Grant Thornton Full Report 2011 - Industry Overview

Sustainable Growth in the Food and Drink Manufacturing Industry
Grant Thornton report commissioned by the Food and Drink Federation
Contents
Section
1. Introduction and executive summary 2. Methodology and survey population 3. UK FDM sector overview 4. Growth drivers and exporting 5. Competitive advantages and areas for improvement 6. Growth barriers and risks 7. The role of Government in optimising growth
Lushani Kodituwakku Director, Head of Strategy & Commercial Advisory T +44 (0) 207 865 2428 E lushani.kodituwakku@uk.gt.com Ioana Nobel Manager, Strategy & Commercial Advisory T +44 (0) 207 865 2142 E ioana.nobel@uk.gt.com Vangelis Apostolidis Executive, Strategy & Commercial Advisory T +44 (0) 207 865 2535 E vangelis.apostolidis@uk.gt.com
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5 15 19 29 43 65 85 103 113
8. Feedback from international federations Bibliography
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Contents
Glossary
ABIA Associao Brasileira das Indstrias da Alimentao (Brazilian Association of Agro-food Industry) ANIA Association Nationale des Industries Alimentaires (French National Association of Agro-Food Industry) CAGR Capex Corporate Compound annual growth rate Capital expenditure Above 50m in turnover wFIAB Federacin Espaola de Industrias de la Alimentacin y Bebidas (Spanish Federation of Food & Beverage Industry) Food & Beverages Food, Beverages & Tobacco GVA H&W Food, soft drinks and alcoholic drinks Food, soft drinks, alcoholic drinks and tobacco products Gross value added Health & wellness
Section 1 Introduction &

executive summary
FAO Food and Agricultural Organisation of the United Nations FDF Food and Drink Federation
IBD Institute for Management Development (Swiss Business School) NPD ONS PBT SME WEF New product development Office for National Statistics Profit before tax Small and medium-sized businesses; below 50m turnover World Economic Forum
FCPC Food and Consumer Products of Canada FDII FDM Food and Drink Industry Ireland Food and soft drinks manufacturing
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Introduction and executive summary
Glossary
1.1 Fdf Message from President Jim Moseley

Food and drink manufacturing in the UK is a Great British success story. By contrast with many of the UKs 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 UKs 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
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1.2 Introduction
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 sectors 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 FDMs 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 highlevel 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
1.3 Executive summary

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 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 Sainsburys 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 industrys 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 Englands 1% GDP growth forecast for 2012
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
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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-onyear 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
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 industrys 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 Mintels 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. UKs 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 FDMs 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 FDMs 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
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 industrys 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 industrys 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 FDMs 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
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
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 industrys main competitive advantages. Other areas of distinction for the UK FDM
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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 onthe-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 industrys 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 industrys 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
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 UKs 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
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 underrepresented 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 FDFs 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 Majestys 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 reengage 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
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
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:
Export incentives I n 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,
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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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Methodology and survey population
2.1 Methodology
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 (SMEs and Corporates) in the UK. The survey was sent out to FDF members (166 members); The Regional Food Group Alliance members; and Grant Thorntons 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-toface 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
International federation interviews Not applicable Not applicable 5 (Brazil, Canada, France, Ireland, Spain)
2.2 Survey population

Number of companies surveyed by business turnover and number of employees specific to UK FDM By business turnover
Over 500m 8 250-500m 8 0-5m 10 5-10m 6
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
0-49 15
By number of employees
Over 2,000 9 1,000-1,999 6
Primary research completed

Online survey Corporates SMEs Total 35 42 77 UK FDM interviews 13 12 25
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
100-250m 11
500-999 10 10-25m 16 50-100m 10 250-499 12 50-249 25
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 FDFs key strategic objectives
25-50m 8
Sources: 1. Grant Thornton survey analysis
Number of companies surveyed by manufacturing sub-sector (SIC 2007)

FDM manufacturing sub-sector 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) Note: a. Some of the 77 companies surveyed are active across more than one sub-sector Sources: 1. Grant Thornton survey analysis Number of businesses 10 3 7 5 4 8 17 30 2 13 3 2
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2.2 Survey population

Exporting activities by category
100%
% of companies surveyed
2.2.2 Export and R&D profile of businesses surveyed

19%
23% 80% 60% 40% 20% 0%

Corporates
Most of the companies surveyed are active both with exporting and R&D Activities
No exporting Exporting
77%
81%
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

SMEs
Section 3 UK FDM
sector overview
UK R&D facilities by category

100%
% of companies surveyed
23% 80% 60% 40% 20% 0%

Corporates SMEs
48% No UK facility 77% 52% UK facility in place
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UK FDM sector overview
3.0 Section summary

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 FDMs 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 industrys 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
3.1 The UK FDM contribution

UK manufacturing sector turnover size by segment
600,000 500,000
m
3.1.1 Turnover
Other
491,727
448,517
Fabricated metal products (except machinery and equipment) Coke and rened petroleum Machinery and equipment Chemicals Automotive
400,000 300,000 200,000 100,000 0
218,353 34,266 39,320 36,932 41,858 50,553 70,445

2008
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%)
211,935 29,015 31,192 31,343 33,796 38,564 72,672

2009

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

600 500
Turnover, bn
13%
15% 10%
400 300 200 100 0 55

2000
1% 414
3% 3% 399
5% 0% (5)%
(2)% (3)% 406 393
(1)% 389
411
423
4% 441
430 (3)%
376 (13)%
Growth, %
3%
3%
3% 3% (0)% (1)%
3%
Other manufacturing turnover Food and soft drinks turnover Food and soft drinks growth (%) Other manufacturing growth (%)
3%
(10)% (15)%
56
2001
57
2002
59
2003
61
2004
61
2005
60
2006
62
2007
70
2008
73
2009
Notes: a. The increase in turnover in 2008 & 2009 is due to SIC code reclassification (from 2003 to 2007 system), which brought companies previously listed under non-FDM related codes into the FDM sector Sources: 1. ONS (2011), Annual Business Survey
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UK gross value added at basic prices
180 160 140 120
GVA, bn

3.1.2 Gross value added and employment
Other manufacturing GVA
7% 4% 1% (1)% 127 3% 5% (3)% 133 129 (2)% 124 130 (1)% (1)% 129 (3)% 134 4%
5% 4% 3%
10% 5% 2% 110
Growth, %
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. FDMs 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 sectors value to the economy can also be measured through employment levels. In comparison with other manufacturing sectors, the food and nonalcoholic drinks sector comes across as a relatively stable employer as it has experienced a lower decline in employment
4% 2% 0% 75.9 1% 77.4 1% 0% 78.1 71.1 1% 66.1 6% 4% 2% -2% -4% -6% -8% -10%
Growth, %
t he 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 a ccording 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
0% (5)%
100 80 60 40 20 0 16
2000
Food and soft drinks GVA Food and soft drinks growth (%) Other manufacturing growth (%)
139
130
(7)% (15)% (10)% (15)% 17

2001
17
2002
18
2003
19
2004
18
2005
18
2006
19
2007
19
2008
20
2009
(20)%
Sources: 1. ONS (2011), Annual Business Survey
UK employment levels (average during the year)

4,500 4,000
Employment, '000s
UK employment costs, bn
0% (4)% (2)%
Growth, %
(1)% (2)% (4)% (3)% (4)% 3,659 3,505 (5)% 3,313 (7)% 3,087 (4)%
(1)% (3)% (5)% 2,735
(0)%
3,000 2,500 2,000 1,500 1,000 500 0 484

2000
(3)% 2,665 2,403 2,204
(4)% (6)% (8)% (10)% (12)%
(5)% 2,973 2,821
Food and soft drinks employment Food and soft drinks growth (%) Other manufacturing growth (%)
Labour costs, bn
3,500
Other manufacturing employment
(4)%
464
2001
449
2002
446
2003
2000
2001
2002
2003
2004
2005
2006
2007
2008
2004
2005
2006
2007
2008
2009
Page 22
2009
436
431 411
(10)% 409 392 377
(8)%
100 90 80 70 60 50 40 30 20 10 0
4% 1% 3% 2% 1% 1% 76.1
0% -1% 78.9 78.9 77.8
0%
-3% 75.5
Other manufacturing costs Food and soft drinks costs Food and soft drinks growth Other manufacturing growth
-9% 8.6 8.7 8.9 9.1 9.2 9.6 9.7 9.7
-7%
10.1 10.1
Page 23
3.2 The UK FDM exports

UK exports of food and non-alcoholic drinks by receiving region (m)
12,000 10,000
'm
3.3 The UK FDM margins

Growth of UK exports of food and non-alcoholic drinks
CAGR 2007-2010 EU Non-EU North America Asia Middle East Africa Latin America Australia & New Zealand Other 10% 18% 16% 21% 18% 28% 16% 16% 14% Total growth 2007-2010 34% 66% 56% 75% 62% 111% 54% 56% 50% Share of UK exports 2007 81% 19% 4% 4% 3% 2% 1% 1% 4% Share of UK exports 2010 77% 23%
PBT margin
SMEs vs. corporates margin (profit before tax/net turnover)

8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0%
2005 2006 2007 2008 2009 2010
3.3.1 UK FDM margins

Companies with turnover above 50m turnover ($80m in 2009 terms)
Other Australia & New Zealand Latin America Africa Middle East Asia North America EU
2007 2008 2009 2010
7.6% 6.7% 5.9% 4.6% 4.5% 3.1% 1.5% 0.6% Companies with less than 50m turnover ($80m in 2009 terms) 6.8% 5.4% 6.2% 5.9%
8,000 6,000 4,000 2,000 0
5% 5% 3% 4% 1% 1% 4%
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 Page 25
Sources: 1. UK Trade Info (2011), Trade Data
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 nonalcoholic 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
Top 15 export countries of food and non-alcoholic drinks (m)

Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Country Ireland France Germany Netherlands Spain Italy Belgium United States Denmark Sweden Canada Russia Portugal Greece Poland Top 15 countries as % of total UK exports 2007 2,167 931 671 574 499 366 312 238 130 106 102 97 85 76 76 83% Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Country Ireland France Netherlands Germany Spain Italy Belgium United States Denmark Portugal Norway Sweden Canada Poland Russia Top 15 countries as % of total UK exports 2010 2,687 1,341 907 902 607 433 433 391 179 152 149 142 139 131 115 80%
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

10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 9.0% 7.6% 7.7% 8.9%
8.3%
Operating margin

4.9% 4.6% 3.7% 3.5% 4.5% Brands Private label
2006
2007
2008
2009
Sources: 1. OC&C (2011, 2010, 2009, 2008), The Grocer
Page 24
2010
3.4 The UK FDM business structure

UK food, beverage and tobacco enterprises by employee size
5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 4,740 3,590 2005 2011 1,273 895 922 755 858 650

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)
3,500 3,000
Number of enterprises
The impact of M&A activity on SMEs (findings from FDF / Grant Thornton survey)
60% 50% 41%
# of SMEs
54%
Number of enterprises
UK food and soft drinks enterprises by employment size 2011

2,955
40% 30% 20% 10% 5% Negatively affected Not affected Positively affected
364 220
250+
2,500 2,000 1,500 1,000 500

10 - 19 20 - 49 0-4 5-9
50-249
10-19
20-49
1-9
1,175 845 715 355

50 - 99
0 255
100 - 249
250 +
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
205 Sources: Grant Thornton survey results
Number of food, beverages and tobacco enterprises by employee size 2007

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 67,995 32,742 70,911 17,018 29,414 7,007 37,638
Number of employees Sources: 1. ONS (2011), UK Business Activity
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
M&A activity in the UK FDM by sector, 2006-2011

Other 81 Functional 13 Frozen Foods 20 Confectionery 20 Fruit & Veg 22 Soft Drinks 30 Dairy 38 Bakery 53 Wholesale & Distribution 97
250+ 50-249 60,442 16,300 63,777 11,941 22,612 3,590 31,095 20-49 10-19 1-9
% of total companies

Meat Fish & Poultry 78
France
Germany
Poland
Spain
Brazil
Italy
UK
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)
Dry Grocery 68
Sources: 1. Thomson Reuters Deal Analytics (2011), M&A Database, 2. BvD Zephyr (2011), M&A Database, 3. Press releases
Page 26
Page 27

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 M&A activity in the UK FDM by foreign acquirers by country, 2006-2011
Other 19 Ireland 21
Other European nations 28 India 1 Brazil 3 Canada 5 Germany France Netherlands 12 6 8
USA 20
Thailand 17
Section 4 Growth drivers

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

12
# of acquisitions
10 8 6 4 2 0
Turkey Ireland Italy Netherlands South Africa France Spain Brazil Germany
10 8 6 4 4 3 3 3 3 3 2 2
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. SME (anonymous survey response)
Page 28
Other European
Other
USA
Page 29
Growth drivers and exporting
4.0 Section summary

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
4.1 FDM growth drivers for the UK consumer market

Growth drivers for the UK market in the next 5-10 years (1 least important, 5 most important; findings from FDF / Grant Thornton survey)
Average score Health & Wellness products Demand for value products Demand for premium products 3.41 3.40 3.31 3.23 3.14 2.72 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% % of responses 1 Sources: 1. Grant Thornton survey analysis 2 3 4 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 Page 31
Demand for branded products Demand for own label products Appetite for CSR related products
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
Page 30

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 industrys 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 segments 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
1,500 1,450 1,400
'bn
4.1.2 Growth drivers (supporting evidence from desktop research)

2.6% 2.4% 2.7% 3% 3% 2% 1,456 2% 1% 1% 0%
2012 2013 2014 2015
1,350 1,300 1,250 1,200

2009
1.4%
1.6% 1.1% 1,350 1,382 1,418
GDP GDP growth (%)
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 Page 33
1,297
1,314
1,329
2010
2011
Notes: a. GDP at constant prices Sources: 1. IMF (2011), World Economic Outlook Database
UK population forecasts
80,000 70,000 60,000
Population 000's
62,261 17% 26% 20% 20% 17% 2010
64,776 18% 25% 19% 19% 18% 2015
67,173 19% 25% 20% 18% 18% 2020
69,403 20% 24% 20% 18% 18% 2025
71,393 22% UK - Over 65 23% 20% 18% 17% 2030 UK - 45-64 UK - 30-44 UK - 15-29 UK - 0-14
50,000 40,000 30,000 20,000 10,000 0
Sources: 1. ONS (2010), National Population Projections
Page 32
Sources: Factiva (Guardian, 13 September 2011, UK inflation: what the economists say)

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
135 130 125
Index (2005=100)
4.2 FDM growth drivers for the global market

World population forecasts by region, 2010 & 2030
6,000 5,000
Population, millions
120 115 110 105 100 95

2005
The difference in the total market's performance is due to the stronger growth of branded food and drink products compared to private labels
4.2.1 Growth drivers (from survey output and supporting evidence from desktop research)
4,968 4,211 2010 2030
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, Africas 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 45s 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
4,000 3,000 2,000 1,000 0

North America Central & South America Western Europe Africa
Private label food and drink Total food and drink
419 449
350 337
Eastern Europe
358 423
599 720
1,572 1,027
2006
2007
2008
2009
2010 (est)
Asia
Sources: 1. Mintel (2011), Private Label Food and Drink-UK
Sources: 1. United Nations, Department of Economic and Social Affairs, Population Division (2011), World Population Prospects: The 2010 Revision
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
World population forecasts by age group, 2010 2030

9,000 8,000
World population, millions
sold are unlikely to change. Corporate # 1
7,000 6,000 5,000 4,000 3,000 2,000 1,000 0
9% 19% 21% 25% 26%

2010
10% 20% 21% 24% 25%

2015
11% 21% 21% 23% 24%

2020
12% 21% 21% 22% 23%

2025
14% 22% 21% 22% 22%

2030
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
Sources: 1. World Bank (2008). Is the Developing World Catching Up?
Page 34
Page 35

Real GDP growth forecasts by region, 2010-2016
7% 6%
Real GDP growth, %

China and India are expected to grow their average private consumption per capita the fastest by 2015, followed by Brazil. Even at those rates, Chinas and Indias 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 UKs 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 Where industry growth will come from (findings from FDF / Grant Thornton survey)
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
% share of industry growth

World North America Western Europe Transition economies Asia & Australasia (incl Japan) Latin America Middle East & North Africa Sub-Saharan Africa
5% 4% 3% 2% 1% 0%
2010 2011 2012 2013 2014 2015 2016
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 valueadded 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
37%
35%
From exports From the UK 63% 65%
Corporates
Sources: 1. Economist Intelligence Unit (2011), Views Wire
Private consumption per capita, $ at current prices

CAGR 2010 Brazil Canada China Australia & NZ India Poland United Kingdom 6,630 26,829 1,500 51,651 830 7,550 23,731 2015 10,220 33,573 3,550 59,705 1,380 11,160 28,287 2010-2015 9.0% 4.6% 18.8% 2.9% 10.7% 8.1% 3.6%
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
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
Global population is a significant driver especially combined with higher GDP on a global scale. Corporate # 4
Page 36
SMEs
Sources: 1. OECD & FAO (2011). OECD-FAO Agricultural Outlook 2011-2020 2. World Bank (2008). Is the Developing World Catching Up?
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4.3 Exporting opportunities

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 industrys 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)
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 its 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
Key: Over 25 responses 20-24 responses 15-19 responses 10-14 responses 1-9 responses
4.3.2 UK historic export performance UKs 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 UKs 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 countrys 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
increasingly sophisticated and disciplined customer channels which were difficult to penetrate in the past as they were very fragmented. Corporate # 5
Grant Thorntons 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
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UK exports of food & soft drinks, 2000, 2005 & 2010 UK exports of food, beverages and tobacco
CAGR of UK exports to each country, 2005-2010 Australia Brazil 2000 2005 2010 Canada China France Germany India
Australia Japan France* Spain Poland Russia Germany China USA

Historic and forecast private consumption, US $
% share of UK exports to countrys imports, 2010 3.2% 1.5% 1.4% 0.3% 6.1% 2.0% 0.8% 63.1% 1.8% 0.4% 0.6% 2.8% 1.4% 2.0% 0.7% 4.9% 2.0% Share of countrys imports as a % of world imports, 2010 0.8% 0.7% 2.4% 5.0% 4.4% 6.9% 1.0% 0.6% 3.8% 5.4% 1.7% 4.4% 0.3% 1.1% 2.9% 2.8% 8.2% Other 30% European Union 27* 22% Other 35% European Union 27* 22% Notes: a. Based on EIUs estimates and forecasts Sources: 1. Economist Intelligence Unit (2011), Views Wire
US $ 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
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 Page 41
UK Food & Soft Drinks Exports, m
1,000 900 800 700 600 500 400 300 200 100 0
CAGR of country imports, 2005-2010 12.2% 21.1% 9.7% 22.5% 6.7% 7.6% 20.7% 5.4% 5.5% 3.6% 7.9% 8.5% 9.8% 15.9% 13.9% 4.3% 6.0%
Brazil Canada China France Germany India Ireland Poland United Kingdom
6.1% 16.0% 7.0% 2.8% 7.3% 11.1% 9.3% 6.8% 5.1% (0.3)% 14.9% 13.4% 3.0% 22.6% 6.8% (0.3)% 4.5%
Ireland Italy Japan Mexico Netherlands New Zealand Poland Russia Spain USA
Notes: a. UK exports to France in 2010 reached 1.3bn, but for viewing purposes they have been scaled down. Similarly, Ireland that is UKs 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 exports of food, beverages and tobacco
Global export of food, beverages & tobacco 2000-2010

Region Australia Brazil Canada China France Germany Ireland Italy CAGR 2000-2010 5.7% 6.9% 7.7% 12.5% 6.5% 10.7% 5.1% 9.1% Region Japan Poland Russia Spain United Kingdom USA European Union 27 World CAGR 2000-2010 8.2% 21.0% 11.8% 8.9% 5.4% 7.5% 9.0% 10.0%
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 megamarkets, 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
USA Ireland 13% 1% Australia 3% Brazil France 3% China 8% 3% Germany United Kingdom Spain Canada 6% 4% 4% 3%
USA 10% Ireland 1% Germany Australia 6% 2% France United Kingdom Canada 2% China Brazil 6% 3% Spain 4% 6% 3%
Notes: a. EU 27 excludes France, Germany, Spain, UK and Ireland which are shown separately Sources: 1. UK Trade Info (2011), Trade Data
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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
Section 5
Competitive advantages & areas for improvement
Following the crisis, the domestic market has been hurt and there is a severe restructuring taking place domestically, so growth will certainly come from abroad during the next few years. FDII (Food and Drink Industry Ireland) We believe that growth can come from export markets, and we encourage them to look towards exporting, but, unfortunately, the web of food companies is not sufficiently well armed to attack it. ANIA (French National Association of the Food Industry)
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5.0 Section summary

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
5.1 The attractiveness of the UK as a place to invest

World Economic Forum 2011 World Competitive ranking
Ranking 1 2 3 4 5 6 7 8 9 10 12 18 26 29 36 41 53 56 66 Country Switzerland Singapore Sweden Finland US Germany Netherlands Denmark Japan UK Canada France China Ireland Spain Poland Brazil India Russia
IMD Business School 2011 World Competitiveness Yearbook

Ranking 1 2 3 4 5 6 7 8 9 10 19 20 24 29 32 34 35 44 49 Country Hong Kong US Singapore Sweden Switzerland Taiwan Canada Qatar Australia Germany China UK Ireland France India Poland Spain Brazil Russia
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 countrys 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 UKs 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
Sources: 1. World Economic Forum(2011), World Competitive Ranking, 2. IMD (2011), World Competitiveness Yearbook
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5.2 UK FDM competitive advantages

UKs competitive advantages ranked by average score (1-weakest, 5-strongest; findings from FDF / Grant Thornton survey)
Product quality New product development Brand loyalty R&D Technology Productivity Labour skills Exchange rate Foreign partnerships/trade agreements Labour cost Government support Regulation
10% 20% 30% 40% 50% 60% 70% 80% 90% 0%
5.2 UK FDM competitive advantages

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 dont 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
5.2.1 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 worlds 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
Average score 3.9 3.5 3.5 3.4 3.3 3.2 3.1 2.8 2.8 2.4 2.1 1.9
100%
% of responses
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)
4.5 4.0
Average score

R&D NPD Technology
3.5 3.0 2.5 2.0
France
Brazil
Germany
Australia and NZ
Canada
China
Eastern Europe
India
Ireland
Rest of Asia
Rest of Western Europe
Spain
USA
Countries above the line were deemed to be less developed than the UK in the chosen areas
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5.3 Competing markets

Regions the UK FDM is facing competition from (findings from FDF / Grant Thornton survey)
45% 40%
% share of responses
5.3.1 Competition Because of the nature of the industry, European nations continue to be viewed as the biggest competitors to UK FDM
Corporates SMEs
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
Top 100 food and soft drink companies in the world by turnover, 2003
35 30
# of companies
33
35% 30% 25% 20% 15% 10% 5% 0%

South America North America Europe Asia Oceania
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
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
25 20 15 10 5 0
Denmark Netherlands Germany Australia Canada Mexico Ireland Japan France USA Italy UK
17 6
Top 51-100 5 5 Top 50 4 3 2 2 2 2 2
Sources: 1. Leatherhead Food Research (2004), Top 100 Food & Beverage Companies
Top 100 food and soft drink companies in the world by turnover, 2010
35 30
# of companies
Main markets the UK FDM is facing competition from (findings from FDF / Grant Thornton survey)
30
25 20 15 10 5 0
Switzerland Denmark Netherlands Mexico Brazil France Ireland Japan Italy Germany Canada China USA UK
12 5 5 4 4 3 3 3
Top 51-100 Top 50 2 2 2 2 2
Key: Over 13 votes 9-12 votes 5-8 votes 1-4 votes Sources: 1. Grant Thornton survey analysis
Notes: a. The UK loss from 2003 reflects the buy-out of Cadburys by Kraft. However, Cadburys remains a separate brand with a UK identity Sources: 1. Leatherhead Food Research (2011), Top 100 Food & Beverage Companies
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5.4 Brand loyalty and awareness

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
5.5 New product development

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 Cadburys 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
140,000
# of new product variants
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 20052011, 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
120,000 100,000 80,000 60,000 40,000 20,000 0

Netherlands Brazil France Germany Canada Ireland Japan Italy China Spain India USA UK
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 industrys efforts to promote British products abroad through food trade exhibitions

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

9,000 8,000 7,000 5,570 6,000 5,000 4,000 2,932 3,000 2,000 1,000 0
Brazil 2005 Brazil 2010
7,988 6,734 5,168 3,503 3,769 4,255 2,842 744 710

Ireland 2005 Ireland 2010 Spain 2005 France 2005 Canada 2005 Canada 2010 France 2010 Spain 2010 UK 2005 UK 2010
6,742
Branded Private label
Private label penetration

2010 Brazil Canada France Ireland* Spain UK Notes: a. Irelands penetration refers to 2007 Sources: 1. Planet Retail data reported in the Food and Drink Europe Data Trends 2011 7% 22% 30% 29% 32% 41%
Notes: a. The total numbers of NPD for each country reflect the actual figures sourced from Mintel. However, the split for branded and private label above have been calculated approximately using the Top 10 most active NPD manufacturers in each country and accounting for the total NPD activity in each case. Sources: 1. Mintel (2011), NPD Database
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5.5 New product development

New product variants in the UK by category
9,000
5.6 Productivity comparison

GVA per employee at current prices,
8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2006 2007 4,807 6,164 486 824
638
507 542
622
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

70,000 60,000 50,000 40,000 30,000 20,000 10,000 0
2003 2004 2005 2006 2007 2008 2009
5.6.1 Productivity
France Germany Italy Japan Spain United Kingdom USA
UKs food and beverage sector is characterised by high productivity above the average manufacturing level and has been steadily growing over the years UKs 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 sectors 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, UKs FDM productivity was overtaken by France and Italy, which were previously below the UK. This is due to Sterlings depreciation that took place at the beginning of the economic downturn
Soft drinks 6,967 6,313 7,482 7,901 Food
2008
2009
2010
2011
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
Sources: 1. OECD (2011). OECD Structural Analysis Statistics (STAN), 2. ONS (2011), Annual Business Survey
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
Growth in GVA per employee at current prices for food & beverage, calculated in national currency
Country France Germany Italy Japan Spain United Kingdom USA CAGR 2003-2008 3.5% (0.5)% (0.4)% (1.7)% 3.5% 4.7% 1.8%
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
Sources: 1. OECD (2011). OECD Structural Analysis Statistics (STAN), 2. ONS (2011), Annual Business Survey
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5.6 Productivity comparison

125,306
5.7 R&D and technology investment

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
1.00% 0.80%
% of output
GVA per employee for manufacturing sector vs. food & beverage, 2008
GVA per employee at current prices, national currency 140,000 120,000 60,525 69,053 68,611 66,433 100,000 80,000 60,000 40,000 20,000 0 Japan* Italy United Kingdom France Germany Spain USA 99,162
5.7.1 R&D
Canada France Germany Ireland Japan Netherlands Poland Spain
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
60,022
56,953
50,781
56,455
39,966
44,717
Total food & beverage productivity Total manufacturing productivity
0.60% 0.40% 0.20% 0.00%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
8,622
9,961
United Kingdom United States
Notes: a. Japans figures are in 1,000s Yen Sources: 1. OECD (2011). OECD Structural Analysis Statistics (STAN); 2. ONS (2011), Annual Business Survey
Notes: a. R&D expenditure as % of industry output expressed in national currency Sources: 1. OECD (2011), OECD Structural Analysis Statistics (STAN)
CAGR 3 y (2008-2010) EU average Non-EU average Devro Unilever (0.1)% 1.4% (1.7)% (1.9)% (5.4)% (13.1)% (6.7)% (7.8)% (17.3)% (1.6)% 4.6%
UK Food producers R&D investment/ Net sales vs. EU and non-EU average 2010
3.5% 3.0% 2.5% % 2.0% 1.5% 1.0% 0.5% 0% EU average Unilever Non-EU average Devro BEIG Topco Tate & Lyle Premier Foods Dairy Crest Northern Foods United Biscuits Wittington Investments 1.3% 1.6% 1.1% 0.8% 0.7% 0.6% 0.6% 0.5% 0.2% 3.0% 2.1%
BEIG Topco Tate & Lyle Premier Foods Dairy Crest Northern Foods United Biscuits Wittington Investments
Notes: a. The EU Industrial Scoreboard for food producers is based on an EU survey of 1000 EU and non-EU businesses across sectors. The data in the graph are based on 33 EU food companies and 22 non-EU companies who responded to the survey, b. Wittington Investments is the ultimate shareholder of Associated British Foods and Fortnum & Mason Sources: 1. EU (2011), The 2011 EU Industrial R&D scoreboard
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Capital expenditure vs. industry turnover for food & soft drinks
CAGR 20002008
Net capital expenditure, m

5.7.2 Capital expenditure Although the UKs 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, Germanys FDM investment in fixed assets was 28% higher in 2009 than in the UK Moreover, in 2009, Brazils total investments (including both tangible and intangible assets) reached 5.8% of the industrys turnover at 5.4bn, but, in 2010, they returned to the 2008 levels of 4.9% Technology investment intention in the next five years (Findings from the FDF/Grant Thornton survey)
Don't know Higher than current level Lower than current level 60% In line with current level No internal capabilities 25% 75%
10 15 20 25 30 35 40 45 0 5
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
78,000 76,000 74,000

Turnover, m
3,000 2,500 2,000 1,500 1,000 500 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 Industry turnover Net capital expenditure
100% 52% 40% 49% 51% 48% Corporates SMEs
1.9% 0.7%
72,000 70,000 68,000 66,000 64,000 62,000 60,000
Total turnover Net capital expenditure
Number of responses Sources: 1. Grant Thornton survey analysis
Sources: ONS (2011), Annual Business Survey
Investments in the food & beverage industry as a % of the industrys turnover, %

7%
Industry investments as a % of turnover
6% 5% 4% 3% 2% 1% 0% 1.9% 1.8% 2.4% 1.8% 4.9%
5.8% 4.9% 2008 2009 2010
Investment intentions in R&D in the next five years (Findings from the FDF/Grant Thornton survey)
Don't know Higher than current level Lower than current level In line with current level No internal capabilities 75% 25% 100% 44% 100% 50% 50% 56% Corporates SMEs
Brazil Total investments
Germany Capex
UK Capex
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
10
15
20
25
30
35
Sources: 1. ONS (2011), Annual Business Survey; 2. Associao Brasileira das Indstrias da Alimentao (2011), Statistics ; 3. Statistisches Bundesamt Deutschland (2011), Structural Data on the Industry Sources: 1. Grant Thornton survey analysis
Number of responses
40
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Sources: 1.ANIA (2011), Bilan et Perspectives Economiques Confrence 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 dont think its 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
5.8 Labour skills

QS 2011 World University Ranking
Country Brazil Canada China & HK France Germany India Ireland Top 10 0 0 0 0 0 0 0 0 0 0 0 0 4 6 Top 100 0 5 6 2 4 0 1
5.8.1 Skills Comparative ranking in reading

412 459 481 494 495 496 496 497 500 500 501 508 524 533 556 300 350 400 450 500 Reading score 550 600 Brazil Russia Spain UK Taipei (China) Ireland France US Germany Poland Switzerland Netherlands Canada Hong Kong (China) Shanghai (China)
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
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. SME (anonymous survey response) 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

Netherlands Poland Russia Spain Switzerland UK US 3 0 0 0 3 19 32
Comparative ranking in maths

386 468 483 487 487 492 495 497 513 526 527 534 543 555 600 350 400 450 Maths score 500 550 600
Brazil Russia Spain Ireland US UK Poland France Germany Netherlands Canada Switzerland Taipei (China) Hong Kong (China) Shanghai (China) 300
Notes: a. PISA is the OECD Programme for International Student Assessment, which evaluates the quality, equity and efficiency of school systems throughout the world. , b The QS World University Ranking is produced by QS Intelligence Unit and evaluates 700 universities worldwide Sources: 1. QS Intelligence Unit (2011) QS World University Ranking; 2. OECD (2011) Programme for International Student Assessment (PISA)
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5.8 Labour skills

Manufacturing and processing graduates as % of total graduates
2.5% 2.0%
% of tota graduates
5.9 Labour costs

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
2005 2009
Labour costs per employee for food, beverage & tobacco, s

50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0
2003 2004 2005 2006 2007 2008 2009
Growth of labour costs vs. production output in food, beverage and tobacco, calculated in national currency
France Germany Ireland Italy Japan Netherlands Poland Spain United Kingdom United States Country France Germany Ireland Italy Japan Netherlands Poland Spain United Kingdom USA Labour cost per employee, CAGR 2003-2008 2.9%* 0.2% 4.3% 2.3% -0.4% 2.8% 2.4%* 3.5% 4.9% 2.3% Production output per employee, CAGR 2003-2008 4.2% 3.7% 4.3%* 1.6% 0.5% 6.7% 7.8%* 4.0%* 4.5%* 5.9%
1.5% 1.0% 0.5% 0%

United States Netherlands Switzerland United Kingdom Brazil Italy France Poland Ireland Spain Germany Canada
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%)
Notes: a. Based on ISC code 54 Manufacturing and Processing Sources: 1. OECD (2011), OECD Structural Analysis Statistics (STAN)
Sources: 1. OECD (2011). OECD Structural Analysis Statistics (STAN)
Labour costs per employee,
Unit labour cost growth forecasts, 2008 2011

6% 4% 2% Ireland UK Eurozone
Notes: a. The figures with an * sign reflect the 2003-2007 period Sources: 1. OECD (2011), OECD Structural Analysis Statistics (STAN)
Engineering graduates as % of total graduates

30% 25%
% of total graduates
5.9.1 Labour costs Despite being regarded internationally as a flexible labour market, the UKs 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, UKs 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 UKs 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 Page 61
15% 10% 5% 0%
Switzerland Italy Netherlands United Kingdom Ireland Japan United States Spain France Germany Canada Poland Brazil
2005 2009
Ive 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
20%
0% (2)% (4)% (6)% (8)% (10)%
Sources: 1. European Commission (2010), Forecasts
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)
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5.9 Labour costs

Labour costs per employee for food, beverage and tobacco vs. manufacturing, 2009 in national currency
80,000 Labour cost per employee, national currency 70,000 60,000 50,000 40,000 30,000 20,000 10,000 France* Ireland Japan* Netherlands Poland* United Kingdom United States Italy Germany* Spain 0 Food, drink & tobacco Manufacturing
5.9 Labour costs

Margin growth for food and soft drinks as measured by PBT divided by Turnover
Country Canada France Germany Poland Spain UK CAGR 2005-2009 (9.2)% (1.6)% (8.6)% 2.7% (8.3)% (2.3)%
In 2011, UKs 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 Sterlingeuro 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. FDII (Food and Drink Industry Ireland)
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
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. UKs 2009 labour costs were sourced from ONS and differ substantially from the OECD 2003-2007 figures quoted above because they account for different parameters Sources: 1. OECD (2011). OECD Structural Analysis Statistics (STAN); 2. ONS (2011), Annual Business Survey
Minimum monthly wage by country, 2011

1,600 1,400 1,200 1,000 800 600 400 200 0 1,499 1,365 1,207 1,027 641 234 371 113
Ireland Netherlands France Canada* Poland* Russia Spain UK
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 Irelands labour costs are expected to go down by more than 8%. During the same period, UKs 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 countrys 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. UKs 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

1,424
Minimum wage
Notes: a. Canada applies different minimum wages by state (varying from 8.75CAD to 11.00CAD) that we used to calculate an average minimum. Polands minimum wage reflects the new 2012 level to be introduced Sources: 1. Grant Thornton desktop research
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Brazil
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5.10 FDM profit margin

Margin (profit before tax/ net turnover) comparison across FDM
14% 12%
Gross margin, %
5.10.1 Profitability comparison UK FDMs have maintained higher margins compared to most rival nations even during the economic downturn
Canada France Germany Poland Spain UK
Section 6
Growth barriers & risks
10% 8% 6% 4% 2% 0%
2005 2006 2007 2008 2009 2010
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%
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 1300 Sources: 1. Bureau Van Dijk Orbis (2011), Grant Thornton analysis
Profit before tax margin growth for FDM

Country Canada France Germany Poland Spain UK CAGR 2005-2009 (9.2)% (1.6)% (8.6)% 2.7% (8.3)% (2.3)%
Notes: a. Calculations based on financial results reported by food and soft drinks manufacturers listed under the SIC codes, b. 2010 results are based for a smaller number of companies as not all companies reported 2010 results. Ireland is excluded as only 83 companies were available in the financial database, while the other countries are based on a much higher sample e.g. Germany 4600, UK 1300 Sources: 1. Bureau Van Dijk Orbis (2011), Grant Thornton analysis
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Growth barriers and risks
6.0 Section summary

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 industrys 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
6.1 Current and future risks

Current and future risks for the UK FDM manufacturing (Findings from the FDF/Grant Thornton survey)
5 4.0 3.2 3 2 1 3.8 3.3 3.7 2.8 2.6 2.9 Current Future
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
Risk (1 lowest, 5 highest)
3.6 3.0
3.4 3.4
Labour cost/legislation
Education system & training
Access to raw materials
Track record of innovation
Government incentives & support
Tax system
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. SME (anonymous survey response)
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6.1 Current and future risks

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
6.2 UK performance vs. multinationals investment criteria

UKs performance vs. multinationals investment criteria (Findings from the FDF/Grant Thornton survey)
5 4 3
Score (1 lowest, 5 highest)
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 UKs 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
3.9
3.8
3.7 2.4
3.5
3.2
3.1 2.6
3.0
3.4 Mutinationals investment criteria Current UK performance
2.2
2 1
Labour cost/legislation
2.0
Access to raw materials
Government incentives and support
Education system and access to workforce
Track record of innovation
Tax system
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6.3 Access to raw materials

UK commodities imports as a % of domestic use
90% Imports of commodities as a % of domestic use or supply for domestic us 80% 70% 60% 50% 40% 30% 20% 10% Beef and veal Sugar beet and sugar Poultry Wheat Barley 0% Oats Pork 2006 2007 2008 2009 2010

CAGR in prices of raw materials
Commodity Wheat Barley Oats Beef Pork Poultry Cheese 2005-2008 26.9% 26.8% 18.4% 12.3% 6.7% 10.4% 10.6% 2008-2011(a) 10.4%
2010 price per tonne,
2010 average commodities prices across the world, per tonne

3,500 3,000 2,500 2,000 1,500 1,000 500 0
Wheat Poultry Sugar Barley Beef
3,038 2,531 1,686 EU World 779 480 460 159 171 155 119
6.6% 18.3% 4.2% 5.0% 3.3% 1.3%
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 UKs 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
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 selfsufficiency 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), Agriculture in the United Kingdom
Sources: 1. European Commission (2011), AGRIVIEW; 2. World Bank (2011), Commodity Markets; 3. FAO (2011), International Commodity Prices
UK average historic commodities prices, per tonne

1,800
Commodity price per tonne,
OECD 2011-2019 forecasts on average commodities prices, $ per tonne

6,000
Forecast prices per tonne, $
9.1%
10% 8% 5.6% 5.8% 3.4% 6% 4% 2% 0%
Wheat Barley
1,600 1,400 1,200 1,000 800 600 4001.5% 200

2011* Food & Drink ination
5,000 2008-2011 4,000 3,000 2,000 1,000 0

Poultry Brazil Raw sugar Beef Brazil Pork Brazil Wheat Poultry EU Pork EU Beef EU
Oats Beef Pork Poultry Food & Drink Ination
2011/2013 2013/2015 2015/2017 2017/2019
4.5% 2.5%
0
2005 2006 2007 2008 2009 2010
Notes: a. 2011 prices reflect averages from January until August. Sources: 1. Defra (2011), Agricultural Price Index; 2. ONS (2011), Consumer Price Indices
Sources: 1. Defra (2010), UK Food Security Assessment: Detailed Analysis 2. Defra (2008), Ensuring the UKs Food Security in a Changing World
Sources: 1. OECD & FAO (2011), OECD-FAO Agricultural Outlook 2011-2020
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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 decades 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 Brazils 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 doesnt help. I dont know what the solution is, but that is the single biggest challenge as I look out into the future. Corporate # 6
6.4 Access to finance

SME access to finance to fund current business requirement (Findings from the FDF/Grant Thornton survey)
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
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
% of responses
87.5%
Yes
No
12.5%
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 dont 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
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6.4 Access to finance

% of businesses across industries successful in getting loan finance from banks
120% 100% 80% 94% Banks (2007) 97% 86% 65% 64% Banks (2010) 63% 86% 89% 89% 91% 79% 84% 72% 82% 77% 75% 74% 72%
6.5 International tax comparison

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 Comparison of main rate of corporation tax
45% 40% 35% 30% 25% 20% 15% 10% 5% 0%
Switzerland Ireland Netherlands Singapore Spain Poland South Korea Germany Canada France Russia China Brazil India UK World average Romania Malaysia OECD average Hong Kong Italy US

40.0% 33.2% 33.3% 34.0%
Comparison of highest personal tax rate

Country Sweden Denmark Netherlands UK Japan Ireland Germany China France USA Poland Brazil Rate 56.6% 55.4% 52% 50% 50% 47% 45% 45% 41% 35% 32% 27.3%
success rate %
25.6% 21.2% 19.0% 20.0% 25.0% 25.0% 25.0% 23.0% 24.0%
60% 40% 20%
26.0%
30.0% 28.3% 29.4%
31.4%
16.0% 16.5% 17.0% 12.5%

Germany Sweden Poland Italy United Kingdom Spain France Netherlands Ireland
0%
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
Net percentage balances 20 15 10 5 0
Decrease
Sources: 1. KPMG (2011), Corporate and Indirect Tax Survey 2011
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 Governments 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 countrys attractiveness for investment, assuming competitors such as Germany and Netherlands do not reduce theirs further Having said this, the UKs current rate is in line with the OECD average and still higher compared to EU countries such as Ireland, Romania or Poland
Increase
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 Governments 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
(5) (10) (15) Availability
(20) Demand 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
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 Irelands crisis. Corporate # 8
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
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Sources: 1. Bank of England. (2001) Trends in Lending, October 2011, 2. Factiva, 3. Financial Times
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6.6 Balance of power in the supply chain

Balance of power shift in the supply chain over the past five years
90% 80% 70%
% of responses

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 couldnt 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
6.6.1 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)
77%
60% 50% 40% 30% 20% 10% 0% In favour of FDM In favour of retailers No change 13% 10%
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. Its 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.
Impact of balance of power shift on your company

100% 80% 60% 40% 20% 0% (20)% (40)% (60)% (80)%
58% 22% (19)% 22% 11% (68)%
46% 37% (17)%
3% 10% 48% (48)% 24% (67)% Positive Neutral Negative
Corporate # 13
% of responses
Turnover
Prot margin
Technology investment
Contract terms
Payment terms
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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
Its 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
6.7 Access to skills

Access to skills (findings from the FDF/Grant Thornton survey)
120% 100%
% of reponses
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
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
80% 60% 40% 20% 0%
25%
36% No Yes
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
75%
64%
C orporates Sources: 1. Grant Thornton analysis
S ME s
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, weve been surprised how difficult it is to find expertise in certain areas such as engineering, particularly food technologists. Corporate # 5
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 Improves study and were utilised for the purpose of this report)
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6.7.2 Reasons for skill shortages (from survey output) The industrys 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 industrys 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-thejob 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

UK food and beverage HE students vs. total HE student numbers
4,000 3,500
Number of students
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
2,547,470
2,600,000 2,550,000 2,500,000
3,000 2,500 2,000 1,500 1,000 500

2006/07 2007/08 2008/09 2009/10
2,362,815 2,306,105 2,650 2,695
2,396,050 3,380
2,450,000 2,400,000 2,350,000 2,300,000 2,250,000 2,200,000 2,150,000
3,065
Food and beverage HE students Total HE students
Since I joined the industry 20 years ago, weve 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.
Number of students
Sources: 1. HESA (2011), Students in Higher Education
UK food and beverage manufacturing and processing FE

40,000 39,000 38,000 37,000 36,000 35,000
2006/7 2008/9
39,401
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. Were good at identifying top performers and giving them the right education and career opportunities but at the expense of the rest. SME # 15
36,025
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
34,000

Notes: a. The definition has changed, therefore the numbers for 2006/7, 2008/9 may not be directly comparable Sources: 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)
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 Page 81
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Total HE students

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 tomorrows dairy leaders. The project was initiated by six dairy companies, namely Arla, Robert Wiseman, Mller 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.
Number of apprenticeship starts
UK food and soft drink apprenticeships starts

2,500 2,000 UK 1,500 1,000 500 0 1,022 24 59 552 387
2006/7
6.7.4 Apprenticeships
2,500
Mller Dairy Even though the course is focused on food science and engineering, students also develop a commercial understanding of the dairy market and products. Mller Dairy
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
Northern Ireland Scotland Wales England
845 35 32 378 400

2007/8
831 117 35 262 417

2008/9
2,500
Notes: a. According to the FDF Sources: 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)

Number of apprenticeship starts
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
1,800,000 1,600,000 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0

2007
1,594,167
1,611,000

England Germany 224,800 239,900

2008
Notes: a. England figures are for fiscal years 2007/8, 2008/9 Sources: 1. Department of Business, Innovation and Skills, 2. Statistisches Bundesamt Deutschland
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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
Section 7
The role of Government in optimising growth
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
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7.0 Section summary

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 industryspecific 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
7.1 The role of Government in optimising growth

Areas of Government support (multiple choice survey question)
Support needed score (1 lowest, 5 highest)
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
Corporates SMEs
5 4 3 2 1 0
Labour law Education reform Taxation Training R&D
3.8
3.8 3.4 3.0
3.6
3.6 3.1
3.6
3.4
3.7
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
The single most important area of Government support (open ended survey question)
60% 50% 40%
% of mentions
50% 27% 19% 0%

Education & training Remove trade barriers & incentivise exports
30% 20% 10% 0%
23%
25%
23% 0%
13%
8%
13% 0%
Focus on innovation

Corporates SMEs
Tax breaks/incentives
Cutting red tape
Employment law exibility
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7.1 The role of Government in optimising growth

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
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
7.2 Education and training

Feedback from primary research on the role of Government Topic
Basic education
Issue
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
Government actions based on FDM feedback

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 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 FDFs 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
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
Incentivise apprenticeships
Reduce labour red tape in hiring and firing staff and increase opportunity to recruit from nonEC labour. SME # 12

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 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
Promote the industry as a career choice and help recruit people across the value chain
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
7.3 Food security

Raw material supply
Issue
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 UKs 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 According to BIAC, OECDs 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 noncommercial 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 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
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 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
Public education
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7.3 Food security

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 havent 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; whats being produced, what needs to be imported and whether its 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 cant 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
7.4 Taxation
Corporate taxation
Issue
UKs 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 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 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

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
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
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, its not 50%; its significantly more than that because you need to add national insurance contributions on top of taxes. Its 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 shouldnt have to pay tariffs to get basic raw material; its crazy especially when my competitors dont 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

Removing trade barriers
Issue
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 Governments attention, better negotiations and more effective lobbying, the Government may be able to negotiate better trading terms with these nations 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 consulates 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 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
Export advice and support
In many cases, FDM businesses and SMEs in particular are not aware of the beginningto-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
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
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 dont use Canadian wheat anywhere else, so we make special products for the Canadian market and that drives up costs. Corporate # 5 Global companies shouldnt 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, its 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 thats 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
Labour law flexibility
Issue
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 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
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
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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, weve 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 dont 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. Weve got compliance of 80-90% in the UK France, Germany and compliance of around 40% in Mediterranean countries such as Spain and Italy. Youve got huge gaps in compliance costs, so the German, French and UK agricultural ministers should fine the countries that dont adopt regulation because at the moment were 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 its 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

Tax relief and tax credits
Issue
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 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

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
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 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
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
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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 dont 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 youre obviously taking a risk, but in reality weve tried it and it is very difficult. If there is any funding available, it is so bureaucratic its 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, its just for ground breaking ideas which dont apply in our case. SME # 13
7.8 Balance of power

Balance of power
Issue
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 UKs 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 dont 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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Patum zzrit, Feedback quisl from iliqui international tie mincin federations ullaorer
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
8.1 International comparison based on interviews with trade associations

Brazil
The Brazilian FDM sector is growning consistently
Canada
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
France
The sector returned to growth in 2010 after a 7% decline in 2009
Ireland
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 industrys priority is to reduce its cost base to remain competitive
Spain
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
Performance of FDM in the country over the past few years
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
Growth drivers

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 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
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 countrys economic recovery
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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)
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Patum zzrit, quisl from iliqui Feedback tie mincin ullaorer international federations

Brazil
Brazil is relatively selfsufficient having access to locally sourced raw materials at better prices and quality in comparison to other markets This gives the country a cost advantage

Brazil
The countrys 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
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 Canadas 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
France
Historically the main EU exporter with a strong agricultural sector, but losing its competitiveness to Germany. This is due to the fact that mediumsized companies are not financially strong enough to pursue export markets
Ireland
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 UK stronger in branding and packaging Ireland was traditionally more focused on the primary sector, but is moving up the value chain
Spain
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
Canada
The biggest barrier to the sectors 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 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
France
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
Ireland
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)
Spain
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
Competitive advantage
Challenges / barriers of FDM in the country
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
France has traditionally had a strong agricultural sector and better availability of raw materials France has a strong food culture
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 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
Comparison with the UK
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
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
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
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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. FIAB (Spanish Federation of Food and Drinks Industries) It depends what country we compare ourselves to, but generally, I would rate Spains 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. FIAB (Spanish Federation of Food and Drinks Industries) 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. FIAB (Spanish Federation of Food and Drinks Industries) Without a doubt exports are the only way to get us out of the crisis. FIAB (Spanish Federation of Food and Drinks Industries) 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. FIAB (Spanish Federation of Food and Drinks Industries) 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%. FDII (Food and Drink Industry Ireland) 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 didnt know how to keep this advantage and benefit from the fact that we have a strong agricultural sector. ANIA (French National Association of the Food Industry) 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. FDII (Food and Drink Industry Ireland) 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 were moving upwards along the value chain. FDII (Food and Drink Industry Ireland) 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. ANIA (French National Association of the Food Industry) 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. FDII (Food and Drink Industry Ireland) Middle income class has been growing exponentially and consumers have more money to spend. Its 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. FIAB (Spanish Federation of Food and Drinks Industries) 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. FCPC (Food and Consumer Products Canada) 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. FIAB (Spanish Federation of Food and Drinks Industries) 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 weve 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. FIAB (Spanish Federation of Food and Drinks Industries) 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. FIAB (Spanish Federation of Food and Drinks Industries) 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 industrys development. ABIA (Brazilian Association of Food Industries)
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. ANIA (French National Association of the Food Industry) 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. ABIA (Brazilian Association of Food Industries) 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. FDII (Food and Drink Industry Ireland) 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 ANIA (French National Association of the Food Industry) 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. FDII (Food and Drink Industry Ireland) 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. FDII (Food and Drink Industry Ireland) 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. FCPC (Food and Consumer Products Canada) We lack a food sector long-term vision and plan driven by the Gov. We have growth action plans, but we dont have a vision thats been bought in by governments to help the industry grow. FCPC (Food and Consumer Products Canada)
Sources: 1. Primary research with trade federations in Brazil, France, Ireland and Spain
Bibliography
Sources 1. ANIA (2011). Bilans et perspectives conomiques 2. Associao Brasileira das Indstrias da Alimentao (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 UKs Food Security in a Changing World 10. Defra (2008). UK Food Security Assessment: Detailed Analysis 11. Economist Intelligence Unit (2011). Views Wire 12. EU (2011). The EU 2011 Industrial R&D Scoreboard 13. European Commission (2010). Forecasts 14. European Commission (2011). AGRIVIEW 15. Eurostat (2011). Short-term and Structural Business Statistics
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Bibliography
16. Factiva (2011). Press releases 17. FAO (2011). International Commodity Prices 18. FDII (2011). The Food and Drink Industry in Ireland Competitiveness Indicators 2010 19. FIAB (2010). Informe Econmico 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 Improves 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 27. Leatherhead Food Research (2011). Top 100 Food & Beverage Companies 28. Mintel (2011). NPD Database 29. OC&C (2011, 2010, 2009, 2008). The Grocer 30. OECD & FAO (2011). OECD-FAO Agricultural Outlook 2011-2020 31. OECD (2011). OECD Structural Analysis Statistics (STAN)
Bibliography
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 compare de la comptitivit des industries agroalimentaires franaises par rapport leurs concurrentes europennes 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 20112012 45. World Intellectual Property Organization (2011). IP Statistics 46. World Trade Organisation (2011). Statistics Database
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Important notice
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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.
Delivering Sustainable Growth 6 Catherine Street, London WC2B 5JJ tel 020 7420 7103 email caroline.fox@fdf.org.uk web www.fdf.org.uk This document is printed on paper which is made from 100% recycled fibres sourced only from post-consumer waste Designed by Red Ant Solutions

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Sustainable Growth in the Food and Drink Manufacturing Industry

Grant Thornton report commissioned by the Food and Drink Federation

8. Feedback from international federations Bibliography

Section 1  Introduction &

Introduction and executive summary

1.1 Fdf Message from President Jim Moseley

Jim Moseley FDF President

Introduction and executive summary

Introduction and executive summary

1.3 Executive summary

Introduction and executive summary

Introduction and executive summary

Introduction and executive summary

Introduction and executive summary

Introduction and executive summary

Introduction and executive summary

Section 2  Methodology &

Methodology and survey population

Methodology and survey population

2.2 Survey population

Primary research completed

500-999 10 10-25m 16 50-100m 10 250-499 12 50-249 25

Sources: 1. Grant Thornton survey analysis

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

Methodology and survey population

Methodology and survey population

2.2 Survey population

2.2.2 Export and R&D profile of businesses surveyed

23% 80% 60% 40% 20% 0%

Sources: 1. Grant Thornton survey analysis

UK R&D facilities by category

23% 80% 60% 40% 20% 0%

48% No UK facility 77% 52% UK facility in place

Sources: 1. Grant Thornton survey analysis

UK FDM sector overview

UK FDM sector overview

3.0 Section summary

3.1 The UK FDM contribution

400,000 300,000 200,000 100,000 0

218,353 34,266 39,320 36,932 41,858 50,553 70,445

211,935 29,015 31,192 31,343 33,796 38,564 72,672

UK turnover food and soft drinks vs. other manufacturing

400 300 200 100 0 55

(2)% (3)% 406 393

UK FDM sector overview

UK FDM sector overview

3.1 The UK FDM contribution

3.1 The UK FDM contribution

(7)% (15)% (10)% (15)% 17

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

UK employment levels (average during the year)

(1)% (3)% (5)% 2,735

3,000 2,500 2,000 1,500 1,000 500 0 484

(3)% 2,665 2,403 2,204

(4)% (6)% (8)% (10)% (12)%

(5)% 2,973 2,821

Other manufacturing employment

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

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

(10)% 409 392 377

0% -1% 78.9 78.9 77.8

-9% 8.6 8.7 8.9 9.1 9.2 9.6 9.7 9.7

UK FDM sector overview

Section 1 Introduction &

Section 2 Methodology &

Section 4 Growth drivers