The UK Market for Agri-Food and Horticultural Products: opportunities for Dutch SME s

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1 The UK Market for Agri-Food and Horticultural Products: opportunities for Dutch SME s Report produced on behalf of the Embassy of the Kingdom of the Netherlands, UK by Promar International. July

2 Background The Embassy of the Netherlands commissioned leading agri-food consultancy Promar International to review the UK agri-food and horticultural market. The purpose of the research was to identify opportunities in the UK agri-food market for Dutch food and drink Small and Medium Sized Enterprises (SME s) (1-5 year time horizon). The research was carried out between April and June 2013, consisting of: Desk-based analysis of a significant body of published information and data. Supplemented by telephone interviews with industry leaders. This report documents key analysis, insights and conclusions. 2

3 Contents Chapter 1: Executive Summary...4 Chapter 2: Economic Outlook...11 Chapter 3: UK Agri Food Sector Map...23 Chapter 4: UK Agriculture...26 Chapter 5: UK Food and Drink Manufacturing...56 Chapter 6: UK Trade in Food and Drink...66 Chapter 7: UK Food Retail and Food Service Market...87 Chapter 8: Opportunities for Dutch Suppliers Chapter 9: Supporting Information

4 Chapter 1: Executive Summary Chapter contents: Key research findings. Key conclusions and opportunities for Dutch SME s 4

5 Executive Summary We believe the UK is an attractive market for Dutch businesses for several reasons. A large and growing population means there is significant demand for food and drink products: In 2012 total household expenditure on food and drink through retail and food service channels was 187* billion a figure that has grown by 2.5% per annum since The UK has one of the biggest and most advanced grocery retail markets in Europe. It is more than twice the size of the retail market in the Netherlands and UK grocery retailers are considered to be some of the best in the world. The food service market in the UK is more than 3.5 times the size of the Netherlands. There are many leading global businesses as well as a huge variety of cafes, restaurants and bars. The agri-food industry in the UK is becoming increasingly globalised: This means the UK is becoming more reliant on trade. This is extremely promising as the Netherlands is the UK s biggest trading partner accounting for 12% of all food and drink imports in The UK welcomes direct inward investment by foreign businesses. Indeed, in the last decade there have been several major, high profile investments made by foreign investors in the UK and foreign firms now occupy major positions in the UK agri-food sector. There is no reason to suggest this trend cannot continue. Includes retail sales of alcoholic drinks 5

6 Executive Summary The UK agri-food market is also highly competitive and there are no easy opportunities The UK is a major food producer focused on supplying the domestic market: Dutch businesses must compete against a large, well established and technically proficient agricultural industry, which supplies two-thirds of the food industry s domestic requirements. Consolidation of the agricultural industry and supply chain integration has created greater alignment between farmers and the food chain, which (aided by volatile market conditions) has led to the formation of long-term supply chain relationships between buyers and suppliers in both retail and food service channels. It will be especially difficult for Dutch businesses to establish a foothold in the market where long-term supply chain relationships are already in place. The current climate supports a pro-british approach to sourcing some commodity items; in particular meat, seasonal fresh produce, poultry, cereals and milk. In some cases (especially liquid milk) the UK market is effectively closed to foreign businesses unless they invest directly in the supply chain. The demands and specifications of buyers can be extremely challenging, especially for those new to the market: Product safety and quality protocols are extremely high and recent events have only increased the requirements for suppliers to demonstrate transparency and traceability throughout the supply chain. Price is important and negotiations can be notoriously difficult but there are also high expectations with regards to product innovation, marketing requirements, demonstrating sustainability and ethical credentials. There are many established global and local players that fiercely defend their market share. It can take suppliers a long time and require significant investment to enter the market. 6

7 Executive Summary Overall we believe that suppliers from the Netherlands are in an excellent position. Dutch businesses have several key assets which enhance the potential for doing business in the UK: Significant potential for innovation at all stages of the value chain. The Dutch agri-food landscape (i.e. the interaction of universities, R&D centres and businesses) promotes innovation and knowledge transfer. An entrepreneurial and progressive mindset. The Dutch agri-food complex has arguably evolved at a quicker pace than its European counterparts when it comes to the withdrawal of political intervention. Focussed on supplying international markets. Dutch businesses have historically aligned their businesses to supply target markets. Already a key supplier to the UK market. There is a long history of doing business between Dutch and UK markets, which facilitates even more engagement. 7

8 Executive Summary However, suppliers must also be responsive to a fast changing environment and consider how best to engage the UK market. How things have been done in the past is not necessarily how things should be done in the future. How and where consumers purchase food and drink is changing. Consumers, heavily influenced by the economic environment, increasingly seek value (price) as well as values (e.g. ethical considerations). Local and global provenance co-exist as local and global issues matter more to consumers. There is increased pressure for supply chains to be shorter, more agile, more transparent and based more on a long-term relationship focus than short-term and transactional. Market and economic conditions constantly change the dynamics of the industry. There is no reason to suggest that businesses in the Netherlands cannot succeed in the UK market providing they have a good product / service, a clear strategy, operational plan and the right mentality. 8

9 Executive Summary We believe there are two broad ways in which Dutch suppliers should approach the UK market.(1) The difference is distinguished by whether the business is a volume player in the market or a niche player in the market. Volume players Volume suppliers to the UK market have benefited from a well functioning wholesale market system on both sides of the channel. This has undoubtedly helped the Netherlands to achieve its current position as the leading non-domestic source of food supply to the UK market. However, the wholesale market model is under threat from buyers that increasingly demand short, transparent and dedicated producer aligned supply chains and for some commodities - growing support for British product. We believe the wholesale market model will be an opportunity for some but it will not be the preferred route-tomarket the major UK buyers would like to use. In our view, this leads to an increasing necessity for Dutch suppliers to get closer to the UK market in other ways; for example: By establishing direct-supply relationships with UK buyers. By utilising a UK based marketing partner. Through direct investment in the UK supply chain (M&A or greenfield investment). (1) We do not suggest these are by any means the only opportunities. Our conclusions are based on the weight of evidence analysed and the insights obtained through trade interviews. 9

10 Executive Summary Niche players The innovative potential of Dutch suppliers provides an excellent platform for Dutch SME s to create opportunities at all stages of the value chain. The precise opportunities are potentially endless but we have categorised them in three broad areas as follows: 1. Exporting high-tech production and processing technologies and agri-food intellectual capital. Enabled by significant clusters of R&D organisations in Food Valley and close collaboration between government, academia and industry. 2. Creating higher value products from standard foodstuffs to provide high value solutions to UK businesses. For example, functional food ingredients such as enzymes, proteins, flavours, colours and nutraceuticals. 3. Marketing artisanal and traditional Dutch speciality products on a global provenance platform. Current knowledge and awareness by UK consumers of Dutch specialities (e.g. cheeses, cooked meats, waffles and so on) is low but, with appropriate marketing, could follow in the footsteps of suppliers from France, Spain and Italy. 10

11 Chapter 2: Economic Outlook Chapter contents: Brief overview of UK economic position. Impact of economic environment on UK consumers. Industry perspectives.

12 Economic outlook The financial crisis of 2008 caused a deep recession in the UK economy lasting 15 months. An initial rebound in 2009/10 gave way to a second recession in 2011 which lasted for 9 months. Recent data from the Office for National Statistics shows that the UK narrowly avoided a third recession at the end of 2012 and beginning of In fact the economy grew by 0.3% in the first quarter of This recent data has meant more people are cautiously optimistic that the UK economy is on the road to recovery. GDP growth of up to 1% is forecast for the UK in GDP growth of 2% per annum is forecast from 2014 onwards. At the same time as the outlook for Eurozone countries has got worse: Economic growth in the Euro area in 2013 will be virtually nil according to the OECD. Debt problems in southern Mediterranean countries and the political structure of the EU continues to prevent recovery. In the short term the UK economy looks to be in a better position than Europe. We believe this creates immediate opportunities for businesses in the Netherlands to invest in and/or trade with the UK. Once the UK economy is on a path to sustainable growth we believe that the UK economy will continue to be a fundamentally attractive long term market for businesses in the Netherlands to invest in and/or trade with. 12

13 Industry perspective(1) I would expect 2013 to be more or less a carbon copy of Little or no growth. I think 2014 will feel like the year of recovery. I am cautiously optimistic about the economy in The sense of optimism is improving. We are clearly not out of the woods yet but we are getting there. Europe looks to be in a far worse position than the UK. Some of the unemployment data looks terrifying and Germany is fundamental to keep the whole economy going. I question how sustainable that is. Right now I think the UK is more attractive because it s outside Europe; our prospects look better and we are a relatively less risky economy to do business with at the moment. (1) Trade interviews 13

14 Economic outlook UK GDP growth (%)(1) Quarter-on-quarter Year-on-year Euro: Sterling Monthly Average Spot Exchange Rate (2) UK inflation growth (CPI measure (%) (1) Actual Bank of England Target UK Central Bank Interest Rate (%) (2) (1) Office for National Statistics (2) Bank of England 14

15 Regional economy The UK population is estimated to be 63.2 million (31 million men and 32.2 million women). London is the most highly populated area (circa. 8 million people). Other densely populated urban areas include major cities such as Birmingham, Manchester, Leeds, Liverpool, Newcastle, Glasgow, Bristol, Edinburgh, Cardiff and Belfast Average earnings are highest in London ( 34,984 p.a.) and the South East ( 28,181 p.a.) and lowest in Wales ( 23,617) and the North East ( 23,779). Northern Ireland Scotland Wales South West South East London East West Midlands East Midlands Yorkshire and The Humber North West North East United Kingdom Average Annual Earnings by Region ( )(2) 0 10,000 20,000 30,000 40,000 London and the South East has proven to be more resilient to the economic environment than other regions of the UK. Map of the UK distorted to reflect population density(1) (1) The Daily Telegraph (2) Office for National Statistics 15

16 Demographics The UK population is ageing. In % of the population was aged 65 and over a figure that is expected to increase to circa 23% by The median age of the population in 2011 is circa. 40 years and is increasing. People in a non-white ethnic group as a percentage of all people(1) Changing age structure of UK population )(1) 100% 90% % 70% 60% 50% 40% 30% 20% 10% 0% The UK is an ethnically diverse population. There are concentrations of ethnic groups in major urban centres such as London, Birmingham, Leicester and Manchester. Indian is the largest non-white ethnic group followed by Pakistani and Black/African/Caribbean/Black British. (1) Office for National Statistics 16

17 Consumer reaction UK consumer activity has been heavily influenced by the prevailing economic environment since Household expenditure (all items) has been subdued. Unemployment is currently at 7.8% - its highest level for some time. Slow growth in average earnings has failed to compensate for rising prices (especially fuel and food). As a result most households in the UK feel worse off. Although food and drink is less exposed to the effects of recession than other sectors of the economy, there has been a notable impact on consumer behaviour: Consumers are far more conscious of food prices. Consumers have been buying less or trading down (i.e. selecting more economical options) for products such as bread, cereals, red meat, fruit and vegetables (amongst others). Promotions, discounts and value for money are important motivating factors for consumers. Eating out (e.g. in restaurants) has once again become more of an indulgence or to mark a special occasion than a regular occurrence. 17

18 Consumer reaction At the same time UK consumers are also more demanding that their food and drink deliver additional benefits and are still prepared to pay a price premium for them; for example: Many (but not all) consumers increasingly expect staple items such as bread, meat, milk, seasonal fruit and vegetables to be of British origin. Many (but not all) consumers increasingly expect food to be produced in a fair and ethical way. Consumers rely on third party product labels (e.g. FairTrade, Red Tractor, RSPCA Freedom Foods) as evidence of welfare/sustainability credentials. Health and wellness is a key motivating factor for many consumers that seek out products which are low in salt, fat and sugar, contribute to their daily required intake of 5 portions of fruit and vegetables, are free-from artificial additives and ingredients, contain functional health ingredients and so on. Consumers are increasingly demanding convenience products that fit in with busy time poor lifestyles (especially for weekday meals), particularly those that are positioned on a health and wellness platform (e.g. healthy prepared meals, salad pots, fruit juices and smoothies and so on). The legacy of the events of recent years appears to be an adjustment in what consumers consider to be value-for-money. Consumers will seek out promotions and discounts for undifferentiated everyday products. Consumers are prepared to pay more on products that deliver clear tangible benefits (e.g. convenience, health). 18

19 2008 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q4 Consumer reaction 2 UK Household Expenditure Growth(% change, quarterly)(1) UK Unemployment (%)(1) European Union United Kingdom -2 4,000 3,500 3,000 2,500 2,000 1,500 1, Comparison of Monthly Earnings (EUR)(2) Ger Nl It Fr UK Sp Growth in earning and prices (%)(1) Earnings Prices (1) Office for National Statistics (2) Eurostat (as at 2012) 19

20 Bought 4.2% less Food retail prices & consumer reaction Consumers bought 4.2% less food in 2011 than in 2007, in particular: Bread Beef Lamb Fish Fruit Vegetables Potatoes Alcoholic drinks % UK Food Inflation (percentage change on last year)(1) CPI Food RPI Spent 12% more Consumers spent 12% more for food in 2011 than in 2007, especially on: Butter Eggs Sugar and preserves Chocolate Bacon Cereals Coffee and other hot drinks Consumers saved 6.8% by trading down, especially on: Cereals Biscuits and cakes Lamb Pork Fish Butter Eggs Tea (1) Office for National Statistics 20

21 Industry perspective(1) We regularly track consumer behaviour and one of the key things that we see is a re-evaluation of value for money. Overall the quantity of consumer goods being purchased is falling as consumers improve their own financial position by paying down debt. Food prices remain a key issue for shoppers; they are very aware and sensitive to changes. Shopping behaviours are becoming more polarised there is growth in the premium and economy extremes of the market but little to no growth in the middle. I believe that is because the value for money proposition is more obvious to consumers at the premium and economy extremes of the market. We are still seeing double digit growth in our food service sales channels, which is not the rational response we expected to see. People do not seem to be cutting back on food purchased out of home and affordable indulgences. We are seeing increased demand for messaging and labelling on menus; for example, dietary information, sustainability information because consumers are more concerned about how their food is produced. (1) Trade interviews 21

22 Industry perspective(1) Consumers are more price conscious and that has led to an increased expectation that promotions are more common, loyalty has diminished as consumers are prepared to seek out the best deals and private label products are a bigger feature of the market. We see a mixture of consumer behaviours. London and the South East is quite different, it s more multi-cultural and affluent and people seem to be prepared to experiment more, try new products. In other parts of the country people are more conservative and less prepared to take risks. Consumers appear to be a lot more price and issue driven. Price is a symptom of the economic environment. Issues such as sustainability, waste, provenance, animal welfare, safety are more important to consumers but as they tend to be informed mostly by the media the level of knowledge is mostly superficial. (1) Trade interviews 22

23 Chapter 3: UK agri-food sector map Chapter contents: Diagrammatical overview of the UK supply chain. Brief discussion on key trends.

24 UK agri-food sector map(1) Exports 18.2bn(of which) Highly processed 10.6bn Lightly processed 6.9bn Unprocessed 1.6bn UK Consumers 63 million Total consumer expenditure (retail and food service channels) 187bn Consumer spend food service 81bn Consumer spend food retail 106.4bn Food service outlets Gross Value Added bn Employees 1,514,000 Enterprises 115,177 Outlets 431,109 Whoelaslers Gross Value Added - 9.2bn Employees 195,000 Enterprises 15,115 Food retailers Gross Value Added bn Employees 1,246,000 Enterprises 53,641 Stores 89,679 Manufacturing (includes everything from primary processing to more complex foods) Gross Value Added bn Employees 404,000 Enterprises 7,472 Manufacturing sites 9,340 Agricultural Whoelaslers Gross Value Added - 2.0bn Employees 40,000 Enterprises 4,125 Supply industry (incl. Machinery) Gross Value Added - 407m Employees 6,000 Enterprises 433 Agricultural supply industry (machinery, fertilizers, pesticides) Gross Value Added - 1.1bn Employees 12,000 Enterprises Farmers & Primary Producers Gross Value Added - 8.8bn Employees 481,000 Farm holdings 222,668 Imports 37.6bn (of which) Highly processed 13.8bn Lightly processed 16.8bn Unprocessed 7.1bn (1) Defra 24

25 Key trends The key stages of the UK agri-food supply chain include production, processing and manufacturing, wholesaling, import and export and sales direct to consumers via retail and food service channels. The processes within the grocery supply chain are becoming more integrated. Retailers want to work closer with suppliers so that they can increase flexibility, reduce lead time and increase frequency of deliveries to lower the amount of stock held. Consolidation within the supply chain has also become more widespread. Certainly vertical consolidation has seen strong growth. Retailers for specific product categories are now using their own processing facilities, with direct sourcing pools. Manufacturing facilities will have direct agreed contracts with retailers, and will have to deliver large volumes at competitive pricing. Horizontal consolidation has also occurred, with fewer, but larger processors, and the same is seen with producers. Whilst retailers work directly with suppliers and processors for their products, and will already have established relationships, smaller chains and independent retailers use wholesalers to buy produce. Price tends to be the main driver. 25

26 Chapter 4: UK Agriculture Chapter contents: UK agriculture facts and figures Overview of key product sectors (production & self-sufficiency) Sector specific summary of the supply chain vertical. Key trends analysis. Industry perspectives.

27 UK agriculture overview Farming defines the national landscape and plays a critical role in supplying two thirds of the UK s food and drink manufacturers raw material requirements. Land in agricultural use is +17million hectares (~70% of total UK area) and nine times that of the Netherlands. There are 221,000 registered holdings and employs 476,000 workers, which is three times that of the Netherlands. It contributes 8billion gross value added to the UK economy (~2% of total UK output) and twice that of the Netherlands. The UK s temperate climate and varied geography means that a broad base of commodities can be sustainably produced; key sectors include livestock ((i.e. meat - beef, lamb, pig and poultry) equivalent to 35% of total agricultural output), cereals and industrial crops (21% of total output), livestock products (e.g. milk and eggs) (19% of total output) and vegetable and horticultural products (10% of total output). UK self-sufficiency for all food and drink products in 2012 was 62% and varies considerably by sector: Self-sufficiency is highest in cereals (105%), milk (102%), beef (89%) and poultry (87%). Self-sufficiency is lowest for fruit (12%), vegetables (59%) and pigs (56%). UK farming is regarded as technically proficient and globally competitive and plays an important role in managing the natural environment. 27

28 Employees and owners Land, labour and holdings Agricultural land use(1) Land use by farming type(%)(1) % 73% 72% 71% 70% 69% 68% Utilised agricultural area (000 ha) % of total UK area 19% 9% 35% 21% 3% 3% 10% Cereals & industrial crops Vegetables & horticultural products Potatoes Fruit Other crop products Livestock Livestock products Other Agricultural labour force (000 s)(1) Ave decline of 3,000 pa Number of holdings by size (000 s)(1) hectares and over to under 100 hectares 20 to under 50 hectares under 20 hectares (1) Defra: Agriculture in the United Kingdom:

29 UK agricultural output and value added Agricultural accounts UK million(1) CAGR (07-12) 7% Gross output (basic prices) Gross value added (basic prices) CAGR (07-11) 7% Total income from farming CAGR (07-11) 8% (1) Defra: Agriculture in the United Kingdom:

30 UK agriculture compared to the Netherlands 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2, ,190 UK NL 1,858 Agriculturalland use (000ha) 476 UK NL 209 Employment (000) UK NL 83 Number of holdings (000) 8 UK NL 4 Gross value added (EURbn) (1) Defra: Agriculture in the United Kingdom:

31 UK agriculture trends The route-to-market for agricultural commodities has become increasingly consolidated. Farmers are increasingly aligned to the supply chain with long term supply contracts. Often these are through business structures such as co-operatives, which may also own processing operations or through marketing groups which act as an intermediary between the farmer and processor. These supply chain relationships sometimes extend to the retailer where they see benefit in securing long-term supplies or in marketing the provenance of key products such as milk. This arrangement creates a vertically integrated supply chain model from producer to retailer, which is a barrier to entry to foreign businesses without direct inward investment. Sectors with the highest degree of vertical integration and therefore represent a major barrier to businesses in the Netherlands include: Liquid milk. Virtually all retailers have a long term supply contract with farmers via the major milk processors (Muller/Wiseman, Arla and First Milk). Poultry. +70% of poultry consumed (by volume) in the UK flows through a supply chain involving a major integrator and multiple retailer. Other sectors such as pork, beef, fresh produce are also integrated but to a lesser extent (i.e. they may involve integration of some but not all of the supply chain such as production and processing only) but other supply chain models are also evident (such as wholesale markets for fresh produce). These chains remain less closed to opportunities for Dutch traders. 31

32 Industry perspective(1) The underlying and long term trend is of consolidation. In all sectors we see fewer farms but they tend to be operating on a larger scale. One of the biggest challenges in the agricultural industry remains farmer succession. We struggle to recruit enough young farmers into the industry to replace those retiring and exiting the industry. The average age of a farmer in the UK is 58 which is far higher than other industries. UK agriculture is benefitting from the global tightening in the balance of supply and demand for agricultural commodities. It is helping to drive prices up and provides long-term optimism they might remain at a higher level. A lot of knowledge is leaving the industry. As older farmers retire and there are fewer younger people taking over we risk losing valuable farming know-how. (1) Trade interviews 32

33 Industry perspective(1) Following the Horsegate scandal [i.e. Detection of horse meat in products labelled otherwise] we have seen renewed demand for British agricultural produce, not just in the retail sector but also in the food service sector from companies such as Greggs and Boots. We have seen the strategic supply chain model in the retail sector start to take hold in the food service sector. Companies such as KFC are wanting to build closer relationships with suppliers. The outlook for the agri-food sector in the UK is very positive. The UK is home to world class farmers and agri-food businesses who are technically proficient and globally competitive. We have strong domestic markets in sectors such as dairy, grains, pig poultry and beef and food companies that are interested in local sourcing. (1) Trade interviews 33

34 million Cereals Production (000 tonnes) and selfsufficiency (1) 115% Total value of production and prices (1) % 105% 100% 95% 90% 85% Vol (000 tonnes) Productio n as % of total usage (rhs) /tonne Cereals production millions Cereals(2): The UK is the fourth largest producer of cereals and oilseed crops in the EU. 5 million hectares of land in the UK is used for growing crops with 80% of this used for production of cereals and oilseeds. Cereal production in the UK tends to be focused on the Eastern side of the country. As a result cereal processing units and stores tend to be located in the same parts of the country. Milling wheat price tonne Malting barley price tonne Oilseed rape price tonnes) (1) Defra: Agriculture in the United Kingdom: 2012 (2) Agriculture and Horticulture Development Board 34

35 Cereals vertical summary Production Cereal farming Central Storage Merchants/FCBs Exports Imports Primary Processing Maltsters Millers/ flour mills Starch manufacturers Feed Secondary Processing Brewers & distillers Food industry E.g. manufacturers of baked goods, breakfast cereals, sauces Livestock farms Consumption Beer and whisky Bread, biscuits, cakes, flour, breakfast cereals, sauces Meat, Dairy, Eggs 35

36 Horticulture: fruit Production (000 tonnes) and selfsufficiency (1) % 12% 10% 8% 6% 4% 2% 0% Vol (000 tonnes) Production as % of total usage (rhs) Total value of production ( million) and prices ( /tonne)(1) Horticulture: 200,000 hectares of land is used to grow horticulture (fruit, vegetables and ornamentals) in the UK. The highest concentration of horticultural production is in Eastern England with much of the glasshouse production occurring in this area. Flower production again occurs mainly in the East with another cluster in Cornwall in the West. Fruit production millions Dessert apples Pears Raspberries Stawberries (1) Defra: Agriculture in the United Kingdom: 2012 (2) Trade interview 36

37 million Horticulture: vegetables Production (000 tonnes) and selfsufficiency (1) 70% 60% 50% 40% 30% 20% 10% Vol (000 tonnes) Production as % of total usage (rhs) Total value of production ( million) and prices ( tonne)(1) /tonne % Total production area (000 ha)(1) Fresh vegetable production millions" % open production 1% protected cauliflowers tomatoes (1) Defra: Agriculture in the United Kingdom:

38 Horticulture: potatoes Production (000 tonnes) and selfsufficiency (1) % 80% 70% 60% 50% 40% 30% 20% 10% 0% Vol (000 tonnes) Production as % of total usage (rhs) Total value of production ( million) and prices ( tonne)(1) Total production area (000 ha)(1) Fresh potato production millions early potatoes maincrop potatoes all potatoes (1) Defra: Agriculture in the United Kingdom:

39 Fresh produce vertical summary Seed merchants, agro-chemicals, machinery, plant breeders, R&D UK horticultural farms 200,000ha planted area Producer groups, Co-Ops, marketing agents Fruit and Vegetables imports Fresh fruit Fresh Vegetables Packing facility PYO b /Farm shop/veggie boxes Multiple retailers (c.80% by volume) Food service Wholesalers Independent retailers 39

40 Floriculture Production ( million) and selfsufficiency (1) Total production million Production as % of total usage % 52% 51% 50% 49% 48% 47% 46% 45% 44% 43% UK floriculture production by type (000tonnes)(1) Total production area (000 ha)(1) The overall value of production in the ornamental sector remained static at 1.0 billion in 2012, reflecting slow and challenging trading conditions across all market sectors (1) Defra: Agriculture in the United Kingdom:

41 Floriculture vertical summary UK production (incl. bulbs, cut flowers, foliage, indoor plants, outdoor plants and trees (c. 1.05bn) Imports (c. 1.05bn) NL account for 77% UK exports (mostly narcissi) 0.47bn Wholesale Markets (e.g. New Covent Garden Market) Supermarkets Garden centres & nurseries Online Retailers are increasingly establishing direct sourcing relationships with growers (UK and overseas). Consumers (c. 2.05bn spend) 41

42 Pigs Production (000 tonnes) and selfsufficiency (1) 70% 60% 50% 40% 30% 20% 10% Vol (000 tonnes) Production as % of total usage (rhs) Total value of production ( million) and prices ( tonne)(1) Total production millions Pig price (pence/kg deadweight) % (e) UK pig holdings (000 s), by size of holding(1) 12% Total 10,900 holdings 9% 11% 47% 1 to 9 pigs 10 to to to % and over (1) Defra: Agriculture in the United Kingdom:

43 Pig meat vertical summary Feed, Agrochem, Machinery Pig Herd Live pig imports Marketing Groups Pig marketings Live pig Exports Abattoirs Exports Wholesalers, traders, depots Processors Imports Retail Fresh/Frozen Retail Bacon Retail Processed Food Service Consumers 43

44 Poultry Production (000 tonnes) and selfsufficiency (1) UK poultry holdings (000 s), by size of holding(1) 17% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Total 2,400 holdings 1 to broilers Vol (000 tonnes) Production as % of total usage (rhs) Total value of production ( million) and prices ( tonne)(1) (e) Total production millions Prices (average producer prices (pence per kg carcase weight)): % 58% to and over (1) Defra: Agriculture in the United Kingdom:

45 Poultry vertical summary Breeding Farms & Laying Hens Egg Hatcheries This aspect of the chain is typically integrated by major players Company Growing Units Raise broilers (hens reared for meat, not eggs) Marketable broilers Contract Broiler Growers Abattoirs Processors Fresh exports (mostly dark meat) Fresh and processed Imports Wholesalers Processed Exports Food Service Retailers Consumers 45

46 Beef Production (000 tonnes) and selfsufficiency (1) % % % % % % % % % % 0 0% Vol (000 tonnes) Production as % of total usage (rhs) 500 Total value of production ( million) and prices ( tonne)(1) 0 Total production millions Finished cattle (pence per kg liveweight): All prime cattle (e) UK beef holdings (000 s), by size of holding(1) 13% 5% 11% 13% 19% 39% Total 60,500 holdings 1 to 9 beef cows 10 to to to to and over (1) Defra: Agriculture in the United Kingdom:

47 Beef vertical summary Feed, Agrochem, Machinery UK Dairy farms UK Suckler Herd Store producers Finishers Home fed beef marketings Live cattle imports Live cattle Exports Marketing Groups Auctions Abattoirs Imports Exports Processors Wholesaler s/traders Intervention Retail Fresh/Frozen Retail Processed Food Service Consumers 47

48 Dairy Production (000 tonnes) and selfsufficiency (1) % 100% 80% 60% 40% 20% 0% Vol (000 tonnes) Production as % of total usage (rhs) Total value of production ( million) and prices ( tonne)(1) 0 Total production millions Prices (average price received by milk producers, net of delivery charges (pence per litre)) (f) (e) UK dairy herd (000 s), by size of holding(1) % 17% 22% 32% 14% Total 22,600 holdings 1 to 9 dairy cows 10 to to to and over (1) Defra: Agriculture in the United Kingdom:

49 Dairy vertical summary Feed, Agrochem, Machinery UK Dairy farms On farm waste and stock use Liquid imports Available for human consumption Liquid exports Liquid milk Manufacture 42 Dairies 51 Dairies 11 Dairies n/a 6 Dairies 11 Dairies Doorstep Retail Cheese Butter Cream Condensed SMP Consumers 49

50 Cross-cutting themes Environment. As agriculture accounts for 70% of total land use in the UK its role in managing the environment is key. It is also a key feature of the CAP (recent negotiations identified three core areas: crop diversification, ecological focus areas and retention of permanent grassland ) which will continue to have a significant bearing on farming practices. Compliance & legislation. Driven in-part by environment factors as well as pressure to increase supply chain transparency and accountability there has been a significant increase in the extent of legislative compliance UK farmers are required to complete. Whilst seen as burdensome it also helps to raise production standards across the whole of the farming base. Profitability. Total Income From Farming (TIFF), which is the governments measure of profitability, indicates that UK farming is the most profitable periods it has been for over 30 years. However, profitability varies considerably depending on enterprise size and type (e.g. dairy / livestock / arable / fresh produce etc) as well as natural cycles and unforeseen events. As the UK agricultural industry is increasingly liberalised profitability is increasingly affected by global events, in particular the balance of global supply and demand for commodity products influencing UK prices. Confidence and investment. Investment by agricultural enterprises in the UK also varies in line with profitability. In some sectors, such as pig production, extended periods of poor profitability has left a legacy of underinvestment in assets. Even when profitability levels improve farmers are sometimes reluctant to invest because of a lack of confidence that profitability can be sustained. 50

51 Cross-cutting themes Succession. The average age of a farmer in the UK is 58 and there is a shortfall of younger people entering the industry. Business succession is therefore a major issue to many businesses but particularly in family run generational farms. Rather than family farm being passed on to the next generation it is increasingly likely that farms will continue to consolidate so that there are fewer, larger farms. Supply chain practices. In 2009 the Competition Commission introduced a Grocery Supply Chain Code of Practice (GSCCOP) to govern practices and policies throughout the supply chain. The code of practice was introduced following sustained concerns of unfair practices. Economic liberalisation and political reform. Ongoing CAP reform and globalisation of markets means that the UK agriculture industry is increasingly exposed to global developments. For example, global commodity prices have much more significant bearing on UK commodity prices, changes in natural business cycles, the development of global supply chains, geopolitical shocks (such as trade restrictions) and so on. 51

52 Industry perspective(1) UK [horticultural] production is highly exposed to the weather because the vast majority of production is not protected under glass. This makes it difficult to guarantee volume supply at the edges of the growing season. It also influences consumers. An early sunny spell in March creates instant demand for produce that is not yet in season. Food on the move is a key target for us. We target out of home consumption opportunities [such as lunch] with single serve salad products that are, healthy, easy and convenient to eat. Safety is much less of a concern in fresh produce supply chains so the decision to source British or imported produce is more of a commercial or moral decision. Low prices can still open doors in some parts of the market. Currently our pre-prepared salads are showing the strongest sales growth. These are premium lines that retail for 2.50 to 3.00 per item, which is not what we expected to see given the economic environment. I think that consumers see these as value-for-money because the cost of purchasing all the individual elements are greater and there is less waste. (1) Trade interviews 52

53 Industry perspective(1) The UK liquid milk market is effectively closed to foreign suppliers without direct inward investment in the UK supply chain. It is difficult to envisage a SME entering this market as it is highly concentrated and capital costs of entry very high. The big picture indicators for UK dairy are positive. We are close to cost of production prices but that s largely due to 2 years of poor weather. We are currently seeing prices pick up and this is leading to increased confidence. There are opportunities outside of the cow liquid milk market. Alpro have been successful not just in the UK market but globally as the appeal for non-dairy sources of milk [e.g. Soy, rice, almond] grows amongst a group of consumers that perceive them as healthier. I believe that the major milk processors in the UK will increasingly look to capitalise on milk powder markets in high growth economies such as the BRICs. The biggest barrier to entry to the UK liquid milk market is scale. (1) Trade interviews 53

54 Industry perspective(1) Although the UK is technically self-sufficient in lamb we still import a considerable amount of meat from New Zealand because UK consumers demand year round supply. The horse meat scandal has helped UK producers in the short-term at least. We have seen demand for British beef sustained and people have traded up and purchased more expensive cuts. One of the biggest challenges to producer profitability [meat sector] is the price of feed...it often means the difference between a producer making a profit or a loss. There is a massive opportunity for Dutch growers to get closer to the UK market. Projects such as Thanet Earth demonstrate that it is possible. A major challenge for Dutch SME businesses is going to be receiving financial backing. The fresh vegetables industry is in a period of consolidation. Farming and packaging has become very much a scale business. It is difficult to compete without scale now because the business is capital hungry on the production. (1) Trade interviews 54

55 Industry perspective(1) In some cases producers have invested in processing, packing and distribution facilities and deal directly with multiple retailers We have one of the best [pig meat processing] plants in the UK, which is about 10-15% more efficient than the rest. But if you compare this plant with European ones, particularly in Denmark and Holland we are only really on a par with their average and a long way behind the best I think that in the next five years we will see more rationalisation and consolidation across the processing sector. However, there is also likely to be more investment in new processing facilities, especially in East Anglia. The rise in feed [prices] has significantly impacted the profitability of the [poultry] industry because the price increases at retail have not been sufficient to compensate. This cost pressure will force more rationalisation and drive more efficiency in the supply chain. (1) Trade interviews 55

56 Chapter 5: UK Food and Drink Manufacturing Chapter contents: UK food and drink manufacturing key facts and figures Investment examples. Procurement strategies. Key trends analysis. Industry perspectives.

57 UK food and drink manufacturing Employing 400,000 people, worth 72 billion in total turnover and contributing 19.5 billion in gross value added food and drink manufacturing is the single biggest manufacturing sector in the UK and is therefore vital to the UK economy. There are approximately 7,000 food and drink manufacturers registered in the UK. There is tremendous variety the UK is home to many of the world s most recognised global FMCG brands as well as many local and regional players. Beverages represents the biggest manufacturing sector worth 16.5 billion. Meat and meat products represents the second biggest sector worth 14 billion. Bakery ( 10 billion) and Dairy ( 8 billion) are other major sectors. They are also mature sectors and output growth is in the low single digits. Although fruit and fresh vegetables processing is a smaller market by comparison ( 6 billion), it is a sizeable high margin opportunity that is growing by as much as 10% per annum. 57

58 66,052 18,309 6,489 69,673 18,762 6,327 72,862 19,343 6,380 72,062 19,476 6,439 Size and performance UK food manufacturing industry(1) CAGR (08-11) 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10, % 16% 14% 12% 10% 8% 6% 4% 2% 0% Total t'over food manufacturing ( million) Gross value added ( million) Number of enterprises Food manufacture t'over as % of total UK manufacturing t'over (rhs) +2.2% +1.6% -0.2% UK Food manufacturing turnover by industrial classification (%)(1) 19% 23% 12% 18% 8% 8% 10% 2% Meat and meat products Fruit and fresh vegetables Vegetable and animal fats Dairy products Grain mill and starch products Bakery Other food Beverages (1) Office for National Statistics, Annual Business Survey 58

59 UK manufacturing compared to the Netherlands 7,000 6,000 5,000 4,000 3,000 2,000 1, Number of enterprises(1) 6,439 4,195 UK NL Gross output EURbn(1) UK NL Number of employees (000) (1) UK NL Gross value added EURbn(1) UK NL (1) Office for National Statistics and CBS (Statistics Netherlands) 59

60 Manufacturing growth by industrial classification(1) 45% GVA as a percentage of turnover 40% Bakery, 9,880 Other food products, 15,647 35% Fruit and fresh vegetables, 5,985 30% Beverages, 18,440 25% Dairy products, 8,386 Vegetable/animal oils and fats, 1,111 20% 15% Grain mill and starch products, 6,647 10% Meat and meat products, 14,741 5% Turnover growth (% p.a.) 0% -6% -4% -2% 0% 2% 4% 6% 8% 10% 12% (1) Office for National Statistics, Annual Business Survey & Promar International Calculations. Other foods includes: sugar; cocoa, chocolate and sugar confectionery; tea and coffee; condiments and seasonings; prepared meals and other foods not easily classified. 60 Size of bubble equates to market size million

61 Foreign investment in UK manufacturing In recent years some of the biggest investment in food and drink processing and manufacturing has come from overseas investors, for example: Bright Foods, a Chinese owned firm purchases 60% of leading cereal brand Weetabix in 2012 remaining 40% held in private equity firm Lion Capital. Tulip (part of Danish Crown group), established in UK since 2003 through acquisition of Hygrade Foods and Flagship Foods. Arla, a Danish owned dairy co-operative with a 26% share of the liquid milk market, present in UK since 2003 The Muller Group, German owned dairy business established 30m UK operations in 1991 to sustain rapidly growing demand for its Muller Corner product. Bakkavor Group, Icelandic processor made major step in UK by acquiring Geest (Dutch) business in ForFarmers, a Dutch owned feed company that acquired BOCM Pauls for 58million in The recent history of inward investment is evidence of the strategic value investors see in the UK and that the UK welcomes and protects foreign investment. Dutch businesses that are also considering direct investment in the UK should therefore feel positive. However, the scale of these investments also indicate the funds required to enter key sectors of the UK market, which may be a barrier to entry for small and medium sized businesses. 61

62 Demand for agricultural materials UK food manufacturers purchase over 50 billion in goods and services per annum: Approximately two thirds of manufacturers requirements are supplied by domestic producers with the remaining balance supplied by importers. Many large manufacturers employ sophisticated procurement strategies to sourcing and supply of raw materials. Price volatility and continuity of supply has increased the importance of effective procurement. In general, manufacturers sourcing strategically important raw materials are under pressure by stakeholders (such as customers and consumers) to demonstrate transparency and provenance are adopting long term partnership style relationships with suppliers. At the same time, manufacturers also seek opportunities to improve their margins by making the procurement process more competitive between suppliers and use purchasing tactics such as auctions, e-tenders and so on to obtain the best price. The matrix below is a quick and effective way for suppliers to evaluate their position in relation to buyers in order to anticipate strategies and tactics buyers are most likely to employ. 62

63 Identifying procurement strategies Where you are supplying an undifferentiated product and competing against many other suppliers and it is a high spend item for the customer; for example bread-making flour for a bakery. High Leverage Short term relationship Focus on price negotiation Highly competitive Deal only with buyer Strategic Long-term partnership High level of contact & communication Personal relationships Deal with senior staff Where you are supplying a strategically vital ingredient where there are little/no available alternatives. For example, a rare breed/variety that the retailer is known for selling. Where you are supplying an undifferentiated product, there are other suppliers in the market and it is a low spend item (e.g. salt). Buyer spend* Low Transactional Minimal (no) contact Automated processes Contact with junior staff Low Market difficulty** Security Off and on relationship Contact high but infrequent e.g. agreeing specifications High Where you are supplying an ingredient to a detailed specification or where an element of risk is involved (e.g. shellfish) but the customers overall spend is low and infrequent. *Determined by value of spend and/or percentage contribution to customer costs of production **How easy/difficult it is for the customer to obtain ingredient/material from other suppliers and/or extent of technical specification required. 63

64 Demand for speciality ingredients Speciality food ingredients (flavours, flavour enhancers, preservatives, sweeteners, colours, enzymes, hydrocolloids, acidulants, antioxidants etc) are in high demand by UK food manufacturers. Speciality ingredients typically represent a small proportion of overall costs of production but have the potential to add significant value to the product; for example: Salt reduction solutions (especially in meat, bread and cheese) to help achieve industry-wide salt reduction targets set by government. Natural, non-caloric sweeteners (such as Steviol Glycosides extracted from the leaf of the Stevia plant and Monk Fruit) enable drinks manufacturers to reduce sugar levels in response to consumer demand and industry pressure groups. Natural food additives such as colours, flavours, sweeteners and preservatives to support a widespread trend in positioning food and drink products as natural or free-from artificial additives. Fruits, vegetables, herbs, leaves feature as the raw material source for artificial additives e.g. Anthocyanins are found in a wide range of fruits, flowers and vegetables and have a red to purple colour that can be used in a wide range of products such as confectionery, jellies, jam, soft drinks. Ingredients such as beta-glucans, calcium, vitamins, plant stanol esters, pro and pre-biotics etc that provide functional benefits to heart, bone, digestive health etc. The UK market for functional products is worth an estimated + 700M with annual growth of +5%. 64

65 Speciality ingredients create value not cost Ice cream cost structure (1) 18% 17% 4% 3% 57% Dried milk Sugar Vegetable fat Functional systems Flavour Functional ingredients provide benefits that are closely aligned with consumer benefits and therefore create value. In the ice cream example (opposite) the value adding ingredients are the flavour and functional systems (e.g. emulsifiers that may be used to stabilise a low fat ice cream). Milk, sugar and fat account for 93% of costs of production but do not necessarily add value (i.e. these are ingredients consumers would expect to see and therefore do not attribute a higher value to them). Functional ingredients solutions are derived from sustained investment in R&D and core competencies in technical and scientific disciplines such as food technology and biosciences. The Dutch agri-food industry is extremely well placed to capitalise on these opportunities. Significant R&D expertise Agri-food landscape promotes close working relationships between academia, R&D centres (TNO, NIZO, Food Valley) and business. Extremely high educational standards (esp. in universities). A progressive and innovative mindset. (1) Danisco 65

66 Chapter 6: UK Trade in Food and Drink Chapter contents: UK food and drink trade key facts and figures Sector specific analysis of position of the Netherlands. Key trends analysis. Industry perspectives.

67 Trade overview UK self-sufficiency in food and drink was 62% in 2012 (underlying trend of long term decline). The UK is a net importer of food and drink. In 2012 the UK s trade gap (value of exports minus cost of imports) was billion. The UK is particularly reliant on imported fruit and vegetables and meat, which account for 22% and 15% of total imports respectively. The Netherlands is the single biggest source of food imports to the UK ahead of France, Ireland, Germany and Spain. In 2012 the UK imported 4.6billion worth of food from the Netherlands, which is equivalent to 12.2% of total UK imports. Key products the UK imports from the Netherlands include (amongst others): Poultry (145,000 tonnes equivalent to 38% of total poultry imports. The Netherlands is the UK s single biggest source of imported poultry). Bacon and ham (116,000 tonnes equivalent to 37% of total bacon and ham imports. The Netherlands is the UK s second biggest source of imported bacon and ham). Vegetables (600,000 tonnes equivalent to 32% of total vegetable imports. The Netherlands is the UK s second biggest source of imported vegetables). Pork (64,500 tonnes equivalent to 18% of total pork imports. The Netherlands is the UK s second biggest source of imported pork). 67

68 Trade UK Food Self-Sufficiency(1) UK Imports by country of despatch(1) Poland U.S.A. Denmark Belgium Italy Spain Germany Irish Republic France Netherlands % of all food % of indigenous type food ,031 1,032 1,452 1,947 2,072 2,329 3,287 3,501 4,363 4,568 million ,000-10,000-15,000-20,000-25,000 12% of UK total UK Balance of Trade in Food and Drink(1) ,248-13,583 million UK Imports by commodity type (%) (1) 7% 7% 7% -14,351 5% 6% 7% -15,419 8% 3% -16,521-17,014 13% 22% -17,370 15% -20,158-20,346 Fruit and Veg Meat Drink Coffee, tea, etc. Dairy Fish Cereals Misc. Oils -18,748 Animal feed Sugar -18,646-18,179 (1) HM Revenue and Customs 68

69 000 tonnes Trade balance fruit Total imports and exports (1) 4,000 Fresh fruit Imports 3,500 Fresh fruit Exports 3,000 The UK is a major net importer of fruit and currently imports 3.4 million tonnes. Exports have grown since 2004 but still represent 3% of imports. 2,500 2,000 1,500 1, (1) HM Revenue and Customs 69

70 Importer share - fruit UK Fruit imports (% of total) by country of despatch Provisional 2012(1) 18% Share of UK fruit imports by country of despatch (top 5 countries only) (1) 16 Spain South Africa Costa Rica 16% 14% 34 Colombia 12% Netherlands Dom Republic France Brazil Ecuador Others 10% 8% 6% 4% 2% 6% 5% 5% 5% 5% 6% Equivalent to circa 5% of total domestic demand. 0% Spain Costa Rica South Africa Colombia Netherlands (1) HM Revenue and Customs 70

71 000 tonnes Trade balance - vegetables Total imports and exports (1) 2,500 Fresh vegetables Imports Fresh vegetables Exports 2,000 The UK increasingly has a trade deficit in fresh vegetables. Despite a slight decline in 2009/10 imports have continued to rise in 2011/12. The UK currently imports +2 million tonnes per year. 1,500 1, (1) HM Revenue and Customs 71

72 Importer share - vegetables UK Vegetable imports (% of total) by country of despatch Provisional 2012(1) 45% 40% Share of UK vegetable imports by country of despatch (top 5 countries only) (1) Spain Netherlands France Poland Irish Republic 35% 30% 25% 20% 15% 32% 31% 31% 30% 31% 32% Others 10% 31 5% 0% Equivalent to circa 13% of total domestic demand. Spain Netherlands France Poland Irish Republic (1) HM Revenue and Customs 72

73 Trade in seed potatoes UK seed potato imports by country of despatch, 000 tonnes(1) Share of UK vegetable imports by country of despatch (top 5 countries only) (1) 80% Ireland Germany Belgium Average annual seed potato imports are circa. 25 million tonnes. The majority of which come from the Netherlands. Dutch seed imports account for ~4% of total UK seed potato supply(2). 70% 60% 50% 40% 54% 46% 68% 60% 58% 63% 30% France 20% NL - 5,000 10,000 15,000 20,000 10% 0% NL Belgium France Germany Ireland Others (1) United Nations (2) British Potato Council 73

74 Trade in flowers and plants UK imports and exports of plants and flowers, million (2012)(1) 200 Origin of flower and plant imports (%)(2) Bulbs Cut flowers Foliage Indoor plants Outdoor plants Trees Other Total Import Export Daffodils are the only main UK export. The Netherlands Colombia Spain Kenya South Africa ROW The Netherlands has a dominant position accounting for over three quarters of cut flower imports. Cut flowers from other destinations are also likely to have passed through the Netherlands flower auction markets at some stage. (1) Defra (2) HM Revenue and Customs 74

75 000 tonnes Trade balance poultry meat Total imports and exports (1) Poultrymeat Imports Poultrymeat Exports The UK has a long-run trade deficit in poultry meat was a record year for poultry meat imports; therefore the fall off in 2012 does not necessarily mark a period of decline (1) HM Revenue and Customs 75

76 Importer shares in poultry meat(1) UK poultry meat imports (% of total) by country of despatch Provisional 2012(1) Share of UK poultry meat imports by country of despatch (top 5 countries only) (2) 27 Netherlands 50% 45% 40% 35% 30% 39% 43% 45% 45% 47% 38% Poland Germany Irish Republic Others Equivalent to circa 7% of total domestic demand. 25% 20% 15% 10% 5% 0% Netherlands Poland Belgium-Luxembourg Irish Republic Germany (1) Poultry meat: includes fresh, chilled or frozen carcase meat, cuts and offal (inc. liver). (2) HM Revenue and Customs 76

77 000 tonnes Trade balance poultry meat products Total imports and exports (1) 350 Poultry meat products Imports Poultry meat products Exports Imports of poultry meat products (including (prepared, salted, cooked poultry meat) have more than doubled in the 10 years to Exports have also increased in this time but equivalent in volume to 15% of imports (1) HM Revenue and Customs 77

78 Importer shares in poultry meat products(1) UK poultry meat product imports (% of total) by country of despatch Provisional 2012(1) Share of UK poultry meat products imports by country of despatch (top 5 countries only) (2) 60% 50% Thailand Netherlands Irish Republic 40% 30% Consumer concerns over food safety may threaten poultry meat imports from Thailand, possibly to the advantage of the NL 7 10 Brazil Others 20% 10% 15% 14% 14% 16% 12% 8% 11 0% Thailand Irish Republic Brazil Netherlands Germany (1) Poultry meat products: includes prepared, preserved, salted or cooked poultrymeat and offal (inc. liver). (2) HM Revenue and Customs 78

79 000 tonnes Trade balance - pork Total imports and exports (1) Pork Imports Pork Exports There has been a gradual decline in the volume of fresh pork imports since a peak of 462,000 tonnes in In 2012 the UK imported 349,000 tonnes At the same time exports have been gradually increasing and reached their highest level in ,000 tonnes (1) HM Revenue and Customs 79

80 Importer shares in pork(1) UK pork imports (% of total) by country of despatch Provisional 2012(1) 50% 45% Share of UK pork imports by country of despatch (top 5 countries only) (2) Denmark 40% 35% Germany 30% Netherlands Irish Republic Others 25% 20% 15% 10% 12% 13% 12% 11% 15% 18% 14 Unbalanced consumer demand for loin meat creates supply deficit and import requirement. UK exports/processes surplus cuts such as shoulder and leg. 5% 0% Denmark Netherlands Belgium-Luxembourg Germany Irish Republic (1) includes carcase meat and cuts, both bone-in and boneless. (2) HM Revenue and Customs 80

81 000 tonnes Trade balance bacon and ham Total imports and exports (1) Bacon and ham Imports Bacon and ham Exports The UK has a long-standing trade deficit in bacon and ham products although recently imports have been falling and currently stand at 257,000 tonnes its lowest level in over a decade (1) HM Revenue and Customs 81

82 Importer shares in bacon and ham UK bacon and ham imports (% of total) by country of despatch Provisional 2012(1) 60% Share of UK bacon and ham imports by country of despatch (top 5 countries only) (1) Denmark Netherlands Germany Irish Republic Others 50% 40% 30% 20% 10% 50% 45% 49% 44% Bacon is an everyday item for British consumers and highly price sensitive. UK bacon is sold at a substantial premium. 37% 37% 0% Denmark Netherlands Germany Italy France (1) HM Revenue and Customs 82

83 000 tonnes Trade balance beef and veal Total imports and exports (1) Beef and veal Imports Beef and veal Exports Beef exports have been rising since 2005 because of the lifting of an export ban (exports prior to 2005 were beef and veal of non- UK origin). Beef and veal imports have been fairly stable since 2005, the majority of which originates in Ireland (1) HM Revenue and Customs 83

84 Importer shares in beef and veal UK beef and veal imports (% of total) by country of despatch Provisional 2012(1) Share of UK beef and veal imports by country of despatch (top 5 countries only) (1) 80% 15 70% 60% Irish Republic Netherlands Germany Poland 50% 40% 30% In contrast to Europe veal has limited appeal to the UK market. It is more likely to be sold through specialist independent butchers and food service channels. 68 Others 20% 10% 5% 5% 6% 7% 7% 6% 0% Irish Republic Netherlands Uruguay Germany Namibia (1) HM Revenue and Customs 84

85 000 tonnes Trade balance in wheat 4,000 3,500 3,000 2,500 Total imports and exports (1) Wheat, unmilled Imports Wheat, unmilled Exports Wheat is one of the few products where the UK consistently runs a trade surplus. The reversal of this trend in 2012 was caused by extremely adverse weather in the summer of 2012 prompting record level of imports. 2,000 1,500 1, (1) HM Revenue and Customs 85

86 Importer shares in wheat(2) UK unmilled wheat imports (% of total) by country of despatch Provisional 2012(1) 40% Share of wheat imports by country of despatch (top 6 countries only) (1) 35% Spain Netherlands 30% 25% 9 USA Portugal Others 20% 15% 10 10% 26 5% 0% 2% 4% 2% 1% 1% 3% Canada Germany France U.S.A. Irish Republic Netherlands (1) HM Revenue and Customs (2) Bread making wheat 86

87 Chapter 7: Retail and Food Service Market Chapter contents: UK retail and food service market key facts and figures Category specific market analysis, trends and opportunities. Key trends analysis. Industry perspectives.

88 Grocery retail market With a population of 63million, household expenditure on food and non-alcoholic drink worth 88.5billion and growing by +4% p.a. the UK is one of the most attractive grocery retail markets in Europe. Over +95% of food and drink purchased for consumption in the home is sold through a supermarket chain; the remaining share of the market is accounted for by independent retailers (such as butchers or farmers markets). Four supermarket chains account for 76% of the market. Tesco is the market leader with a 29.9% share. Asda, part of the Wal Mart group has a 17.5% share Sainsbury s has a 16.9% share Morrisons, following acquisition of Safeway group in 2007 has an 11.5% share. Collectively, the Big 4 have grown their share of the market by 8.1% since 2010 at the expense of small independent and convenience stores. Recently, premium retailer Waitrose and discount stores Aldi and Lidl posted record collective market share figures of 4.9% and 6.4% respectively. Aldi and Lidl have benefitted from their position as a cheaper option for shoppers, whilst Waitrose has been successful by re-positioning themselves from being expensive to value-for-money. These recent successes aside, it is still the four leading retailers Tesco, Asda, Sainsbury s and Morrisons that exert considerable influence over the UK food and drink industry and shape opportunities and challenges for suppliers. 88

89 Food service market The Food service market defines food and drink consumed out of the home. It includes food and drink consumed in public sector organisations (e.g. hospitals, schools etc) as well as private sector organisations (e.g. bars, restaurant, hotels etc). UK consumer expenditure on food eaten out of the home in 2012 was 51.8billion, which is 3.5 times that of the Netherlands. In the five years to 2012 expenditure grew by 3% p.a. The UK foodservice market is highly fragmented. In 2012 there were 168,000 foodservice units, of these, 72% were independently ran. The foodservice market is highly mature, with many outlets established for a number of years. Recent years have seen the decline in foodservice sales and the sector become more competitive, with consumers cutting back on their spending. With a decline in sales, operators have had to concentrate on what the consumer is demanding so to gain sales. Areas of success have been; Health and wellness Convenience home delivery and take away Ethical sourcing Innovation Large food service chains, such as McDonalds have consolidated their supply chain, and now have direct links with farmers. Other larger food service businesses have contracts with suppliers for their produce. Smaller, or independent retailers will often use wholesalers for their produce of work with suppliers for the more expensive products e.g. meat. For high end restaurants the sourcing of the product and the story behind it is more important, however this tends to be the case for the main element of the dish, e.g. meat. 89

90 Food service supply chain (simplified) Consumers Profit sector Cost sector Restaurant (e.g. Traditional sit down restaurant) Quick service restaurant (e.g. Fast food) Pubs (e.g. Traditional pubs) Hotels Leisure (e.g. Sports clubs) Staff catering (e.g. In the work place) Health education services (e.g. Schools, hospitals) Delivered wholesale (Brake Bros. and 3663 are the major players) Wholesale / Cash & Carry (click here to see list) Food service operator (Compass, Sodexo & Aramark are the major players in the market) Manufacturer / producer / supplier NB: Distribution channels in the food service market can be complex. Manufacturers/suppliers can have direct supply relationships with the outlets (e.g. Restaurant) or supply through a food service operator (i.e. A contract caterer that prepares and serves the meal); through a wholesale / cash and carry business or through a delivered wholesale business (this is the same as a 90 wholesale but they physically deliver the goods as well).

91 Food retail & food service market value 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 UK Household Food Expenditure (Food and Non-Alcoholic Drink) millions(1) 0 CAGR 07-12: 4% % 5% 4% 3% 2% 1% 0% 60,000 50,000 40,000 30,000 20,000 10,000 0 UK Expenditure Food Eaten Out millions(1) CAGR 07-12: 3% 10% 8% 6% 4% 2% 0% -2% -4% Household Food Annual % change Food eaten out Annual % change (1) Defra: Agriculture in the United Kingdom:

92 UK food retail & food service compared to the Netherlands Population (millions)(1) 63 UK 17 NL Consumer food service spend on food and drink (EURbn) (2,3) 51 UK 13 NL ,400 2,350 2,300 2,250 2,200 2,150 2,100 Consumer retail spend on food and drink (EURbn)(2,3) UK NL Per capita spend on food and drink through all channels (EUR p.a.) (2,3) 2,352 2,206 UK NL (1) Office for National Statistics and CBS (Statistics Netherlands) (2) Defra (3) Agricultural Economic Report 2012, LEI Wageningen 92

93 UK country variations in food and drink expenditure Country variations in average food and drink expenditure per person, per week(1) England Total Population: 53 million Wales Total Population: 3.1 million Scotland Total Population: 5.3 million N Ireland Total Population: 1.8 million H'hold food & drink ex. alcohol Eating out food & drink ex alcohol H'hold alcoholic drinks Eating out alcoholic drinks (1) Office for National Statistics 93

94 Regional differences food retail Regional variations in average household food and drink expenditure per person, per week(1) UK big 4 supermarket density (Tesco, Sainsbury s, Asda and Morrisons only, 2010)(2) England ave South West South East London East West Midlands East Midlands Yorkshire & the Humber North West North East (1) Office for National Statistics (2) Ordnance Survey 94

95 North East North West Yorkshire & the Humber East Midlands West Midlands East Midlands London South East South West England ave Regional differences food service Number of food and beverage service businesses, by region(1) Northern Ireland Scotland Wales South West South East London East West Midlands East Midlands Yorkshire and The Humber North West North East 4,075 12,030 7,300 13,940 20,955 23,805 13,095 11,400 9,545 11,580 15,185 5, ,000 10,000 15,000 20,000 25,000 Regional variations in average out of home food and drink expenditure per person, per week(1) (1) Office for National Statistics (based on VAT registrations and PAYE data) 95

96 Regional variation On the whole there is little distinction in food consumption patterns between the regions. One of the major reasons for this is the national distribution network of the major supermarkets which account for the majority of food and drink purchased in the UK whose local adaptation of product lines is fairly limited. Many of the major food service companies operating in the UK also tend to standardise their menus. That said, some regional differences do exist: There is a higher concentration of food service establishments in London and the South East. Average earnings are also higher in these areas and eating out is more commonplace than in other areas of the UK. Ethnic and religious influences on food consumption patterns are more pronounced in major urban areas with diverse population ethnicities (e.g. London, Birmingham, Manchester, Leeds). London stands out as the only region in the UK that could be described as distinctly different to the rest of the UK. Some companies are reportedly implementing organisational structures to serve London as a distinct market. 96

97 Food retail Pressure on household budgets is undoubtedly driving some of the growth at the discounters, but messages about quality are starting to resonate. Lidl announced this week that it will increase its fresh meat and poultry floorspace by 50% within the year, and Aldi s new convenience store in Kilburn is a departure from its traditional edgeof-town offering. These changes are likely to appeal to a new and different group of shoppers which will bolster the performance of the discounters even further.(1) Retail Expenditure Share % (14 April 2013) (1) Changes in retailer share of the grocery market ( ) % -9.4 Retailer profiles can be found in Chapter 9: Supporting Information Others Hard discounters Waitrose M&S -1 Co-Op Morrisons Sainsbury's Asda Tesco With the exception of the Co-Op all retailers have increased their market share at the expense of other supermarkets, made up of independent retailers and symbol groups. Asda, Tesco and Sainsbury s have benefitted. So too has Waitrose and the hard discounters both of which have increased their share. (1) Kantar Worldpanel (2) Trade Interviews 97

98 Industry perspective(1) Growth in the grocery retail market has come mainly from the premium and budget end of the market. The middle ground is being squeezed and is highly pressured. It appears that the value for money proposition is strong at the premium and budget market but less clear in the middle. Growth is coming from convenience store formats and online sales, larger supermarket stores are faring less well. This is clear when you look at retailers such as Morrison and the Co-Operative that are not exposed to online or convenience store formats performing less well. There s a competitive and consumer element to consider in the polarisation of the retail market. Necessity is a major driver; consumers generally aspire to shop in more stores that are perceived to be more premium so as confidence improves they will look to trade up not down. Other retailers will also look to regain market share and use powerful tools and mechanics such as promotions to attract consumers. In time I expect this issue will settle down. We have seen a resurgence in small, independent retail stores that have exciting and new concepts such as Cook and Laverstoke Park. These tend to be at the premium end of the market and located in affluent areas (e.g. London, Harrogate in the North) where there is a strong food culture. (1) Trade interviews 98

99 Industry perspective(1) We are starting to see retailers segment the UK retail market geographically to isolate London as its own market supported by a management structure purely focussed on this market. This is quite exciting, suppliers can really capitalise on this if they are quick to react. Online is an exciting development in the UK grocery retail market. It s not a simple case of what s instore is also on-line; the supply chain cycle is shorter and products (e.g. especially packaging) needs to be carefully adapted. Online brings suppliers from the Netherlands closer to the UK, products could be packaged and shipped from the Netherlands to the UK with relative ease. The retailers are extremely good at what they do. They are capable of creating an extremely good environment to showcase our [fresh produce] products ensuring it s fresh, displayed well and they respond well to consumers. Ultimately they are able to grow category sales, which benefits us financially. (1) Trade interviews 99

100 Industry perspective(1) Our retail customers are extremely demanding, we have to operate to tight deadlines, usually 2 weeks is a maximum to deal with any issues and questions they need solving. We are also expected to provide a lot of technical and R&D support and we have therefore needed to invest heavily in this area. Retailers say they understand the pressure on suppliers but do not engage in dialogue with them. They are only concerned with shareholders and are resistant to change. The UK is much more sophisticated than other European/World markets. For example, processing standards much higher, many more accreditations, sophisticated retailers, tiered branding, sourcing & supply chains. A brand is not just a crest like in many other countries it must have ethics, CSR, genuine point of difference, has to mean something. Price is important but becoming less of a way to achieve competitive advantage. In an era when price matching is so prevalent buyers look to other ways of differentiating their category. This opens up potential discussions on how suppliers can add value in other ways, such as through improved sustainability. These are good ways to position yourself as supplier. (1) Trade interviews 100

101 Category dynamics(1) Milk, Consumption per capita, per annum (kg) * Bubble size varies according to market size ( bn) 50 Bread & Bread products, Flowers and plants, 2 Poultry, 4.0 Butter & Yellow fats, 20 Processed Meat, Fruit, 3.8 Red Meat Ice Cream, 1.1 Ready Meals (beef, pork, lamb), 10 Vegetables, 5.0 (inc pizza), Desserts, 1.5 Potatoes, 1.1 Yoghurt, 1.8 Cheese, 2.5 Salad, Volume growth/decline (y-o-y%) (1) Various sources incl. Mintel, Kantar, Defra *Flowers and plants consumption per capita in not kg 101

102 Category dynamics Product Trend* Driver >5 years Poultry Increasing -Perceived as value for money -Positive health perceptions Red meat Decreasing -Perceived as expensive & indulgent -Negative health perceptions Fresh vegetables Increasing -Convenience: growth in processed ready to cook vegetables. -Heavy category promotions Fresh fruit Increasing -Convenience: growth in processed snacking fruit. -Heavy category promotions Processed meats Increasing -Convenience -Increased product innovation -Sustained market growth. - Nations favourite protein -Welfare, safety and traceability essential. -Steady decline. -Changes in demand by cut (less premium cuts) -Special occasion protein. -Welfare, safety and traceability essential. -Convenience: pre-packed portions -British when in season -Convenience: pre-packed portions -British when in season -Sustained growth. -Improved profile of frozen foods. -Welfare, safety and traceability essential. *Volume consumption 102

103 Category dynamics Product Trend* Driver >5 years Ready meals Increasing -Convenience -Quality improvements (own label) -Increased product innovation -Improvements to health profile Salad Increasing -Growth in salad bowls -Heavy category promotion. -Product innovation (e.g. leaf varieties) Milk Decreasing -People drinking less milk. -Dietary changes. Yoghurt Increasing -Product format innovation (e.g. pouring yoghurt, pouches). -Strong health positioning (e.g. digestive health). -More occasion driven product innovation (e.g. breakfast, dessert yoghurts) -High growth. -Increased innovation. -Labelling transparency. -Own label products dominate brands -Convenience: pre-packed portions -British when in season -More functional milk innovation -Niche markets (soy, rice milk) on the rise. -Sustained market growth. -Indirect health claims. -Packaging/format innovation. *Volume consumption 103

104 Category dynamics Product Trend* Driver >5 years Cheese Increasing -Category innovation driven by convenience (e.g. snacking). -Improved health profile (e.g. low fat) for everyday consumption. -Appeal of speciality cheese (occasional consumption), artisanal producers Bread & bread products Decreasing -Fall in white bread consumption. -Sensitivity to price changes. -Increased consumption of healthy breads. Ice Cream Decreasing -Decline of everyday consumption but increase in occasional indulgence Butter & yellow fats Decreasing -Increased use of cooking oils over fats on health grounds. -Processed cheese growth via NPD (convenience & health important). -Speciality cheese growth via product innovation, category promotion. -Further decline in white bread sales. -More healthy breads. -Continued shift from everyday to indulgent consumption. -Further decline of use as cooking ingredient. -Use as spread driven by NPD. *Volume consumption 104

105 Innovation examples: flavoured milk Product name Frijj Milkshake Company Price ( ) 1.25 Size Product description Positioning claims Ingredients Dairy Crest 471ml Frijj is a fresh milkshake product which is said to be thick and smooth. The range contains several flavours such as vanilla, chocolate, banana etc Low fat, free-from artificial colouring and flavourings, fresh, high in calcium Skimmed Milk (76%), Whole Milk (18%), Sugar, Buttermilk Powder, Modified Maize Starch, Strawberry Flavouring, Stabilisers (Carrageenan, Guar Gum), Colour (Beetroot Red). Analysis Dairy Crest has invested in the Frijj brand to create a much fresher and healthier image and emphasise health driven benefits such as fat content, calcium levels, absence of artificial colours and flavours. The product still retains a sense of fun (appealing to a younger market) as well as capturing the food-togo market.

106 Innovation examples: lactose-free milk Product name Lacto-Free Company Arla Price ( ) 1.29 Size Product description Positioning claims 1litre Lactose free*, pasteurised semi skimmed filtered dairy drink. Part of a lactose-free range of products that also includes cream and cheese. Lactose free* Analysis Lactose and gluten free product have significantly increased in popularity in recent years owing to consumer perceptions that they are healthier than conventional varieties (regardless of a diagnosed allergy). Ingredients Semi Skimmed Milk, Lactase Enzyme The free-from market continues to grow rapidly and several major companies (including Arla) have entered this market. *We make every effort possible to ensure that Lactofree dairy drink contains no lactose. We carry out rigorous scientific testing using the most accurate UKAS-accredited tests available which enable us to detect lactose at the trace level of 0.03%. At this detection level our tests show that there is no lactose present in Lactofree. Please refer to for more information. Not suitable for milk allergy sufferers.

107 Innovation examples: extra filtered milk Product name Cravendale Milk Company Arla Price ( ) 1.98 Size Product description Positioning claims Ingredients 2litre Pasteurised, homogenised, semiskimmed, fresh filtered milk Stays fresh for 7 days Red Tractor (Assured Food Standards), Recyclable Materials Semi-skimmedmilk Analysis The filtration process that keeps milk fresher for longer is designed to fit in with busy consumer lifestyles (less frequent trips to local shops) and to minimise waste. The product has been supported with heavy marketing and stands out as most milk is sold unbranded.

108 Innovation examples: Danone Activia Product name Company Activia Danone Price ( ) 1.84 Size Product description Positioning claims Ingredients 4X125g Strawberry flavoured yoghurt, which is said to be deliciously creamy Contains Bifidus ActiRegularis, suitable for vegetarians, recyclable packaging Yogurt with Bifidus ActiRegularis (Whole Milk, Skimmed Milk Powder, Cream, Yogurt Cultures), Strawberry (10%), Sugar (8.3%), Stabilisers (Modified Maize Starch, Pectin, Guar Gum), Colours (Anthocyanins, Beta- Carotene), Acidity Regulators (Citric Acid, Calcium Citrate, Sodium Citrate), Flavouring. Analysis Activia has successfully repositioned its message in light of European health claims legislation on functional health claims. Despite being unable to make digestive health claims the brand and products still have mass appeal with the UK market on the basis of softer health claims messaging and use of imagery.

109 Innovation examples: Dairylea Dunkers Product name Dairylea Dunkers Company Price ( ) 1.12 Size Product description Positioning claims Ingredients Kraft Foods 4X47g Cheese dip with breadsticks designed as a lunchbox/snack item primarily aimed at children. Free-from artificial colours, flavours, preservatives, convenience, suitable for vegetarians Cheese Dip: Skimmed Milk (Water, Skimmed Milk Powder*) (58%), Cheese (16%), Whey Powder (from Milk), Butter, Milk Proteins, Concentrated Natural Lemon Juice (from fresh lemons), Stabiliser (Sodium Carbonate)**, Citrus Fibre, Salt, White Breadsticks: Wheat Flour, Vegetable Fat, Wheat Dextrin (5.5%), Barley Malt Extract, Yeast, Wheat Germ (1%), Salt, *Spray Dried, **To hold all the ingredients together. Analysis A good example of a product that aims to increase out of home cheese consumption. Positioned as a children's lunchbox item. The product is supported by health driven marketing claims in particular the absence of artificial colours, flavours and preservatives.

110 Innovation examples: Cathedral City Product name Cathedral City Cheddar Company Price ( ) 2.55 Size Product description Positioning claims Ingredients Dairy Crest 200g Cheddar cheese available in various line extensions said to be the nations favourite cheddar brand The nations favourite cheddar brand Reclosable stay fresh packaging Analysis Mass market cheddar cheese (like liquid milk) is largely undifferentiated and therefore heavily dominated by sales of retailer own label products. Dairy Crest have been able to create a brand with significant mass market appeal.

111 Innovation examples: processed meat Product name Company Price ( ) 1.49 Size Product description Positioning claims Mattessons Fridge Raiders Kerry Foods 3X25g Roast flavour chopped and shaped chicken breast with added starch High protein, children, convenience Analysis Mattesons Fridge Raiders have capitalised on a number of key trends such as snacking and convenience to increase the popularity of their meat snacks range. Ingredients Chicken Breast (91%), Vegetable Oil, Roast Seasoning (Salt, Yeast Extract, Garlic Powder, Onion Powder, Sage, Flavourings), Rusk (Wheat), Tapioca Starch, Dextrose Mattessons has also countered possible consumer concerns by highlighting the high meat content of the product.

112 Innovation examples: prepared meals Product name Innocent Veg Pot Company Innocent Price ( ) 3.99 Size Product description Positioning claims Ingredients 390g A hearty stew of sweet potatoes, beans, red peppers and smoky paprika. It's a delicious meal of fresh veg, tasty sauce, rice and herbs - giving you 3 portions of veg in every pot. With no colourings, flavourings or nasty things you wouldn't add yourself. 5-a-day, natural product, convenience, recyclable materials Cooked Brown Rice (17%) [Water, Brown Rice], Tomato, Water, Carrot, Pinto Beans, Red Kidney Beans, Onion, Sweet Potato (5%), Potato, Red Pepper (4%), Sweetcorn, Spinach, Vegetable Oil, Red Chilli (0.8%), Cornflour, Lemon Juice, Garlic, Sea Salt, Cajun Seasoning [Spices, Herbs, Mustard Seed, Salt, Sugar], Smoked Paprika (0.2%), Green Chilli Purée, Coriander, Black Pepper. Analysis Innocent are a well known and loved juice brand in the UK and have diversified by launching veg pots a prepared vegetable meal which can be paired with meat or fish (or eaten on its own) with a range of flavours. The product embodies several trends including; natural, healthy, 5-a-day message, convenience, recyclable materials.

113 Innovation examples: prepared meals Product name Company Charlie Bighams Cottage Pie Charlie Bigham Price ( ) 7.00 Size Product description Positioning claims Ingredients 650g Tender pieces of British beef slow cooked with red wine and fresh thyme then topped with our handmade creamy mashed potato Premium, convenience, provenance Cottage Pie Filling (53%), Creamy Mashed Potatoes, Cheese and Herb Topping, Cottage Pie Filling is made from: Fresh Beef (39%), Fresh Onions, Fresh Carrots, Fresh Celery, Red Wine, Beef Stock, Worcestershire Sauce, Wheat Flour, Sunflower Oil, Molasses, Tomato Purée, Fresh Garlic Purée, Fresh Thyme, Salt, Fresh Bay Leaf, Black Pepper, Ground Star Anise, Ground Cloves, Creamy Mashed Potatoes are made from: Potato, Single Cream, Butter, Free Range Pasteurised Egg Yolk, Salt, Cheese and Herb Topping is made from: Cheddar Cheese, Fresh Parsley, Black Pepper, Fresh Thyme, Beef Stock is made from: Beef Bones and Meat, Water, Salt, Worcestershire Sauce is made from: Malt Vinegar (from Barley), Spirit Vinegar, Molasses, Sugar, Salt, Anchovies, Tamarind Extract, Onions, Garlic, Spices, Flavouring. Analysis Charlie Bighams meals retail at a significantly higher price point than other prepared meals (circa 7 compared to circa. 5) yet continue to perform well in the market because of the clear positioning and high quality.

114 Innovation examples: prepared vegetables Product name Company Price ( ) 2.00 Size Product description Sainsbury's Ready To Roast Mediterranean Vegetables Drizzled With Olive Oil 400g J Sainsbury s 400g A mix of red onion, courgette, peppers, tomatoes, olive oil, garlic and basil Positioning claims Ingredients Convenience, fresh Red Onion (29%); Courgette (20%); Red Pepper (19%); Yellow Pepper (18%); Cherry Tomatoes (11%); Olive Oil (2%); Garlic Purée (1%); Basil. Analysis Basic processing of vegetables provides consumers with instant meal options that require very little preparation in the home. The variety of vegetables per portion is a key selling point as consumers would otherwise have to purchase a larger number of individual items if they were to prepare it themselves which potentially increases costs and waste.

115 Innovation examples: prepared fruit Product name Sainsburys Classic Fruit Salad Company Price ( ) 2.00 Size Product description Positioning claims J Sainsbury s 320g Prepared and ready to eat pineapple, Apple, Orange, Strawberry & Grape Convenience, fresh Ingredients Pineapple (29%); Apples (27%); Oranges (21%); Strawberry (13%); Grape (11%). Analysis Prepared fruit is increasingly popular as a snacking item and/or meal portion (e.g. as a lunch time item). Convenience and variety is a key selling point to consumers. Such products tend to retail at a relatively high price point (e.g. 2+).

116 Innovation examples: prepared salad Product name Company Price ( ) 2.50 Size Product description Positioning claims Ingredients Sainsbury's Pomodorino Tomato Side Salad Bowl, Taste the Difference J Sainsbury s 175g Mix of baby salad leaves and salad vegetables with baby pomodorino tomatoes, a sachet of balsamic dressing and a sachet of Parmigiano Reggiano Convenience, premium, fresh Pomodorino Baby Plum Tomato (31%); Salad Leaves; Cucumber; Balsamic Dressing (11%); Parmigiano Reggiano Cheese (from Cows' Milk) (6%); Chive; Parsley.Salad Leaves contains: Green Batavia, Red Cos Lettuce, Wild Rocket.Balsamic Dressing contains: Balsamic Vinegar (30%) (Wine Vinegar, Grape Must), Water, Extra Virgin Olive Oil (16%), Sugar, Rapeseed Oil, Dijon Mustard (Water, Mustard Seed, Spirit Vinegar, Salt), Molasses, Cornflour, Salt, Black Pepper Analysis Prepared salads offer similar benefits to consumers as prepared vegetables and fruit; namely variety, low wastage, convenience. Products typically contain a dressing either in a sachet or small plastic tub.

117 The importance of innovation Continual innovation is extremely important in the UK market. Circa 12,000 food and drink products are launched every year in the UK including: New products New varieties Line extensions New packaging types / materials Promotional / seasonal (short life) products In particular retail buyers are looking to source products that are different and add value to the category and that continue to innovate once in the market. Innovation is relevant throughout the entire value chain; and could include for example: New consumer products and concepts (e.g. Dutch speciality cheeses / meats etc) New sustainable packaging solutions Production solutions that improve quality, adds variety, reduces waste, improves sustainability, reduces cost and so on Technical manufacturing solutions that help to reduce or remove, for example, salt, fat and sugar, artificial additives and ingredients or add functional health benefits. Products that are genuinely innovative are much more likely to succeed in the UK. 117

118 Trends online shopping Internet access in the UK is around 85%, this is lower than the Netherlands where it is 94%, but still higher than many other European countries. Shoppers are now accessing the internet on a much more frequent basis, and through many different forms of technology. In terms of what consumers are buying when using the internet, grocery and food shopping is ranked 8 th. On-line grocery shopping in the UK was worth 5.9 billion in 2011, it is forecast to be worth 11.2 billion by 2016 (an increase of 89%). On-line retailing is the fastest growing type of grocery retailing in the UK, e.g. ahead of hypermarkets and discounters. 17% of people in the UK use the internet to purchase groceries, a figure that is expected to rise to 44% by The average frequency of on-line shopping is 1.4 times per month. The number of customers using in every fortnight or more, currently stands at around 29%, this is down from 36% in Shoppers are using on-line grocery shopping for special occasions, with 35% using it every 2-3 months. 118

119 E-commerce - direct to consumer opportunities for suppliers Graze is a healthy snack box that can be delivered via post as they are specifically designed to fit through mail boxes. Each box typically include nuts, dried fruit, dips, olives and seeds, as well as some well-deserved flapjacks, cakes, popcorn and natural treats. Payments are usually on a subscription basis so once signed up they receive regular boxes (e.g. Weekly) delivered to their home. The Blue Pig Company is an example where farmers have created their own website to generate online sales direct to consumers. The company sells pork products such as bacon and sausages as well as fresh pork. The website also provides the opportunity to tell the production story and has information about the family run aspect of the company, a blog links to social media such as Twitter, recipes and so on. 119

120 E-commerce - direct to consumer opportunities for suppliers South Caernarfon Creameries is a leading farmer owned dairy co-operative, which is based in North West Wales. The company produces a range of hard pressed cheeses and salted Welsh butter. In addition to selling through retail channels the company now operates its own website which delivers direct to consumers. Dairy Crest is one of the largest dairies in the UK and owns brands such as Cathedral City, Clover and Frijj. More recently Dairy Crest established Milk and More which delivers fresh milk direct to consumers door steps a traditional delivery channel which declined over many years as consumers increased their food purchases at supermarkets. Consumers pay for milk online (a direct debit system). Other essentials such as bread and orange juice can also be delivered by the milk man. 120

121 E-commerce - direct to consumer opportunities for suppliers A significant proportion of cut flowers are purchased online through companies such as Interflora, who are specialist flower businesses as well as major high street retailers such as Tesco, Sainsbury s M&S, Waitrose and so on. Online purchases of wine is well established in the UK. Majestic Wine are the most high profile wine specialist operating on a national scale with over 175 stores across the UK as well as selling online for home delivery. Other companies such as Laithwaites operate in a similar way but on a smaller scale (12 stores) and an online presence. Because wine can be distributed and stored in ambient conditions it makes it easier to distribute. 121

122 Trends social media Social media usage in the UK is high. Facebook is the biggest social network with +30 million UK accounts in the UK. There are +25 million Twitter accounts in the UK. There are +10 million LinkedIn accounts in the UK. Other social media forms such as Pinterest, Instagram and Flickr are used but less frequently. Many consumers particularly younger consumers use the internet and social media to form opinions about products and companies, which in-turn influences consumption patterns. Social media can be a powerful way to build brand equity amongst UK consumers, especially if targeting younger consumers (i.e.<40) where social media usage is higher. Companies that have been successful in using social media include: Innocent Smoothies; Tesco; Aldi; Walkers; Waitrose; Rekordilig Cider; Lurpak, Cadbury s amongst others Use of social media tends to be more successful when: It is used as an extension of the brand i.e. where the voice, tone, imagery, content and so on are all consistent with the personality of the brand. It encourages two-way communication and engagement with consumers. Is fun and appealing. 122

123 Social media examples [click on picture to follow] 123

124 Trends - sourcing policies In recent years grocery retailers have been lobbied hard by trade organisations, action groups and (to some extent) by consumers to implement policies that source as much British produce as possible at a fair price i.e. one that the lobbyists state will provide a reasonable return to producers, processors and manufacturers. Partly motivated by external pressure and partly by commercial benefit, some retailers have committed to sourcing British produce, in some cases e.g. milk, fresh meat committing to source 100% British produce effectively preventing foreign businesses from entering the UK market without direct inward investment in the supply chain. Retailers such as Waitrose have made the biggest commitment to sourcing British produce (100% British milk, cream, yoghurt, beef, pork, lamb, poultry (and in processed meat items), fruit and vegetable British in season) but occupy a relatively small share of the total grocery retail market. Wm Morrisons operate a vertically integrated supply chain model from production to retail on fresh seasonal produce, beef and lamb. J Sainsbury s have committed to double the amount of British food we sell by

125 Trends own label Private label products have become increasingly popular with UK consumers because of their value-for-money proposition. The pressure on private label is increasing, with high expectations for new products which are innovative, whilst strong in quality. Going forwards shoppers expect to be buying more private label products, with the products often used as a way to differentiate between retailers. The growth of own label has allowed for wider ranges to become available. Opportunities exist from value to premium ranges. Often the premium ranges are viewed by consumers as being of higher quality and as luxury products compared to brands; this is particularly the case for prepared meals. 125

126 Trends - convenience Convenience is a major factor for all product categories, in particular prepared convenience meals. The UK ready meal market was worth 3.8billion in 2012, bigger than any other major European country. The sector positively benefited from the economic crisis, being used as an alternative to eating out. Ready meals are often used due to limited time for cooking, or lack of culinary skills. Ethnic products are most popular with shoppers, with 40% of the European market held by Indian, Chinese and other Asian dishes. The sector is one which is seeing constant introduction of new products as it responds to changing trends. Over recent years consumers have become increasingly worried over ingredients and additives that their ready meals contain. As such premium products and ranges have been launched which are low in fat, salt and food additives. As well as main meals being sold in a ready format, snacks on the go is also big in the UK. Snack bars, made with cereals, fruit and chocolate now have a significant market size, along with snack size, single packets of crisps and chocolate. Fruit is also now being sold in a convenient format so they can be eaten on the go. Packets and pots of pre sliced and washed fruit are now sold on the market, these range from 80g packs of grapes and apples to tropical fruit. 126

127 Trends health & wellness UK consumers are currently driving a strong trend for health and wellness; as such they prefer products low in fat, salt and sugar, along with demand for those products which carry a functional health benefit. The use of artificial sweeteners and preservatives is in decline by food manufactures; instead they are favouring the use of natural flavours, and healthy and functional additives. The use of natural additives signals increased demand for the ingredients used to make them, such as plants and fresh produce. The health and wellness trend in food is expected to drive growth in the next few years for functional dairy products (fortified milk, pro-biotic yoghurts and drinks); healthy breakfast cereals (oat-based, high wholegrain); healthy snacks (cereal and energy bars, cereal-based and fruit-based snacks) and healthy confectionery (additivefree sweets, low sugar / sugar free products). Beverages are also likely to see a change in the products being sold. With the likes of fruit juices, energy drinks, fortified water, and various dairy drinks offering an alternative to the carbonated drinks on the market. 127

128 Trends - traceability and quality assurance For food to be sold in the UK, whether imported from the EU or produced within the UK it must meet the general food safety requirements of EU law. For imported products which contain animal origin products, they must abide to the Trade in animals and related products (TARP) Regulation For products which are non-animal origin products governing regulations include; EU official controls regulation 882/2004 and The official feed and food controls regulations All EU manufacturing establishments must have approval under regulation EC 853/2004, if they are handling products of animal origin. Products produced within the UK also can carry with them further certifications if eligible. The Red Tractor logo is for products which are produced within the UK, and for British products is a widely used marketing tool. Freedom Foods is a logo used to indicate that the way the products were reared meets RSPCA (Royal Society for Prevention of Cruelty to Animals) standards. Other logos are used to mark organic food and if from a protected origin, supermarkets will also often have their own certifications and inspections. Often the logos can bring a higher selling price, and are regarded with consumers as being of higher quality, despite probably not understanding what they mean. 128

129 Trends - traceability and quality assurance In terms of animal rearing the UK has stricter rules than in the EU for some products. Sow crates for pork production have been banned for a number of years in the UK. Veal is a contentious product in the UK, a limited amount is produced in the UK but this is increasing. Due to the ban on veal crates a number of years ago, rose veal is the only type produced in the UK, and as such white veal is avoided by customers due to the perception of poorer welfare conditions. Traceability is an issue with consumers today, food scares and outbreaks are widely publicised and have an adverse effect on sales and consumption. Retailers are more aware of what impact this could have on their reputation, brand and sales, as such are demanding of suppliers. 129

130 Trends cut flowers Annual sales of cut flowers and house plants are worth circa billion. However, sales are in decline since a peak in sales in 2007 of 2.4billion(1). Cut flowers are estimated to account for 1 billion sales (2) House plants are estimated to account for the remaining 0.75 billion(2) According to market research agency Kantar around a third of cut flower purchases are driven by specific occasions such as: Wedding flowers: million Funeral flowers: million New Baby flowers: million Valentines day flowers: 34.5 million The remaining two-thirds of cut flower sales are impulse purchases. The most popular varieties of cut flowers are: Daffodils, roses, tulips, chrysanthemums and lilies. A significant proportion of cut flower sales are through the major multiple supermarkets who have made everyday cut flower consumption more affordable. Online sales channels still play an important role in flower gifting occasions because of the home delivery distribution network. Analagous to food products, there has been an increase in flowers bearing a FairTrade logo. (1) Flowers and Plants Association (2) Ibis World UK Market Research report 130

131 Trends waste reduction Recent years has seen greater publicity on food waste and reducing it. In the UK households throw away 7million tonnes of food, around 20% (by weight) of total purchases. As consumers try to save money, they have been doing more to limit the amount of food thrown away. Consumers have made a number of changes to their habits; Reduced the amount of food thrown away, Buying what is needed, not tempted by sales mechanics, Using leftovers, The environment is becoming more of a concern with shoppers, and the industry is viewed by them as not doing enough to protect it. 131

132 Trends niche markets The free-from food category in the past 12 months has increased by 25% in terms of value, taking it up to 288million. The free-from food category includes products such as; gluten free, dairy free and lactose free. The growth in this market has been suggested to be due to the increasing number of consumers self diagnosing food intolerances. The UK has the leading ethnic food market in Europe. The ability for consumers to travel, at lower costs than previously, means more people are now going abroad and experiencing new cultures and foods. This is also strengthened by the new rising ethnic population in the UK. The ethnic food market in the UK is constantly developing, with new cuisines and dining experiences. Chinese is the most popular ethnic cuisine in the UK, with Indian second. Together the cuisines account for 70% of the ethnic market, with Indian sales the highest. Recently sales in ethic ready meals have declined slightly, with sales of sauces and accompanying dishes increasing. This suggests that consumers are now cooking dishes themselves, with a strong demand for authentic ingredients. At its peak the organic food market was worth + 2 billion but it has been falling since the impact of economic recession in 2008 and is currently worth 1.64billion according to the Soil Association (sales of organic food through food service channels are much less developed (in total 15.9 million). Organic food shoppers tend to be wealthier, live in London and perceive it to be healthier, greener and tastier than conventionally produced products. However, several reports in the last few years have challenged this notion and the value-for-money proposition has come under pressure. Going forward the major challenge for organic food is to improve its image with consumers that have fallen out of love with the concept. 132

133 Industry perspective(1) Buy British is more of a moral and safety issue, rather than a commercial one. It increases the need for foreign suppliers to be more open and transparent with customers and consumers about how the product was produced, by who, where, when...in short they need to be prepared to tell the story of the journey of that product. That will help to overcome the Buy British barrier. UK manufacturers are becoming more alert to export opportunities in some of the higher growth economies and are staring to implement strategies to capitalise on them. As this develops there may also be increased opportunities for importers to meet increased demand requirements created by a supply shortfall. The food service market has typically been slow to adopt retail practices. However, we have seen some of our bigger food service customers move quite quickly to the strategic supply chain models adopted by the retailers. They want more transparency and insight of an industry where openness, transparency and traceability has not been possible because of how the wholesale markets operate. (1) Trade interviews 133

134 Industry perspective(1) This is a short-term pressure point but buyers are not incentivised by showing loyalty to British suppliers, they are incentivised by growing the category and financial performance. In order to do that they need to work with suppliers that will give them the best opportunity to do that, which means the right product at the right price and the confidence to entrust suppliers with the reputation of the retailer, which means ensuring the product is safe, legal, delivered in the right quantity at the right time. What the horse meat contamination example has shown is that it is robustness of processes that matter, not the amount of accreditations and standards a supplier can evidence. (1) Trade interviews 134

135 Chapter 8: Opportunities for Dutch Suppliers Chapter contents: SWOT analysis. Industry perspectives. Opportunities and recommendations for Dutch food and drink businesses.

136 Strengths of the Dutch agri-food sector The Netherlands is the single biggest source of food imports to the UK. High degree of specialisation in the production of floriculture, meat, dairy, animal feeds, beverages, fruit and vegetables making the Netherlands is a highly competitive global supplier. In particular: Concentration in the meat production industries (i.e. poultry and pork) means that the Netherlands typically benefits from a cost of production advantage over the UK. The development of the glasshouse sector means that the Netherlands is able to produce year round supply of cut flowers, ornamentals, fruit and vegetables with consistent quality. UK suppliers cannot replicate this system of production. Businesses such as The Greenery, ForFarmers, Heineken, Vion, Friesland Campina, Unilever, DSM amongst others help to raise the profile of the Netherlands in the UK. A world renowned wholesale sector provides Dutch producers with access to international markets without the need for foreign direct investment. Focused on delivering innovation through sustained investment in R&D e.g. through centres of excellence such as TNO, NIZO, Wageningen and proven models of knowledge transfer. This knowledge base positions the Netherlands well in providing technical solutions to food manufacturers (e.g. functional health ingredients, enzymes, natural additives). Geographic proximity to the UK and cultural similarities. 136

137 Weaknesses of the Dutch agri-food sector Dutch producers typically sell their produce through wholesale markets but UK grocery retail buyers are increasingly looking for direct relationships with suppliers in order to more closely control costs, quality, safety and traceability. Supply of Dutch produce to the UK is heavily skewed towards high volumes of largely undifferentiated commodity products where economies of scale are typically required to achieve a cost of production advantage. This potentially limits the scope for small and medium sized enterprises which typically lack the scale to participate in these markets. Relative to the UK the grocery retail market is less developed and concentrated; supplier pressure is less intense. This may make it difficult for businesses with a domestic market focus to adjust to the UK grocery retail market where a substantial level of resource is required for effective account management. Limited consumer availability, awareness and appeal of Dutch gastronomy and speciality produce in the UK (especially when compared to France, Spain and Italy). Building consumer demand for Dutch speciality produce is likely to require significant investment in marketing. 137

138 Industry perspective(1) Rotterdam is known as a major trading juncture in Europe. This can be seen as a negative giving a reputation for being transactional, not building long term partnerships a bit one-dimensional and seasonal. I think we have strong cultural similarities. There are some traditional Dutch foods that are virtually unknown in the UK such as Oliebol, Kroket, Metworst, a huge variety of cheeses and Vla all of which could appeal to UK consumers because they are similar to other products on the market. We don t do a very good job at marketing authentic Dutch foods as a speciality product but it s possible because other countries have done exactly that. Fresh produce is synonymous with the Dutch as is pork and bacon as well as dairy. But these are not brands just general product descriptions. Europe has more of a common culture and homogenous undertone to it whilst the UK is somewhat different such as our style of humour which can be critically important to get right when marketing products in the UK. (1) Trade interviews 138

139 Industry perspective(1) The Dutch have more of an advantage in fresh produce production because the glasshouse system is less exposed to the weather. We source a lot from Holland and the produce is always of excellent quality and suppliers on time. During the winter we rely on Dutch suppliers for tomatoes, cucumbers, peppers and some herbs. I believe the Dutch are very strong when it comes to export and scale. There are several Dutch dairy companies that are very successful and have slick operations. The Dutch are very efficient and industrial in their approach. Products tend to be more mainstream with less emphasis on differentiation. Key sectors that spring to mind are dairy and pork. I can t see demand for Dutch exports changing a great deal but if they want to get closer to the UK market it s not the right model to use. The Dutch auction markets do not have the level of transparency and traceability that UK buyers are looking for. (1) Trade interviews 139

140 Opportunities A stable economy with improving near-to-medium term prospects, which is open to trade and investment. A relatively affluent population of 62million (3.7 times that of the Netherlands) with a combined expenditure on food and drink of + 187billion per annum through retail and food service channels. The 4 th biggest grocery retail market in Europe with annual sales (food and drink) in excess of 88billion and CAGR 4%. World class grocery retail businesses each with considerable market share, sourcing a considerable range of food and drink products via highly efficient global and local supply chains. Identifiable growth trends in high value product categories such as poultry, salads, fruit, vegetables, ready meals, processed meats plus others which align with the type of products the UK typically imported from the Netherlands. Extremely diverse food service market made up of global restaurant chains, local cafes and restaurants and catering businesses with annual sales in excess of 51billion and CAGR of 3%. A route-to-market that is dominated by wholesale markets, a model which favours Dutch suppliers. Significant clusters of businesses in London and South East to cater for a more affluent, ethnically diverse population. Over 7,000 highly innovative food manufacturers and processors launching +12,000 new products per year utilising local and global raw materials as well as speciality food ingredients. Technically proficient and productive farming industry. 140

141 Threats UK grocery retailers are increasingly adopting supply chain structures that build direct relationships with British producers and processors in core product categories such as meat, processed meats, liquid milk, seasonal fruit, vegetables and salads. However, whilst promotion of British produce in-store is high, the extent of long-term commitment to sourcing only British produce varies considerably. Recent contamination of processed meat products (e.g. burgers) with horse meat is likely to lead to increased efforts to by manufacturers to label the country-of-origin of meat used. This is likely to favour UK suppliers and threaten Dutch meat suppliers and potentially extend to other product categories too. UK agricultural industry is strong and in a period of growth driven by domestic demand. Although not 100% selfsufficient UK producers are capable of achieving a significant amount of domestic demand. Since 2007 sterling has lost circa. 20% of its value against the Euro, which as effectively led to higher import costs for the UK and a weakened position for European suppliers. Exchange rates are notoriously volatile and very difficult to predict with any accuracy and so it is difficult to foresee how long this situation will remain. 141

142 SWOT summary Strengths The NL is the single biggest non-domestic supplier of food to the UK Competitive producers of poultry, pigmeat, processed meats (e.g. ham, bacon), fruit and vegetables. NL is innovative and advanced in terms of production know-how and technologies (e.g. Greenhouse system). Entrepreneurial and progressive mindset to agri-food production strong in added value products. Substantial knowledge base and extensive collaboration between industry, government and academia. Opportunities The UK has the 4 th biggest grocery retail market in Europe and a thriving food service market. Sales of products where the NL has a strong import presence such as poultry, fruit, vegetables, salad, flowers and plants are growing. UK agri-food sector open to trade and foreign investment. Demand for innovation at all stages of the value chain to meet industry needs. Weaknesses Reliance on wholesale markets. Knowledge and awareness of Dutch gastronomy in the UK is low making it more difficult to market unique Dutch food products. Threats The wholesale route-to-market model is under threat from growing trend for shorter, dedicated and transparent supply chains. Retail and food service buyers moving to a 100% British sourcing policy on strategic commodity items such as meat, milk and in-season fresh produce. Highly competitive environment with long standing preferred supplier relationships in place. 142

143 The way forward for Dutch suppliers (I) We believe there are two broad ways in which Dutch suppliers should approach the UK market. The difference is distinguished by whether the business is a volume player in the market or a niche player in the market. Volume players Volume suppliers to the UK market have benefited from a well functioning wholesale market system on both sides of the channel. This has undoubtedly helped the Netherlands to achieve its current position as the leading non-domestic source of food supply to the UK market. However, the wholesale market model is under threat from buyers that increasingly demand short, transparent and dedicated producer aligned supply chains and for some commodities - growing support for British product. We believe the wholesale market model will be an opportunity for some but it will not be the preferred route-tomarket the major UK buyers would like to use. In our view, this leads to an increasing necessity for Dutch suppliers to get closer to the UK market in other ways; for example: By establishing direct-supply relationships with UK buyers. By utilising a UK based marketing partner. Through direct investment in the UK supply chain (M&A or greenfield investment). 143

144 Export via the traditional wholesale market model The Netherlands is the biggest trading partner in food and drink with the UK and has a competitive advantage in the production of key commodity products. The strong economic incentive to trade with the Netherlands will continue to exist because of the economic rational and/or because the climatic conditions in the UK do not favour domestic production (e.g. fruit). Rationale: Dutch suppliers are in an excellent position as the biggest trading partner with the UK. Sustainable underlying economic incentive for UK to import food products Method: Continued export to UK through wholesale markets. Advantages: Low risk exposure to UK market. Established and well functioning route to market. Reputation of Dutch exporters high. More suited to: Businesses with low strategic interest/reliance on UK market. Disadvantages: Low prices, influenced by exchange rate. Not aligned with current retail sourcing practices and integrated supply chain model. Competition from large scale domestic exporters 144

145 Utilise a marketing partner in UK Production occurs in the Netherlands but produce is marketed through a UK based marketing partner with existing supply chain contract relationships to provide a route-to-market. For this strategy to work there needs to be a strong rationale for the marketing partner to co-operate (e.g. volume supply). Rationale: Controlled exposure to UK market. Chance to build presence in UK with support of marketing partner with local knowledge. Method: Production in the Netherlands to supply a UK partner with existing contracts. Advantages: Existing on the ground infrastructure/knowledge. Stepping stone to further investment. More suited to: Disadvantages: Heavy reliance on UK partner. Needs to be reciprocal value between both parties. Margin loss to partner might not be as profitable as direct exporting. Businesses with long term interest in UK but limited resources / appetite to invest directly. 145

146 Direct investment in UK market In some cases direct investment in production and/or processing operations is the only way to enter the UK market in sectors where supply chains are highly integrated and sourcing policies strongly favour domestic supply (e.g. milk and to some extent fresh meat). Rationale: Only/most beneficial method of entering UK market in key sectors such as liquid milk, red meat. Ability to build permanent strategic position in UK market and overcome country of origin barriers. Method: Acquisition, merger, greenfield investment. Advantages: Permanent presence in market greater knowledge, closer relationships. Increased potential access to markets closed via export method. Disadvantages: High level of investment and risk. Scale of investment required generally high, difficult for SME s to finance this strategy. More suited to: Businesses with significant strategic reliance on UK market and competing in strategic commodity categories. 146

147 The way forward for Dutch suppliers (II) Niche players The innovative potential of Dutch suppliers provides an excellent platform for Dutch SME s to create opportunities at all stages of the value chain. The precise opportunities are potentially endless but we have categorised them in three broad areas as follows: 1. Exporting high-tech production and processing technologies and agri-food intellectual capital. Enabled by significant clusters of R&D organisations in Food Valley and close collaboration between government, academia and industry. 2. Creating higher value products from standard foodstuffs to provide high value solutions to UK businesses. For example, functional food ingredients such as enzymes, proteins, flavours, colours and neutraceuticals. 3. Marketing artisanal and traditional Dutch speciality products on a global provenance platform. Current knowledge and awareness by UK consumers of Dutch specialities (e.g. Cheeses, cooked meats, waffles and so on) is low but, with appropriate marketing, could follow in the footsteps of suppliers from France, Spain and Italy. 147

148 Exporting high-tech production and processing technologies and agri-food intellectual capital. Dutch businesses are renowned for being innovative and investing in production technologies such as glasshouse production and seed potatoes (amongst many others). This core competence is underpinned by a hard to imitate supporting infrastructure where there is close collaboration between government, businesses, academic institutions, which nurtures innovation. Rationale: Global challenges such as the need to produce more food with minimal impact on natural resources, producing safe, secure and affordable food, improving health and wellness, being more sustainable and so on are all highly relevant to the UK agri-food market. Method: Numerous commercialisation methods e.g. sell, license production technologies directly to businesses in the UK. Advantages: Capitalises on key strength of Dutch businesses and wider sectors of industry. Potentially high financial rewards More suited to: Disadvantages: Requires investment by UK businesses (may not be feasible). Competition from UK organisations also working in this area. R&D organisations and businesses with high-technology production solutions looking to expand internationally. 148

149 Creating higher value products from standard foodstuffs to provide high value solutions to UK businesses. Limited geographical scale has meant that Dutch producers work more intelligently to increase the value of their products, transforming them into processed products, transforming residual products such as waste into by products and extracting micronutrients from foodstuffs to provide manufacturing solutions with ingredients such as enzymes, proteins, colours, flavours and neutraceuticals. These solutions are in high demand by UK food manufacturers. Rationale: High value ingredients which (potentially) enable manufacturers to position their product in a number of key ways (e.g. natural, low in salt, fat, sugar, providing a functional health benefit and so on) Method: Numerous. Advantages: Significant added value potential. High demand. Global B-2-B industry, origin less of a concern. More suited to: R&D and knowledge intense businesses. Spin out businesses from academia Disadvantages: Competition from large global players e.g. DSM. High upfront R&D costs. 149

150 Marketing artisanal and traditional Dutch speciality products on a global provenance platform. Countries such as France, Italy and Spain have demonstrated it is possible to build a sustainable market for speciality produce for high value items such as cured meats, cheeses etc on the basis of global provenance and authenticity. This strategy would require significant investment in marketing to UK consumers and buyers to create pull through demand for artisanal products. Rationale: Provides access to UK market for artisanal producers with unique products. Success of countries such as France, Italy, Spain proof of concept for global provenance. Method: Create pull through demand by promoting and showcasing authentic Dutch produce through UK trade shows, judging competitions, collaborative marketing, trade support organisations. Numerous routes-to-market. Advantages: New and unique to UK market, possibly provides category differentiation. More suited to: Artisanal producers wanting to develop internationally. Businesses with a collaborative mindset. Disadvantages: High levels of investment in marketing. Overall profile of Dutch specialities low. May require collaboration from other organisations / businesses. 150

151 Chapter 9: Supporting Information Chapter contents: Retailer profiles. Further information sources. 151

152 Tesco is committed to a six point plan to build a better Tesco in the UK. Areas of focus for 2013/14 are: Service & staff: recruiting more staff and investing in training Stores & formats: focusing expansion on smaller formats and remodelling space in larger stores Price & value: using Clubcard to personalise marketing and communicating new Price Promise coupons-at-till to boost shopper loyalty Range & quality: Completing relaunch of Tesco own brand and relaunching Tesco Finest Brand & marketing: creating a warmer feel and stronger trust in the Tesco brand Clicks & Bricks: further rollout of Click & Collect drive and more focus on Tesco Direct Banner Tesco, Tesco Extra, Tesco Metro Total sales 2012 ( m) 21,813 Format Superstores / Supermarkets Number of stores 2012 Sales area (sq ft) Average sales area (sq ft) ,197,995 24,068 Tesco Extra 14,032 Hypermarket ,050,992 71,643 One Stop, Tesco Express Tesco.com, Tesco Direct 4,751 Convenience & Forecourt 2,186 4,579,000 2,095 2,766 Online n/a n/a n/a Source: IGD Source: IGD Datacentre

153 Sainsbury s is working to strengthen value perceptions, with initiatives such as Brand Match coupons-at-till, more impactful promotions and through the completion of its three year relaunch and overhaul of its mid tier by Sainsbury s brand. Non-food growth is being accelerated through new ranges in hero categories such as clothing, cookshop and papershop and by introducing a 15,000 sq ft non-food offer to more stores. Convenience is a key growth focus with 500 stores now open and a continuing commitment to open 1-2 stores per week. Sainsbury s is committed to becoming an omnichannel retailer with mobile and digital entertainment key parts of this strategy. Source: IGD Banner Total sales 2012 ( m) Sainsbury s 18,042 Format Superstores / Supermarkets Number of stores 2012 Sales area (sq ft.) Average sales area (sq ft.) ,883,226 30,139 Sainsbury s 2,759 Hypermarkets 60 4,178,550 69,643 Sainsbury s Local 1,490 Convenience & Forecourt 525 1,226,278 2,336 Sainsbury s 868 Online n/a n/a n/a

154 Asda aims to become the clear number two retailer in food and number one non-food retailer. The Asda Price Guarantee underpins retailer s value positioning with its guarantee to be 10% cheaper than rivals. Asda is also focusing on quality and innovation with the expansion of its customer tested Chosen by You products and its partnership with Leiths School of Food and Wine to ensure the quality of its Extra Special range. Counters are a key source of investment as Asda builds its fresh food focus. Asda has developing strengths in small store retailing with its Asda Supermarket format and is actively pursuing a multi-faceted digital strategy to extend its reach and build shopper engagement. Source: IGD Source: IGD Datacentre Banner Total sales 2012 ( m) Asda 18,885 Asda Wal-Mart Supercentre Format Superstores / Supermarkets Number of stores 2012 Sales area (sq ft.) Average sales area (sq ft.) 500 2,709,750 31,581 2,410 Hypermarket 32 15,790,657 84,680 Asda 907 Online n/a n/a n/a

155 Morrisons strategy revolves around three areas: driving the topline, increasing efficiency and capturing growth. By the end of 2013, Morrisons aims to rollout its new Fresh Format concept to 100 more stores and complete the renewal of its own brand offer. Morrisons is committed to becoming a major player in convenience through the rollout of its M local format, with development concentrated on the South-East. Morrisons plans to launch its first online grocery offer by Jan Morrisons non-food offer will be limited in-store to priority categories such as childrenswear; a broader range will be offered online. Communicating value and in-house craft skills better will be key to Morrisons marketing strategy. Banner Total sales 2012 ( m) Morrisons 17,905 M local 9 Format Superstores / Supermarkets Convenience & Forecourt Number of stores 2012 Sales area (sq ft.) Average sales area (sq ft.) ,382,996 27, ,997 3,166 Morrisons 1 Online n/a n/a n/a Source: IGD Source: IGD Datacentre

156 The Co-operative Group is the largest consumer co-operative in the world and it aims to further increase membership to 20m by A new advertising strapline Here for you for life aims to emphasise shopper awareness of the retailer s value, quality, ethical and convenience strengths. The Co-operative is committed to expanding its portfolio of small format stores further, faces increasing competition in this sector from other major food retailers. Improving ranging and availability and customer service are key priorities for the business. The Co-operative is exploring how best to pursue an online grocery strategy. Banner The Co-operative Food Total sales 2012 ( m) 4,773 Format Superstores / Supermarkets Number of stores 2012 Sales area (sq ft.) Average sales area (sq ft.) 980 8,924,143 9,106 The Co-operative Food 2,738 Convenience & Forecourt 1,909 3,986,371 2,088 Source: IGD Source: IGD Datacentre

157 M&S operates food halls in its department stores as well as standalone small format stores. Over the last two years M&S has introduced deli counters, in-store bakeries, a stronger fresh offer and exclusive to the UK international brands are being introduced to key stores to move M&S s positioning closer to a food specialist. M&S is developing its estate and making stores easier to shop with segmentation according to location, affluence, demographics and competitors. M&S has upped its focus innovation and tiering within its heavily private label offer. It also aims to build its position in beauty through its Best of Science and Nature concept. Banner Total sales 2012 ( m) M&S 3,283 Marks & Spencer Simply Food Marks & Spencer Simply Food 2, Format Department Store Food Hall Convenience & Forecourt Superstores / Supermarkets Number of stores 2012 Sales area (sq ft.) Average sales area (sq ft.) 299 2,841,855 9, ,742,462 4, ,917 10,979 Source: IGD Source: IGD Datacentre

158 Waitrose differentiates its offer through focus on quality, service and ethics. While primarily a premium operator, Waitrose is keen to emphasise its value credentials through its Brand Price Match commitment (to match Tesco), more eye catching promotions, special offers focused on events and deals through the MyWaitrose loyalty card. Waitrose is working towards a longterm target of 600 stores and 10bn turnover by double that of The little Waitrose convenience format is a key growth channel with up to 300 stores planned by Online is a major opportunity, with drive through and non-store collection pods now being rolled trialled. Banner Waitrose Food & Home Total sales 2012( m) Waitrose 4,878 Waitrose, Waitrose Local Format Number of stores 2012 Sales area (sq ft.) Average sales area (sq ft.) 225 Hypermarket 6 322,551 53, Superstores / Supermarkets Convenience & Forecourt 248 4,658,663 18, ,263 4,424 Waitrose 198 Online n/a n/a n/a Source: IGD Source: IGD Datacentre

159 Aldi is the leading discounter in the UK market. In the current economic climate it is performing very strongly with effective communication of its keen pricing and quality comparability with branded products striking a chord with shoppers. Increased tiering within its private label offer and the inclusion of strategic brands in selected categories is broadening Aldi s appeal to more shoppers. A stronger fresh produce and meat offer is enabling Aldi to increase traction with shoppers undertaking full weekly shops. The development of a new smaller store format should enable Aldi to increase its penetration of urban areas. Banner Total sales 2012 ( m) Aldi 3,599 Format Hard & Soft Discount Number of stores 2012 Sales area (sq ft.) Average sales area (sq ft.) 465 4,124,300 8,869 Source: IGD Source: IGD Datacentre

160 Spar aims to be the largest convenience retailer in the UK and is focused on the small-store sector. Key priorities include strengthening value perceptions through own brand investment, enhancing its fresh offer and aligning stores better with customer missions and meal occasions. Banner Total sales 2012 ( m) SPAR 2,886 Format Convenience & Forecourt Number of stores 2012 Sales area (sq ft.) Average sales area (sq ft.) 2,600 4,002,022 1,539 In the UK, Musgrave supports franchised stores under the Budgens and Londis banners in Britain and also the Centra and SuperValu fascias in Northern Ireland. These independently owned stores operate in local communities providing convenient retail solutions. Banner Total sales 2012 ( m) Budgens 375 Budgens, Londis 726 Format Superstores / Supermarkets Convenience & Forecourt Number of stores 2012 Sales area (sq ft.) Average sales area (sq ft.) ,438 9, ,625 1,701 Source: IGD Source: IGD Datacentre

161 Lidl is also benefiting from the uncertain economic climate and is showing strong growth Its value positioning shows a strong customer appeal and has been developing this further through investment in its fresh offer and communication of provenance. Banner Total sales 2012 ( m) Lidl 2,720 Format Hard & Soft Discount Number of stores 2012 Sales area (sq ft.) Average sales area (sq ft.) 635 6,083,224 9,580 Wine is also a category of opportunity. Iceland is a frozen food focused retailer operating limited line easy-to -shop stores with a clear value positioning. Though the frozen offer remains private label dominated, Iceland is working more with brands to broaden its appeal. Banner Total sales 2012 ( m) Iceland 2,478 Format Superstores / Supermarkets Number of stores 2012 Sales area (sq ft.) Average sales area (sq ft.) 750 3,697,403 4,930 Source: IGD Source: IGD Datacentre

162 Major companies(1) - Meat Name Ownership Turnover m(2) Web 2 Sisters Food Group Family 2,300+ Tulip Foreign owned 957 Cranswick PLC 653 Anglo Beef Processors Family 577 Dawn Meats Foreign owned 298 Danish Crown UK Foreign owned 269 JW Galloway Family 151 Direct Table Foreign owned 101 Dovecote Park Family 98 (1) The Grocer/OC&C (2) Approximate 162

163 Major companies(1) - Poultry Name Ownership Turnover m(2) Web Moy Park Foreign owned 736 Bernard Matthews Family 339 Faccenda Family 337 Banham Poultry Family 96 O Kane Group Family 138 (1) The Grocer/OC&C (2) Approximate 163

164 Major companies(1) Fresh Produce Name Ownership Turnover m(2) Web Wm Morrison Produce PLC 1,013 Argent Food Group Family 446 Fresca Group Family 353 G s Group Holdings Family 281 Produce World Family 251 Berry Gardens Family 186 ult.aspx Albert Bartlett & Sons Family 182 Greenvale AP Family 173 ult.aspx William Jackson Food Group Family 168 Dole Fresh Foreign owned 122 Del Monte Foreign owned 113 Barfoots of Botley Family 76 (1) The Grocer/OC&C (2) Approximate 164

165 Major companies(1) - Dairy Name Ownership Turnover m(2) Web Dairy Crest Group PLC 1,630 Arla Foods Foreign owned 1,435 Muller Wiseman Dairies Milk Link Family 547 Muller Dairy UK subsidiary 401 The Kerrygold Company Foreign owned 249 Meadow Foods Family 247 The First Milk Cheese Company Family 206 Danone UK subsidiary 195 Yeo Valley Group Family 178 https://www.yeovalley.co.uk Lactalis McLelland Foreign owned 168 Glanbia Cheese Foreign owned 122 (1) The Grocer/OC&C (2) Approximate 165

166 Major companies(1) prepared foods Name Ownership Turnover m(2) Web Bakkavor Foreign owned 1,650 Greencore PLC 1,200 Samworth Brothers Family 599 Kerry Foods Foreign owned 500 Birds Eye UK subsidiary 457 McCain Foods UK subsidiary 351 Adelie Foods Private equity 250 Noon Products Family 131 Pork Farms Private equity 130 HJ Heinz Frozen and chilled foods Private equity 118 CP Foods Foreign owned 111 Branston Family 110 (1) The Grocer/OC&C (2) Approximate 166

167 Major companies(1) branded manufacturing Name Ownership Turnover m(2) Web Associated British Foods PLC 9,280 Mondelez International PLC Tate & Lyle PLC 3,607 Premier Foods PLC 2,682 Unilever UK subsidiary 2,172 Mars UK subsidiary 1,594 Coca-Cole UK subsidiary 1,492 Nestle UK UK subsidiary 1,374 United Biscuits Private Equity 1,185 Findus Group Private Equity 1,092 (1) The Grocer/OC&C (2) Approximate 167

168 Major companies(1) branded manufacturing Name Ownership Turnover m(2) Web Princes Foreign owned 1,081 Britvic PLC 981 HJ Heinz Company UK subsidiary 736 R&R Ice cream Private equity 354 Weetabix Private equity 315 Burtons Foods Private equity 296 Nutricia UK subsidiary 292 General Mills UK UK subsidiary 234 Walkers Snack Foods UK subsidiary 224 Tropicana UK subsidiary 224 (1) The Grocer/OC&C (2) Approximate 168

169 Major companies wholesale/cash & carry and food service operators Name Ownership Turnover m(2) Web Palmer & Harvey PLC 4,227 Booker Wholesale PLC 3,179 Bestway Cash & Carry Family owned 1,920 Musgrave retail partners Family owned 1,370 hp Name Ownership Turnover m Web Compass PLC 16,905 (global)* Sodexo PLC 18,000 (global)* Aramark PLC 12,000 (global)* Brake Brothers Private equity 1, UK subsidiary 1,694 (1) The Grocer/OC&C (2) Approximate 169

170 Information sources Organisation Description Web: Information Agriculture & Horticulture Development Board (AHDB) A statutory levy board, funded by farmers, growers and others in the supply chain. Umbrella organisation for sector specific bodies: Market information Industry news R&D transfer British Pig Executive (BPEX) Pig sector body of the AHDB Market information Industry news R&D transfer English Beef and Lam Executive (EBLEX) Beef and lamb sector body of the AHDB Market information Industry news R&D transfer Potato Council Potato sector body of the AHDB Market information Industry news R&D transfer DairyCo Dairy sector body of the AHDB Market information Industry news R&D transfer Home Grown Cereals Authority Cereals sector body of the AHDB emplate/0/0/home/home/ho me.mspx Market information Industry news R&D transfer Horticulture Development Council Horticulture sector body of the AHDB Market information Industry news R&D transfer 170

171 Information sources Organisation Description Web: Information Institute of Grocery Distribution (IGD) Representative body of grocery retailers. Registered as a charity. Grocery retail market data and insight Industry news Food and Drink Federation Representative body of UK food and drink manufacturers Data, information and insight of food manufacturing industry British Retail Consortium Trade association representing all retailers in UK (not just grocery) home.asp Authoritative market knowledge, insight and high profile lobbyists British Soft Drinks Association the national trade association representing the collective interests of producers and manufacturers of soft drinks including carbonated drinks, still and dilutable drinks, fruit juices and smoothies, and bottled waters. s.com/ Influencing government Communicating with the media Promoting sustainability Enhancing sector skills and competitiveness The Chartered Institute of Purchasing & Supply To promote and develop high standards of professional skill, ability and integrity among all those engaged in purchasing and supply chain management Training Qualifications Knowledge 171

172 Information sources Organisation Description Web: Information Department for Environment Food and Rural Affairs (Defra) Department of Health (DoH) Food Standards Agency (FSA) The Food and Environment Research Agency (FERA) Department for Business, Innovation and Skills Government department responsible for environment, food and rural affairs Government department responsible for public health Government department responsible for food safety Government department responsible for food and environment research (e.g. Crop research) Government department responsible for all manner of trade and industry https://www.gov.uk/govern ment/organisations/departm ent-of-health k/ chives.gov.uk/+/http://www. berr.gov.uk/index.html Office for National Statistics Official statistical authority of the UK ndex.html HM Customs & Excise Royal authority responsible for collection of taxes Extensive data/information of agriculture in UK Campaigns to improve health profile of food Responsible for food safety and hygiene across the UK. We work with businesses to help them produce safe food, and with local authorities to enforce food safety regulations. Agri-food research outputs Guidance on doing business/investing in UK Comprehensive statistics databases on UK Comprehensive source of information on UK tax 172

173 Major UK wholesale markets The National Association of British Market Authorities (NABMA) estimates annual total turnover for traditional UK wholesale markets at 2.5-3bn NB trader directories can be accessed via individual wholesale market websites Glasgow Wholesale Market (multiple products) Manchester New Smithfield Market (multiple products) Liverpool Market (multiple products) Birmingham Wholesale Market (multiple products) New Spitalfields Market (fruit & veg) New Covent Garden Market (fruit, veg & flowers) Smithfield Market (meat) Billingsgate Market (fish) Western International (fruit) 173

174 Academic* and scientific research bodies Lancaster University Bangor University Newcastle University Sheffield University Nottingham University Aberystwyth University Campden BRI Institute of Food Research Cranfield University BBSRC** Reading University Leatherhead Food Research *Only includes academic organisations with a significant interest/capability in agri-food. **Biotechnology and Biosciences Scientific Research Council 174

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