Commercial Banking. An Appetite for Growth. Ambition and opportunity for Scotland s food and drink industry.

Transcription

1 Commercial Banking An Appetite for Growth. Ambition and opportunity for Scotland s food and drink industry.

2 02 Welcome. Welcome. Continuing its successful growth story, Scotland s food and drink sector is in a confident mood and has an appetite for expansion. Alasdair Gardner, Regional Managing Director of Commercial Banking for Scotland I m delighted to present our second annual market survey on Scotland s food and drink sector. Following the opportunities we identified in last year s survey, it is encouraging to see that overall confidence levels, in this 12bn plus industry, remain high. Scotland s food and drink industry has been one of the economy s great success stories of recent years. Domestic sales growth and further expansion into overseas markets have cemented its position as the nation s biggest employer. Respondents to our second annual survey of the sector are from across Scotland, representing a broad spread of more than 100 businesses with sales up to 500m. Our findings show the rising cost of raw materials adding further pressure on already tight margins remains the biggest concern for Scottish producers. Uncertainty over global economic conditions also continues to be a major issue. However, despite the challenges there appears to be an upbeat mood in the sector with most firms planning ahead for growth and job creation and almost half looking to break into new export markets. It is pleasing to see that fewer firms would consider moving production overseas and also encouraging that more could quickly ramp up production if opportunities arose. The publication of this year s report is timely as preparations build ahead of a momentous year for Scotland. The Glasgow 2014 Commonwealth Games, the year-long Homecoming celebrations and the Ryder Cup at Gleneagles are together expected to attract visitors and participants from more than 70 countries. The opportunities to promote Scotland as a producer of high quality food and drink to a global audience come as firms increasingly look further afield to sell their products. Markets such as the Far East and Asia, where the whisky industry has already established very strong footholds in many countries, also offer huge potential for the food sector with a rapidly growing middle class willing to spend on high quality products. Bank of Scotland is proud to play an active role in such an important industry for the nation, supporting customers with a full suite of domestic and international services. The many businesses we work with in the food and drink sector provide us with valuable insight into its evolving needs but the extensive research carried out for this report provides a wider insight into the health of the industry, confidence for the future and barriers to growth. I hope you find this report both informative and stimulating as we enter what promises to be a golden era for Scotland s food and drink industry. Alasdair Gardner Regional Managing Director of Commercial Banking for Scotland

3 03 Contents. Contents _ Executive summary. 10_ Food for thought. 05_ Economic outlook and job creation. 12_ The future landscape. 07_ International expansion plans. 09_ Ingredients security. 14_ The golden era for Scotland s food and drink industry.

4 04 Executive summary Executive summary. The international reputation Scotland has built as a home of quality food and drink will continue to deliver significant benefits for the Scottish economy. Scotland s food and drink has been one of the nation s strongest performing sectors in recent years and our findings highlight its importance to the future of the economy. Two-thirds of companies expect to increase their workforce in the next five years as the sector continues to look to outpace the wider economy. From over 100 companies we surveyed, respondents were confident of up to 1,000 new jobs between them over the next five years. If these findings were replicated across the wider food and drink production sector it could mean more than 5,600 additional jobs will be created. Investing for growth More than a third of respondents said they are predicting double digit growth in their businesses driven mainly by expansion into new export markets and investment in products and helping cement the industry s position as one of Scotland s fastest-growing sectors. If the mean five-year growth expectations of 19% reported by respondents looking to expand was seen across the wider food and drink sector, it could significantly exceed Scotland Food & Drink s 2017 target of 12.5bn turnover, which the industry is already at the verge of achieving. The forecasts envisage stronger growth than other sectors in the Scottish economy where almost half of businesses predict turnover to be static in the next six months with less than a third expecting sales to increase 1. Shift in export focus Exporting and new product development are expected to be the key drivers for growth in the sector. Over 40% of firms are planning on expanding their export activities. There has also been a significant shift in where Scottish food and drink companies are setting their international sights as they look for higher growth markets. Almost two-thirds of companies named the Far East/Asia as their key area of focus, replacing Western Europe at the top of the list of target markets. The rapid emergence of countries such as Brazil was also underlined with a 20% increase in the proportion of companies looking at South America. On the ground knowledge of overseas markets was again listed as the area where companies felt most support was needed to help them, a timely finding as a new export strategy for the industry in Scotland is finalised. Key challenges The biggest area of concern for the sector continues to be the cost and volatility of raw materials, cited by almost two thirds of respondents amid greater competition for resources and the threat of poor harvests caused by extreme weather. Given continuing anxieties over a number of Eurozone economies and fears of a slowdown in some emerging markets, the health of the global economy remains a key issue although concerns appear to have eased somewhat from last year. Overall, the report highlights an industry that has performed strongly in challenging global economic conditions and is looking to invest to take advantage of further growth opportunities. 1 Bank of Scotland Business Monitor June 2013

5 05 Economic outlook & job creation. Economic outlook and job creation. Scottish food and drink companies are looking to invest and create jobs to take advantage of opportunities to grow sales. 66% of businesses expect to increase job numbers over the next five years. Over 5,600 is the predicted number of jobs Scotland s food and drink industry is expected to create over the next five years. The growth and investment ambitions of Scotland s food and drink businesses suggest robust underlying confidence. If the 19% growth expected by respondents over the next five years is mirrored across the whole sector it could significantly exceed its 2017 target of a 12.5bn turnover, which the industry is already on the verge of achieving. The findings showed that businesses are willing to invest to achieve their growth ambitions. Across our sample, they expected to invest some 12.8% of turnover over the next five years with two thirds expecting to increase job numbers. Factors such as an increase in the annual investment allowance, which offers businesses tax relief on investments of up to 250,000, are likely to have encouraged companies to increase capital spending. The investment intentions come amid increasing signs that economic conditions in many key markets for Scottish food and drink, including the UK, US and France, are gradually improving. A raft of figures on UK retail sales, house prices and new car registrations have pointed to strengthening confidence among domestic consumers and growth projections for 2013 have recently been raised, albeit to only 0.9%. Recent economic data from the US and France the two biggest markets for Scottish food and drink exports was also seen as encouraging by many commentators. The improving economic outlook appears to be underpinning confidence in the sector with more than a third of respondents (34%) expecting to see double digit business growth over the next five years with 7% predicting a rise of more than 50%. Less than one in ten businesses said they expected their growth figure to be under 5%. PRODUCT INVESTMENT (55%) AND ENTERING NEW MARKETS (53%) WERE BY FAR THE MOST POPULAR ROUTES TO ACHIEVE GROWTH.

6 06 Economic outlook & job creation. THE WHOLE SECTOR IS SET TO SIGNIFICANTLY EXCEED ITS 2017 TARGET OF A 12.5BN TURNOVER. Product investment (55%) and entering new markets (53%) were by far the most popular routes to achieving growth. While the vast majority of companies expect growth to be organic, the improving transactions market is seeing 9% looking at mergers and acquisitions to achieve their goals. There was a broad spread of funding routes being considered with traditional debt financing only being considered by a fifth (21%). Smaller firms were more averse to looking at debt finance (17%) than firms of 15m+ turnover (30%). The growth in alternative financing methods was highlighted by cash flow and asset-based finance together accounting for 48% with a similar percentage (47%) planning on utilising cash reserves. A number of companies are considering multiple funding options. Given the long term decline in the number of Scotland s stock market quoted companies with only two food and drink companies currently listed, the fact that 6% of respondents said they were considering Initial Public Offerings to support their growth plans was encouraging. Only 1% of respondents said they were not planning any funded growth. Plans for job creation were also positive. In the next five years respondents expect to create up to 1,000 new jobs between them. Some 7% said they expect to take on at least 50 new staff. Pressures on the industry including the need to improve productivity, minimise costs, create healthier products and reduce environmental impact is expected to lead to particular growth in demand for roles including food scientists and process engineers. A growing trend seen across manufacturing for reshoring bringing back production from locations such as China and the Far East due to rising costs was reflected in a drop to 12% from 16% last year in the number of respondents who said they would consider outsourcing production to another country to meet increased demand. A move to shorten supply chains and improve quality control in the wake of the horsemeat scandal is also expected to result in less willingness to move production overseas. More than two in five respondents are investing or planning ahead to engage with new international customers, which will help cement the sector s position as the largest contributor to Scotland s export figures after oil and gas. But time pressures and lack of internal resources contributed to a significant difference between the proportion of SMEs (33%) looking for new overseas business compared with mid-market companies 1 (55%). Much of the growth in exports seen to date has been down to the dramatic expansion in overseas sales of Scotch whisky where exports reached a record high of 4.27bn in 2012 a 51% increase since Businesses with a turnover greater than 25m (but less than 750m). 12.8% is the percentage of turnover businesses expect to invest over the next five years. 34% of companies expect to see double digit business growth over the next five years.

7 07 International expansion plans. International expansion plans. A rapid rise in consumer spending power in many emerging economies is seeing businesses follow in the footsteps of Scotch whisky distillers by seeking out higher growth opportunities. With the industry s 2017 export target now set to be increased by over a third on current levels, the focus is on accessing higher growth markets in the Far East and South America. Our survey found that businesses are increasingly responding to the shift in global demand patterns and looking to emerging economies for growth. The upward revision of the Scottish export target reflected the sustained growth seen in overseas sales achieved in recent years. Although the total value of the sector s exports during 2012 dipped slightly due in part to weak demand in many Eurozone countries, it was still the second highest figure on record at 5.31bn. The 1.4% fall last year did serve to underline the need for the food sector in particular to widen its horizons. Some 80% of food exports currently go to ten countries in the Eurozone as well as the US. While whisky exports were also affected by weak demand in some of those markets, that was counterbalanced by strong growth in many emerging economies. Such diversification across the sector would bring benefits both in terms of risk management and economic opportunity. Consumers in some of the world s most exciting economies have already developed a taste for Scottish produce with dramatic results. Since China allowed Scottish farmed salmon to be directly exported there, shipments have risen by more than 1,000 per cent over a two year period. Demand for Scotch in Russia is also growing to the extent that it is expected to overtake the UK for consumption by 2016 with intake set to rise from 56m bottles in 2013 to 78m bottles in Brazil is predicted to be consuming 66m bottles in 2016, a rise of over 40% from current levels. According to our survey, the Far East/Asia (65%) is now the key target market among those companies looking to expand their export activities, displacing Western Europe. That shift is also reflected in the fact Singapore is now the third biggest importer of Scottish food and drink the first time an Asian country has occupied such a high level. More than half of respondents (53%) are also considering Western Europe with almost one in five (19%) targeting Russia. The Middle East is also see as a key region (40%) followed by South America (37%), where markets such as Brazil are seeing a rapidly emerging middle class. North America, where the US overtook France as Scotland s top food and drink export market during 2012, is also being considered by almost a third of respondents (33%). Many companies are looking at more than one market. THE WORLDWIDE RECESSION HAS MEANT BUYERS ARE MORE WARY ABOUT TRYING SOMETHING NEW AND ARE STICKING WITH PRODUCTS THEY ARE SURE WILL SELL. Gary Reid, managing director of Reids of Caithness.

8 08 International expansion plans. The financial woes seen in some of the Eurozone countries, which are key markets for the sector is likely to be the major factor in the slight fall seen in the number of companies looking to export (down to 42% from 44%). The biggest single reason cited by those not looking at export markets was a lack of time and resources (23%) particularly an issue cited by SMEs (28%) with complexity of logistics (18%) and lack of knowledge of international markets (12%) also key stumbling blocks. Short shelf life of specific fresh products was also flagged up by a number of respondents but cash flow or funding issues (8%) were not seen as a major barrier. Reids of Caithness began exporting around three years ago as it looked to develop new customers away from its local market where growth opportunities were limited and the UK market became stagnant. The company now successfully export their range of products to 10 countries worldwide, including Japan, Russia, China, the USA (both East Coast and West Coast) and Canada. Managing director Gary Reid said that in an increasingly brand-driven world the biggest initial hurdle smaller firms face was trying to convince buyers to take on an unknown name. The worldwide recession has meant buyers are more wary about trying something new and are sticking with products they are sure will sell. That makes it harder to try and get listed in the first place but also means retailers are less willing to give a product time to get established. On the ground knowledge of a particular market (25%) was seen as the area where companies felt they would require the most support to achieve overseas success and efforts are already underway to get more specialist food and drink advisors within Scottish Development International s global network of offices. Almost half (44%) of those looking to break into new markets said they were looking at developing new products and packaging to help their push. In a possible reflection of increased investment levels, more than two thirds of companies (70%) said if an opportunity arose in an overseas market they had the capacity to quickly increase production, up from 57% last year. The importance of Scotland s image as being a producer of high quality produce was highlighted with 59% of respondents citing it as the key attribute for overseas buyers with 19% citing strong Scottish branding and 14% provenance. Although the 2014 events are seen an opportunity to raise the profile of Scottish food and drink both among visitors and a global television audience only a minority of businesses (16%) are actively looking to exploit their potential for increasing overseas sales although that figure is expected to increase as the events draw nearer. MORE THAN TWO THIRDS OF COMPANIES (70%) SAID IF AN OPPORTUNITY AROSE IN AN OVERSEAS MARKET THEY HAD THE CAPACITY TO QUICKLY INCREASE PRODUCTION, UP FROM 57% LAST YEAR. 65% of companies looking to expand their export activities said the Far East/Asia is now the key target market. 44% of businesses said they were looking at developing new products and packaging to break in to new markets. 53% of companies are also considering Western Europe for opportunities to expand their export activities.

9 09 Ingredients security. Ingredients security. While globalisation is presenting opportunities, it is also a factor in the increasing cost and volatility of raw materials that is seen as the biggest threat to security of supply. Last year s wet summer and autumn hit UK harvests of key crops including barley and wheat, exacerbating pressures on input prices faced by food and drink manufacturers. The knock-on impact on winter planting of the 2012 summer, the seventh wettest on record in Scotland is also predicted to result in low yields of some crops this year. With a rising incidence of poor harvests globally and increasing competition for commodities, a third of businesses in our survey said security of ingredients supply (33%) was their biggest challenge. The main threat to ingredients security in particular was seen as the rising cost of raw materials (46%) followed by energy costs (17%). The specific impact of the weather, climate change and the risk of diseases affecting key crops was cited by a number of individual respondents as concerns. For manufacturers such as Gary Reid, managing director of Reids of Caithness, price spikes for key ingredients such as butter present a major business challenge. 33% of companies said the security of ingredients supply was their biggest challenge. 46% of businesses indicated that the main threat to security of ingredients was the rising cost of raw materials.

10 10 Food for thought. Food for thought. Global demographic changes present huge opportunities for quality food and drink products, although strong economic headwinds and increasing competition for resources will continue to pose challenges for the sector. GRAPH 1 How many jobs do you plan to create in the next five years? GRAPH 2 Where, if at all, do you feel you would require the most support to achieve overseas success? 33% 12% Access to finance 4% Other 1% Ingredients security 23% 19% 11% 7% 4% 3% 25% On the ground knowledge None Don t know 17% Investment in production 19% Marketing 22% Don t know Data exceeds 100 per cent as a result of a question where respondents were able to select more than one answer.

11 11 Food for thought. Over 40% of firms are still planning on expanding their export activities into... GRAPH 3 What are overseas buyers looking for from Scottish Food and Drink? GRAPH 4 What do you consider to be the biggest threat to ingredients/ supply security in the next five years? 26% 28% 28% 29% 31% 12% 22% 14% 20% 3% 7% 13% 18% Least important Third most important Third most important Second most important 46% 21% 17% 7% Heritage 14% 16% 14% Provenance 32% 14% Proven success 1% 35% 19% Strong Scottish branding 59% Quality Most important Rising cost of raw materials 17% 15% Rising cost of energy to produce products Government policy 4% Conditions set by national/ international financial institutions 8% Other 12% Don t know Data exceeds 100 per cent as a result of a question where respondents were able to select more than one answer.

12 12 The future landscape. The future landscape. Global demographic changes present huge opportunities for quality food and drink products, although strong economic headwinds and increasing competition for resources will continue to pose challenges for the sector. 37% of businesses still consider the global economy among their biggest challenge. 65% of companies regard the rising cost of raw materials as the most pressing area of overall concern, an increase on the 61% seen in last year s survey. Concerns over the global economy among businesses appear to have eased slightly from last year according to our survey, although more than a third (37%) of respondents still consider it the biggest challenge (2012: 42%). However, with worldwide growth projected to remain subdued at slightly above 3% in 2013, it is emerging markets where average GDP growth of around 5.5% is seen this year which will have a crucial role to play in helping the industry achieve its growth targets. While the likes of China, India and Russia are expected to continue to outstrip Western economies, forecasting which markets will offer the most potential is a challenge for businesses. Leonard Russell, managing director of independent spirits group Ian Macleod Distillers, believes trying to predict just how demand may look in different parts of the world many years in the future is an increasingly important part of business planning in the industry. The main challenge is that as an industry what we make today we don t sell for a long time and we need to work out how much stock to lay down now in anticipation of future market growth. Russell believes demand trends will become increasingly volatile, present both opportunities and challenges for individual producers and the industry as a whole. If China started to take to single malt in the same way consumers in Taiwan have done there wouldn t be enough in the industry to supply it, he pointed out. Russell believes the long term prospects for the industry continue to be very strong with higher disposable income in emerging markets and a burgeoning appetite for branded, imported goods putting established whisky producers in a strong position. Single malt still has a very long way to go in terms of global sales. While it is an established category in markets such as the UK, France and US it is still almost unheard of in India and China, he pointed out. But increasing consumer demand from emerging economies is also a significant factor in greater competition being seen for resources, an issue which is expected to continue to be a major risk for producers in the year ahead. With the UN predicting that the world population will reach 8 billion in 2030 requiring 50% more food production globally rising demand on natural resources and ever greater competition for ingredients is expected. Our findings show the rising cost of raw materials is regarded as the biggest overall challenge facing Scottish food and drink producers with 65% citing it as the most pressing area of concern, an increase on the 61% seen in last year s survey. Cost volatility is leading to a fresh approach to procurement emerging among Scottish companies. There appears to be more co-operation between companies in the same sector to group buy key commodities to try and mitigate cost increases. Smarter companies are recognising that working with rivals in some aspects of their business planning can offer significant advantages. SINGLE MALT STILL HAS A VERY LONG WAY TO GO IN TERMS OF GLOBAL SALES. Leonard Russell, managing director of independent spirits group Ian Macleod Distillers.

13 13 The future landscape. Alan Hill, finance director of Browns Food Group in Dumfriesshire, argues that increasing volatility also highlights the importance for firms in the sector to build a broad spread of markets, products and customers. Those businesses too reliant on one customer or product may not be able to pass on any increases in raw material costs and have to absorb them all within the business, he pointed out. The impact of the horsemeat scandal, which first came to light at the beginning of 2013 has also added to cost pressures as many businesses have been forced to re-examine their supply chains and improve traceability. Regaining confidence in integrity of supply in light of the scandal was seen as a key challenge for the industry by over a quarter (28%) of respondents. While a report commissioned by the Scottish Government concluded that the issue was generally handled well in Scotland, a number of recommendations were made to improve the food safety and standards regime including improved risk assessment, testing and surveillance measures. James Withers of Scotland Food & Drink believes that the legacy of the scandal will prove to be a real positive for Scotland. I think the demands for better quality from consumers will benefit a Scottish industry, which has invested heavily over the years in initiatives such as farm assurance schemes that in many respects have led the world. 28% of businesses say regaining confidence in integrity of supply in light of horsemeat scandal is seen as a key challenge for the industry. THOSE BUSINESSES TOO RELIANT ON ONE CUSTOMER OR PRODUCT MAY NOT BE ABLE TO PASS ON ANY INCREASES IN RAW MATERIAL COSTS AND HAVE TO ABSORB THEM ALL WITHIN THE BUSINESS. Alan Hill, finance director of Browns Food Group in Dumfriesshire.

14 14 The golden era for Scotland s food and drink industry. The golden era for Scotland s food and drink industry. James Withers, Chief Executive of Scotland Food & Drink, argues the outlook for the industry has never been better. James Withers, Chief Executive of Scotland Food & Drink The food and drink industry has been Scotland s best performing domestic sector in the past five years and its fastest growing export sector. That contribution has been particularly valuable against such a difficult economic backdrop. While a step-change has been delivered in the industry s performance, I believe the sector has the potential to deliver much more. Ambitious sales and export targets are in place for 2017 and achieving those will not only represent success for the industry but also for Scotland with the potential to create thousands of new jobs. In many respects we are at a game-changing moment for Scottish food and drink. Signs that confidence is starting to return to the domestic economy are encouraging but it is the potential for the industry to build on progress to date in overseas markets that holds the most potential. Food and drink exports have already risen by 50% since Increased global awareness of Scottish produce and a growing appetite for high quality food and drink means the potential market is continuing to expand significantly. The hosting of the Glasgow 2014 Commonwealth Games, the Ryder Cup and second Scottish Homecoming next year will provide an unprecedented opportunity for the industry to play to its strengths. The value of contracts for catering at the events will run into tens of millions and many other food and drink companies will increase sales through developing themed products or packaging. But the legacy opportunity could be worth much more as many thousands of visitors return home with a taste for Scottish produce and hundreds of millions of television viewers are left with a positive image of what Scotland has to offer. The whisky industry has already blazed a trail in overseas markets selling to twice as many countries as the food sector which the wider industry can benefit from. While few people in the Far East may be able to point to Scotland on a map they all know about Scotch whisky. We want to help companies from across the sector tap into that expertise in building sales, customer relationships and supply chains in overseas markets. Given the global potential it is vital we encourage more businesses to look at exporting. Industry bodies and government organisations are working hard to help businesses internationalise with initiatives including getting more food and drink experts on the ground in key target markets. With the right support in place and an emerging generation of Scottish producers and exporters, I believe this will prove to be a golden era for the industry. THE FOOD & DRINK INDUSTRY HAS BEEN SCOTLAND S BEST PERFORMING DOMESTIC SECTOR IN THE PAST FIVE YEARS AND ITS FASTEST GROWING EXPORT SECTOR. James Withers, Chief Executive of Scotland Food & Drink

15 15 Your team in Scotland. Your team in Scotland. If you are interested in discussing your business growth plans, please contact any member of our team: Your senior team Alasdair Gardner Regional Managing Director, Scotland Graham Blair Area Director, SME Banking, North Scotland Ian Collins Area Director, SME Banking, South Scotland Mark Prentice Area Director, Edinburgh & East Scotland Stuart White Area Director, Aberdeen & North Scotland Pete Flockhart Area Director, Glasgow & West Scotland Alison Nicolson Regional Sales Director, Scotland Gillian Fisken Regional Sales Director, Scotland Jane Clark- Hutchison Senior Director, Scotland Your food and drink contacts Clare Richardson Business Development Director, Aberdeen & North Scotland Andrew Clark- Hutchison Relationship Director, Edinburgh & East Scotland Stephen McNeil Relationship Director, Glasgow & West Scotland

16 Supporting Scottish Food & Drink Businesses. Our experienced teams are well placed to support the anticipated growth in the food & drink sector by providing comprehensive expert financial services. The range and depth of expertise across our Scottish teams is underpinned by many years of individual experience. Working alongside our local product specialists, we provide banking solutions tailored to your specific needs including: Trade finance Treasury and risk management services Bonds, guarantees and collections Structured finance solutions Cash management Asset finance Please contact us if you d like this in Braille, large print or audio tape. We accept calls via text relay. Please remember we cannot guarantee security of messages sent by . Bank of Scotland plc. Registered Office: The Mound, Edinburgh EH1 1YZ. Registered in Scotland no. SC Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority Field research for this report was undertaken between 25th July and 15th August 2013 by the UK s largest independent market research consultancy BDRC Continental. To gather representative data from this diverse industry, a broad cross section of 100 Scottish food and drink businesses were interviewed spanning a range of size, location, and product type. Survey questions focused on exporting plans, job creation, capacity and investment, targeting international markets, the traits of internationally successful brands, sustainability credentials. Correct at time of printing: September 2013 MM1769