first one is the flexibility of the labour market, Spain has the

most rigid labour market across OECD. Secondly access to credit for companies, thirdly the

consumer confidence. These are pre-requisites for the industry to grow.”


“We have extremely rich resources of arable land water and energy, we have an educated

workforce, so we have all of the ingredients to have a very successful agro-food sector

from farm to table, but we actually have a very outdated regulatory system that is holding

manufacturing back.”


“If you ask me about challenges of the industry in itself outside of the economic context, the

main issues are: exports. The sector needs to insist more on exports . We need an innovation

strategy, especially dedicated for SMEs. We need to have a framework for commercial

relations, by this I mean that the distribution sector (retailers) are putting pressures on the

manufacturers and there are many situations of abuse. We need for a policy that is

non-restrictive in the relationship between food and health.”


“In terms of labour law, we have the most rigid legislation, and we need to clean it up and

make it more flexible otherwise as we go through a crisis like the one we’ve been through the

result is five million unemployed. If the legislation is not made more flexible it is difficult for

anybody to enter the workforce.”


“The Government had a national export programme and then there were 17 regional

programmes. What we did well, and when I say we I mean FIAB, managed to get an

agreement with all the authorities at national and regional level to have joint export promotion

programmes. This resulted in two concrete initiatives called Plan China and Plan India and this

policy at national level resulted in two markets.”


“The less the Government interferes, the better. We want the Government to maintain their

current support and invest more in infrastructure which is an area of concern for all industries

in Brazil. And also more support on education would be beneficial. But we do not want more

regulation, we would not want to be very regulated by the Government as it would hinder the

industry’s development.”


8.1 Quotes from international federation interviews

Sources: 1. Primary research with trade federations in Brazil, Canada, France, Ireland and Spain Sources: 1. Primary research with trade federations in Brazil, Canada, France, Ireland and Spain

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“The biggest issue is the size of our small companies, but this is not a food specific issue it is

a problem for the whole French industry. We have multinationals and small businesses, but

we have a web of SME/intermediary companies that are not strong enough, are not profitable

enough and do not have financial resources to innovate. We would like to grow these

companies which will help grow the sector in the future.”


“There are several challenges. Infrastructure is weak and education is not producing enough

people with technical skills. As the industry develops it will need more people with high

technical skills.”


“Trying to reduce the cost base in order to increase our competitiveness relative to that of

our trading partners and to generate export led growth will be one the main challenges and

priorities of the sector.”


“Since the end of 2010 the Government realised that the industrial policy has to be reactivated

and that it is important for France to appreciate in value. In this context, they created a

strategic committee, a national industry conference in which 11 strategic industrial sectors

participate among which the food industry. So, since the end of 2010 we have a food industry

strategic committee which includes farmers, the manufacturers, retailers the whole value

chain. The objective of this committee is to think about the future model for the industry, the

opportunities and solutions which can bring value for the French food industry. The committee

will present its recommendations to the Ministry of Industry and Agriculture at the end of

the year”


“There is a strong focus on the industry and the Government is supportive but constrained

by state aids. There is a focus on SMEs and most funding with EU element requires funding

towards SMEs. There are two big industry agencies, State Food Board (Bord Bia) and

Development Agency (Enterprise Ireland), which have strong industry representation at their

board and the work they do reflects industry needs.”


“The main initiatives we would like the Government to support are trying to reduce the cost

base, reduce the regulatory burden, support R&D and overseas market development. Also,

develop a national branding for Irish food.”


“The feeling is that the Government has always been focused on the agricultural sector and

does not realise the impact the processing sector has on the economy. That has to change.”


“We lack a food sector long-term vision and plan driven by the Gov. We have growth action

plans, but we don’t have a vision that’s been bought in by governments to help the

industry grow.”


Sources: 1. Primary research with trade federations in Brazil, France, Ireland and Spain

8.1 Quotes from international federation interviews Bibliography

Sources

1. ANIA (2011). Bilans et perspectives économiques

2. Associação Brasileira das Indústrias da Alimentação (2011). Statistics

3. Bureau Van Dijk – Orbis (2011). Grant Thornton Analysis

4. BvD Zephyr (2011). M&A Database

5. Confederation of Business Industry (2011). Making the UK the Best Place to Invest

6. Dairy UK & National Skills Academy (2011). Project Eden Case Study

7. Defra (2010). Agriculture in the United Kingdom

8. Defra (2011). Agricultural Price Index

9. Defra (2010). Ensuring the UK’s Food Security in a Changing World

10. Defra (2008). UK Food Security Assessment: Detailed Analysis

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12. EU (2011). The EU 2011 Industrial R&D Scoreboard

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17. FAO (2011). International Commodity Prices

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19. FIAB (2010). Informe Económico 2010

20. Food and Drink Federation (2011). Research conducted by FDF

21. IGD (2008). Food for Life

22. IMD (2011). The World Competitiveness Scoreboard 2011

23. IMF (2011). World Economic Outlook Database

24. 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)

25. KPMG (2011). Tax Incentives for R&D in Switzerland

26. Leatherhead Food Research (2004). Top 100 Food & Beverage Companies

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28. Mintel (2011). NPD Database

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30. OECD & FAO (2011). OECD-FAO Agricultural Outlook 2011-2020

31. OECD (2011). OECD Structural Analysis Statistics (STAN)

32. OECD (2011). Programme for International Student Assessment (PISA)

33. ONS (2011). Annual Business Survey

34. ONS (2011). Consumer Price Indices

35. Philippe Rouault (2010). Analyse comparée de la compétitivité des industries agroalimentaires françaises par rapport à leurs concurrentes européennes

36. Planet Retail (2011). Retailer and private label concentration (quoted in Food and Drink Europe Data Trends 2011)

37. QS Intelligence Unit (2011). QS World University Ranking

38. Statistisches Bundesamt Deutschland (2011), Structural Data on the Industry

39. Thomson Reuters Deal Analytics (2011). M&A Database

40. UK Trade Info (2011). Trade Data

41. United Nations, Department of Economic and Social Affairs, Population Division (2011). World Population Prospects: The 2010 Revision

42. World Bank (2011). Commodity Markets

43. World Bank, Development Economics Prospects Group (2008). Is The Developing World Catching Up?

44. World Economic Forum (2011). The Global Competitiveness Report 2011–2012

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Important notice

No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means without the prior permission in writing of the

Food and Drink Federation and Grant Thornton UK LLP, nor be otherwise circulated in any form of binding or cover other than that in which it is published and without

a similar condition including this condition being imposed on the subsequent purchaser. Grant Thornton UK LLP has not verified the accuracy of the data or the

information and explanations contained within this report provided by third parties and therefore accepts no liability in relation to this information on which our analysis is

based. Grant Thornton UK LLP does not accept any responsibility for the information and opinions contained within this report to any third party whatsoever other than

the Food and Drink Federation.

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