C O MME R C IAL B A N K ING. Bank of Scotland Research Series Food and Drink. Fresh opportunity and growth

Transcription

1 C O MME R C IAL B A N K ING Bank of Scotland Research Series Food and Drink Fresh opportunity and growth

2 Our contributors James Withers Scotland Food and Drink Lee Godfrey Browns Food Group What s in this report Foreword Executive summary Key findings Growth and employment International expansion and export Industry focus Challenges and opportunities Scotland: the land of food and drink The support you need

3 Foreword Scottish food and drink manufacturers of all sizes are making ambitious plans for significant investment in research and development, exporting, creating new products and further developing existing offerings. Graham Blair Area Director, Scotland Opportunities abound in Scotland s food and drink industry as producers focus on innovation and new export markets to drive fresh growth in this already confident sector. Welcome to our fourth annual market survey of Scotland s food and drink manufacturers. The strength of the Scottish food and drink industry can be seen throughout this year s report, underpinning the continued importance to the Scottish economy more broadly. Thanks to the business owners, directors and senior managers who have once again supported the survey, we have been able to get to the issues that really matter to those involved in this vibrant industry. The report arrives as celebrations and events continue as part of the Year of Food and Drink Scotland 2015, highlighting the sheer variety and quality of produce that our country s natural larder has to offer. Against this backdrop, Scottish food and drink manufacturers of all sizes are making ambitious plans for significant investment in research and development, exporting, creating new products and further developing existing offerings. Collaboration is also high on the agenda for firms looking to invest in R&D over the next five years, a positive sign that the industry can continue to build on its already strong reputation for more traditional Scottish food and drink produce, while exploring exciting new products and ventures. Both the export and job forecasts set out by respondents in the survey highlights the significant contribution that food and drink manufacturers are making to employment in Scotland and the country s reputation in international markets. This report also highlights a number of challenges for the industry but the overall confidence and investment growth highlighted in our survey reflects the sector s resilience against both sector specific issues and external pressures. I hope you will find this report as insightful and positive as we do here at Bank of Scotland. See Graham Blair talk about this research and the outlook for the food and drink industry. Watch the video at co.uk/business-guidance/ insights-and-ideas/food-anddrink-report/ 3

4 Executive summary Scotland s food and drink industry is making a growing contribution to the economy. Last year saw further progress while the Year of Food and Drink Scotland 2015 has raised public awareness and appreciation of the range and quality of our national produce. Scotland s reputation as the Land of Food and Drink continues to advance. Despite political uncertainties, oil price volatility and slow growth in key export markets, Scottish food exports in 2014 surpassed 1.1 billion for the first time, with total food and drink exports valued at 5.1 billion 1. Far from pausing for breath, the latest survey of Scottish companies by Bank of Scotland Commercial Banking finds most firms planning further growth in sales and investment, while businesses surveyed are planning to, collectively, increase employment by 14,000 roles over the next five years. Confidence in Scottish produce is high, with more than three quarters (78 per cent) of firms surveyed saying that Scottish provenance has a good reputation in international markets. Across the survey as a whole, firms are planning to invest an average 40 per cent of current turnover back into their business over the next five years and expect an average 19 per cent growth in turnover over this period. Particularly heartening is the commitment to innovation and expansion outside existing markets. More than 60 per cent plan to achieve growth by new product development (62 per cent) and 54 per cent intend to do so by entering new markets in the UK. On productivity improvement, just over half (51 per cent) of all firms plan to work in collaboration or partnership with more organisations in their supply chain. Just over three in five businesses (62 per cent) intend to win new international customers over the next five years. And despite continuing slow growth in continental economies, Western Europe remains the most popular geographical area for expansion. Rising labour costs are cited by 42 per cent of firms as the most significant challenge currently facing the food and drink industry in Scotland followed by regulation and compliance concerns (39 per cent). Just over a third (34 per cent) highlighted a possible exit from the EU as the biggest challenge to their businesses. Scotland s food and drink sector makes a 1.5 billion contribution to Scotland s Gross Value Added, equivalent to 12.5 per cent of Scottish manufacturing value added 2. This year s report gives every indication that this input will become even stronger and is on track to hit a new growth target set out by the industry and the Scottish Government to reach turnover of 16.5 billion by New record for Scottish food exports, Scottish Government press announcement May 27 2 Scottish Annual Business Survey 2013 & Scotland of Food and Drink: Taste the difference Confidence in Scottish produce is high, with more than three quarters (78 per cent) of firms surveyed saying that Scottish provenance has a good reputation in international markets. 4

5 Key findings Growth 19% 62% 54% growth in turnover is forecast over the next five years plan to achieve growth through new product development are targeting fresh growth through new markets in the UK Job creation International expansion 46% 14,000 62% of firms plan to generate new growth through job creation jobs are forecast to be created industry-wide over the next five years of firms intend to win new international customers over the next five years Industry challenges and opportunities 71% 42% 39% say rising labour costs are the most significant challenge facing the industry believe regulation and compliance is the biggest issue are looking to capitalise on the provenance of their products and produce 5

6 Growth and employment Scotland s food and drink businesses are well positioned to build on the growth momentum of recent years. All the indications in this year s survey point to substantial growth in turnover, investment and employment. Scotland s economy is in good shape, helped by strengthening inward investment, domestic business investment and record numbers in work. Growth in 2014 is estimated at 2.9 per cent. For the current year the University of Strathclyde s widely quoted Fraser of Allander Institute is forecasting a mild growth slowdown to 2.5 per cent, with a further easing of pace to 2.3 per cent for both 2016 and This slower rate of expansion is due in large part to the adverse consequences of the sharp fall in oil prices on North Sea oil investment and activity. Inverness-based Mackay Consultants is forecasting GDP growth in 2015 of 2.4 per cent, falling to 2.2 per cent in subsequent years due to oil sector contraction 5. For the UK overall, estimates from the Office for National Statistics show an upward revision for growth to 3 per cent for 2014, with a forecast from the Office of Budget Responsibility of 2.4 per cent for 2015 and 2.3 per cent for However, our survey respondents appear altogether more positive, with turnover expected to grow by 19 per cent over the next five years. Business investment is also predicted to be robust. Across the survey as a whole, firms estimate that they 61% are planning to fund growth with cash reserves 55% say complexity of logistics is stopping them from considering investing in or planning to engage new international customers As a percentage, what is your expected business growth forecast (turnover) for the next five years? 23% 20% 16% 11% 9% 6% 8% 4% 4% No growth is forecast 1-5% 5-10% 11-15% 16-25% 26-35% 36-50% Over 50% Don t know 6

7 Firms display a strong commitment to innovation with almost two-thirds (62 per cent) of all firms surveyed planning to develop new products. will invest a sum equivalent to 40 per cent of current turnover back into their business over the next five years. In achieving this business growth, firms display a strong commitment to innovation with almost two-thirds (62 per cent) of all firms surveyed planning to develop new products. More than half (54 per cent) of all firms plan to achieve growth by entering new markets across the UK, where demand for food and drink products is strengthening as average earnings and real personal disposable incomes continue to improve 7, while 41 per cent are looking overseas for opportunities in new markets. Business growth through job creation is cited by 46 per cent of respondents as a way of generating growth over the next five years. As a percentage of your current business turnover, approximately how much are you planning to invest in your business over the next five years? 8% 28% 14% 5% 45% % of current turnover Fraser of Allander Quarterly Economic Bulletin July Scottish Economy Monthly Report Mackay Consultants July Summer 2015 Budget Red Book, HM Treasury, page OBR Economic Forecast summer Budget 2015 Red Book page 106 How do you plan to achieve that business growth in the next five years? 62% 54% 46% 43% 39% 36% 33% 21% New product development Entering new markets in UK Job creation Existing Investment in product infrastructure investment Entering Investment in new markets automation overseas Mergers & acquisitions 7

8 Access to cash or available funding does not feature as a significant barrier to international investment, with just 15 per cent of firms citing this as a potential problem. A large majority of firms (61 per cent) intend to fund business growth out of cash reserves, with just over a third (35 per cent) citing cash flow finance and 32 per cent debt. Other significant fund sources highlighted by respondents include partnerships (28 per cent), equity finance (26 per cent) and asset finance (23 per cent). Of particular benefit to Scottish firms are the marketing initiatives behind the Year of Food and Drink Scotland This is doing much to raise awareness of the range and quality of our food and drink produce. From Stornoway Black Pudding to Arbroath Smokies, and food and drink festivals being held across the country, there is something to suit all tastes for domestic consumers and visitors alike. 35% are planning to fund growth with cash flow finance 32% are planning to fund growth with debt 60% say lack of knowledge of international markets is stopping them from considering investing in or planning to engage new international customers 25% say lack of time/resources is stopping them from considering investing in or planning to engage new international customers 8

9 Firms plan to achieve growth by entering new markets across the UK, where demand for food and drink products is strengthening as average earnings and real personal disposable incomes continue to improve.

10 International expansion and export Scotland s food and drink businesses are strongly positioned for further growth in export markets. Robust performance in recent years not only testifies to achieved success but also provides momentum for future progress. This is borne out by recent figures showing that in 2014 Scotland s food exports surpassed the 1.1 billion mark for the first time, with total food and drink exports valued at 5.1 billion 8. The figures, extracted from official HMRC export statistics for 2014, show that food exports alone grew by 3.5 per cent on 2013, driven primarily by an increase in fish and seafood, up by 38 million. 93% think the idea of Scottish provenance is important to export markets In which markets are you considering investing in or planning ahead to engage new international customers? 61% 52% 50% 30% 21% 8% Western Europe North America Middle East The Far East/Asia South America Russia 10

11 Western Europe remains the international area of choice for engaging new customers, favoured by 61 per cent of respondents. North America is the second most popular overseas destination. This data marks the increasing international awareness and appreciation of the quality and provenance of Scottish food, and Scotland s distinguished heritage as a food-producing nation. Moreover, they also serve to underpin a continuation of distinctive success. In ten years the sector has increased exports of food and drink, not including whisky, by more than 50 per cent to 755 million. This rate of increase exceeds that of the UK average year-on-year rise in export growth and also bucks a decline in total exports 9. Almost two-thirds (62 per cent) of firms say they are investing in or planning ahead to engage new international customers. 63% would expand their production facilities in the UK to fulfil an opportunity in a new international market Are you investing or planning ahead to engage new international customers in the next five years? 19% Yes No Unsure/don t know 19% 62% 30% would expand/build their production facilities in the local (overseas) market to fulfil an opportunity in a new international market 11

12 International trade sanctions do not appear to have had a significant impact on Scotland s food and drink businesses, with 67 per cent of firms saying they have had no effect on their business. Western Europe remains the international area of choice for engaging new customers, favoured by 61 per cent of respondents. North America is the second most popular overseas destination overall while the Middle East is cited by 50 per cent of all respondents and the Far East and Asia by 30 per cent. Almost four in five firms (79 per cent) are thinking of new product development and/or packaging redesign to help achieve international expansion. However, lack of knowledge of international markets is cited by 60 per cent as a barrier to engagement with new international customers. International trade sanctions do not appear to have had a significant impact on Scotland s food and drink businesses, with 67 per cent of firms saying they have had no effect on their business. The majority (63 per cent) of Scottish food and drink manufacturers say that, if an opportunity arose to enter a new international market, they would still opt to expand production facilities here in the UK. Some 47 per cent of firms also say they have the capacity to increase production or expand operations quickly in new international markets. 8 New record for Scottish food exports, Scottish Government press announcement May Scottish Food and Drink Federation website About Our Industry % are thinking about developing or redesigning new products and packaging over the next five years In your opinion, how significant an impact are international trade sanctions having on the Scottish food and drink industry? 67% 11% are contemplating creating new products in the next five years 22% 9% 9% 2% Very Negative Negative No impact Positive may develop or design new packaging in the next five years 12

13 15% 25% 60% What factors are stopping you from considering investing in or planning ahead to engage new international customers? 25% 55% Lack of knowledge of international markets Lack of time/resources Complexity of logistics Finding a suitable retail partner or distributor Cash flow or available funding 13

14 Industry focus Product and marketing innovation is a vital spur for long term growth in any industry. One route to innovation is through research and development spending, something which is already strong in Scottish manufacturing, having doubled since Across the survey as a whole, firms say they plan to invest some 27 per cent of their current turnover in R&D* over the next five years. However successful investment rarely takes place in a vacuum. Firms need to know where there are gaps in the market and how new products and services would be received, as well as making sure that suppliers can deliver. One means of encouraging this is joint-working with companies in the supply chain. This can help to avoid potential problems and ensure greater likelihood of success as well as providing a significant step towards improved productivity. Collaboration can also help resolve distribution and delivery issues. For example, complexity of logistics is cited by 55 per cent of firms as a potential barrier to investment in overseas expansion. And a quarter (25 per cent) of firms also highlight finding a suitable retail partner or distributor is a factor that inhibits investment. 27% the percentage of current turnover businesses are planning to invest in R&D over the next five years As part of your R&D activity, have you/do you plan to work in collaboration/partnership with one or more organisations from your supply chain to strengthen innovation? 35% Yes No Unsure/don t know 51% 14% 14 *Encompassing new product development, new market development, existing product development and market research.

15 More than half of respondents are planning to work in partnership or collaboration with one or more organisations in their supply chain. So it is notable that more than half (51 per cent) of respondents are planning to work in partnership or collaboration with one or more organisations in their supply chain. Considering that 62 per cent of firms say that they will aim to achieve business growth by new product development and 54 per cent by entering new markets in the UK, partnership working may prove an important feature of new investment and expansion across the food and drink sector over the next five years. To help encourage R&D activity, there are government schemes that enable tax credits to be claimed. For these schemes to be effective it is important that the industry knows about them and has sufficient information to make a claim. More than half (52 per cent) of firms say they plan to make such a claim. However, the survey also reveals a significant proportion of firms that didn t know about R&D tax credits or don t know if they would claim in the future. There seems to be an opportunity here for business advisers to help raise awareness among firms about tax credits for which they are eligible. 10 Scottish Food and Drink Federation About our Industry If you will invest in R&D activity, will you attempt to claim an eligible R&D Tax Credit back under the government scheme? 19% 23% 52% Yes No Didn t know about R&D tax credit Don t know 7% 15

16 Challenges and opportunities The cost and price pressures that Scotland s food and drink sector is facing are intense. Inflation as measured by the Retail Prices Index may have been running close to zero in But rising costs and energy and raw material price volatility are among the biggest concerns for the sector. Indeed, rising labour costs are cited by 42 per cent of survey respondents, topping the list as the biggest challenge faced by firms. Continued pricing pressure from supermarkets has been raised as a particular issue for a food and drink suppliers across the UK in a number of recent reports, with some warning that the number of companies facing financial distress in the sector could be set to rise as a result 11. Energy price volatility is mentioned by 35 per cent and volatility in raw material prices by 30 per cent. Concerns over regulation and compliance feature prominently, cited by 39 per cent of firms as major industry challenges, rising to 44 per cent among SMEs. A possible UK exit from the European Union featured among the biggest challenges over the next five years. This was mentioned by 38 per cent of respondents, ranking equal to the percentage expressing concern over sustainability. Other issues highlighted by respondents include ingredient security, cited by 26 per cent, overseas competition (28 per cent), scarcity of natural resources (21 per cent) and lack of skilled labour (20 per cent). 25% consider volatility of raw ingredient pricing to be the biggest threat to supply security in the next five years What do you feel are the biggest challenges for the industry in the next five years? 42% 39% 38% 38% 35% Rising labour costs Regulation & compliance Sustainability A possible exit from the EU Volatility of raw material prices energy 16

17 Despite these challenges, there are no shortage of opportunities in the food and drink sector, as previously indicated by respondents strong interest in product development, R&D and exports. Provenance in particular has emerged as a real positive for the Scottish food and drink industry in this year s report. In addition to the 63 per cent majority of respondents that highlighted provenance as an important factor for export markets, just under three quarters (71 per cent) also say they are currently capitalising on the Scottish provenance of their products Events surrounding The Year of Food and Drink Scotland 2015 should raise further awareness of the range and quality of Scottish food and drink produce both at home and abroad, helping the sector to break into new international markets and achieve further sustained export growth in 2015 and beyond. 12% consider Government policy to be the biggest threat to supply security in the next five years 7% consider Government policy to be the biggest threat to supply security in the next five years Provenance in particular has emerged as a real positive for the Scottish food and drink industry in this year s report. 11 Begbies Traynor Red Flag Alert Research Q4 2014

18 Scotland: the land of food and drink James Withers, Chief Executive of Scotland Food and Drink The Bank of Scotland food and drink report has become one of the really important barometers of the health of our industry, giving us a great snapshot of company sentiment. Once again this year, the results reflect the ambitions of and opportunities facing our industry. Like many sectors of Scotland s economy, there are challenges. Global factors drive up our cost base and variables like exchange rates always have an impact. However, it is the factors that are within our control that form the foundations for optimism. This report highlights the effort that has been put into developing Scotland s reputation as a Land of Food and Drink, with companies overwhelmingly believing we have a strong image overseas. The plans that businesses have to deepen innovation activity is also critical. One element of Scotland s reputation for world class produce is our heritage and tradition. But that can still marry well with smart product innovation, tapping into changing consumer and market trends. One of the most important catalysts for Scotland s remarkable food and drink growth in recent years has been the development of a new culture of collaboration. Scotland Food & Drink as an organisation and concept has been about bringing different sectors, industry organisations, agencies and companies together. Competition between businesses in Scotland is healthy but collaboration opens up new markets and relationships. That is now recognised here and, as a result, Scotland is increasingly seen internationally as a model to follow in terms of driving the reputation and growth of its food and drink sector. The Scottish industry has the talent and ambition in its business base to thrive in the years ahead. Even greater efforts to innovate and collaborate will be key to grasping full potential. One of the most important catalysts for Scotland s remarkable food and drink growth in recent years has been the development of a new culture of collaboration. Methodology Field research for this report was undertaken in June 2015 by Coleman Parkes Research. To gather representative data from this diverse industry, a broad cross-section of 106 food and drink manufacturers in Scotland were interviewed from companies ranging in size, from less than 25m, m and more than 750m annual turnover. Business owners, managers, senior managers, directors and department heads took part in the survey. Our survey questions focused on growth and export plans, job creation, capacity and investment, international markets, and challenges. A separate survey was conducted for the food and drink industry in England and Wales. 18

19 The support you need For more information, get in touch with us Graham Blair Area Director, Scotland References Begbies Traynor Red Flag Alert Research Q Fraser of Allander Quarterly Economic Bulletin July 2015 OBR Economic Forecast summer Budget 2015 Red Book Scotland of Food and Drink: Taste the Difference, March 2015 Scottish Annual Business Survey 2013 and 2014 Scottish Economy Monthly Report Mackay Consultants July 2015 Scottish Food and Drink Federation: About Our Industry 2015 Scottish Government press announcements New Record for Scottish food exports May 2015 Summer 2015 Budget Red Book, HM Treasury Jane Clark-Hutchison Area Director, Edinburgh & East of Scotland Pete Flockhart Area Director, Glasgow & West of Scotland Stuart White Area Director, Aberdeen & North of Scotland Alasdair Gardner Regional Managing Director, Scotland

20 Helping businesses to grow Get in touch Please contact us if you d like this information in an alternative format such as Braille, large print or audio. Calls may be monitored or recorded in case we need to check we have carried out your instructions correctly and to help improve our quality of service. If you have a hearing or speech impairment you can use Text Relay (previously Typetalk). 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 under Registration Number We are covered by the Financial Services Compensation Scheme (FSCS) and the Financial Ombudsman Service (FOS). (Please note that due to FSCS and FOS eligibility criteria not all Bank of Scotland business customers will be covered by these schemes.) Issue date: August 2015 BoS report: 2015BOSFD 20