Food and Drink Report 2017Executive Summary

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FOREWORD

Uncertainty surrounding last year’s EU Referendum vote had slowed down the UK food and drink industry’s aspirations in the short term. This year’s survey shows that while uncertainty remains, companies are moving on from Brexit and re-focusing efforts on achieving growth and increasing confidence.

Elena PaitraManaging Director, Head of Food, Beverages and Tobacco

Food and drink production is an essential part of our culture.

As the UK’s largest manufacturing sector, the food and drink industry shapes our landscape and our way of life. It is fundamental to the UK economy, employing more than 400,000 people and contributing over £28bn a year1.

This year’s survey of decision makers at 100 food and drink firms in England and Wales found a sector that is optimistic about its growth prospects.

Despite the short-term challenges brought about by the UK’s exit from the European Union (EU), such as the spectre of tariffs on EU trade and reduced access to European labour, the sector is gaining confidence. Producers are proactively seeking new opportunities overseas and making steps to solve the productivity puzzle that has stifled UK PLC’s growth.

When we asked respondents if confidence within their business had increased since the vote to leave the EU was announced, nearly half (48%) of all firms said it had. Less than a third (30%) said it had decreased.

But there is uncertainty for some. Almost half (44%) of large and more global firms, with a turnover of more than £750m, said that Britain’s planned exit from the EU had already impacted their importing of raw materials. 1 Food and Drink Federation, FDF Manifesto 2017

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GROWTH

of SMEs told us that they will grow their business by entering

new markets in the UK

of large firms (turnover of more than £750m) are focusing on new product development as a route

to growth

One third (33%) of all firms called on government to provide incentives to

encourage growth

50+50+S 33+67+S68+32+S68% 50% 33%

Firms told us they have more ambitious growth plans than last year. They are forecasting growth of 21% of turnover over the next five years, on average 4.2% per year. This is marginally up from 19% this time last year.

The most popular route to growth is developing new products (57%), followed by growing sales within the UK (51%), creating jobs (48%) and entering new EU markets (43%). A third (36%) will seek inorganic growth through mergers and acquisitions.

Investment plans have held reasonably firm too. Almost half (49%) of firms said they would invest the same or more than last year back into their company in the next 12-24 months. Only 29% said they would invest less.

There has been change in how firms plan to fund their growth plans with creating efficiencies through cost cutting cited by 53%. It seems firms are moving to ‘right-size’ themselves in a defensive move to ensure that they are competitive and ready for growth when conditions improve. Other routes to growth include joint ventures, which a third (30%) of companies are considering, and debt, which 31% are planning to use (up from 15% this time last year).

There has been an increase in the number of manufacturers using cash flow/working capital finance (up from 31% in 2016 to 48%), while the number of producers using cash reserves is also up from 32% in 2016 to 42% in 2017.

Larger companies are using their own resources before seeking funding. Large firms (turnover of more than £750m) plan to use a combination of cash flow (39%) and working capital efficiencies (44%) to fund their business growth. This could reflect a desire to improve efficiency of operations and improve their balance sheet.

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Respondents to this year’s survey suggested there could be employment challenges on the horizon for the sector.

The food and drink industry has a strong reliance on migrant workers, which make up around 38% of its workforce2. Any changes in immigration that result from the UK’s exit from the EU are likely to heavily impact the sector.

And firms have concerns about rising labour costs too. Almost half (48%) of firms said they are the industry’s biggest challenge over the next five years, up from 25% last year. Despite challenges, the sector’s recruitment plans have improved year-on-year. Businesses said they plan to create more than 95,000 new jobs over the next five years. This is an increase of 20,000 on last year’s figures.

The proportion of firms investing in upskilling staff with an eye to boosting productivity has also grown from 34% to 51%. This increase was most notable among firms with a turnover greater than £750m, with two-thirds (67%) saying they were investing in skills development, up from 37% in 2016.

said the UK’s planned exit from the EU had impacted their

recruitment plans

of all companies hope to create jobs over next five years

60+40+S44+56+S

Average number of net new jobs firms plan to create in the next five years

EMPLOYMENT

<£25m turnover

£25m - £750m turnover

>£750m turnover

2 FDF Economic contribution and growth opportunities, June 2017

60%

44%

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said rising labour costs are the biggest challenge for the industry

over the next five years

said regulation and compliance is the biggest challenge for the

industry over the next five years

48+52+S37+63+S

Chancellor Philip Hammond has said closing Britain’s productivity gap must be a national priority3 in order to make every UK business more competitive.

And while there are a number of challenges for the industry it is heartening to see food and drink firms capitalising on opportunities to improve their productivity.

Almost two thirds (64%) told us they were streamlining processes (up from 37% last year), and 57% are investing in supply chain efficiencies (up from 25% in 2016).

Half of firms (51%) are investing in skills development (up from 34% last year), and 49% are restructuring to boost productivity (up from 30%).

Firms told us that an average 36% of their processes were currently automated, but expected that to rise to 53% in the next five years, with 40% of firms saying they planned to invest more in automation in the coming year.

And businesses are looking at opportunities to work collaboratively, with two thirds (63%) planning to work in partnership with one or more organisation to strengthen their innovation.

Producers said one major challenge for them is regulation, flagged by 37% of firms – up from 19% in 2016. This could be a symptom of uncertainty and this is an area where government could step in and provide help to bridge the uncertainty gap.

CHALLENGES AND OPPORTUNITIES

3 Mansion House 2017: Speech by Chancellor of the Exchequer, June 2017

The big three challenges going forward are rising labour costs, potential changes to regulations and compliance rules, and ingredient security. Cost of labour is by far the dominant issue. Firms mitigate these challenges by improving efficiency and productivity through cost cutting, upskilling of labour force and investing in R&D and automation.

48%

37%

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The UK food and drink industry is strongly linked to the EU, so it is no surprise that firms are keen to understand how Britain’s planned exit will impact the sector and its supply chain.

Firms said that the exit from the EU was the biggest threat to supply security in the next five years (41%). This was followed by the volatility of raw material prices (20%). Concerns about ingredient security have also increased, with 36% saying it is one of the biggest challenges for the industry as a whole over the next five years, up from 26% last year.

Half (48%) said they are importing fewer raw materials, potentially because of the UK’s weak pound as a result of the uncertainty around planned exit from the EU.

But positively, firms are increasingly looking to support the UK supply chain. When we asked if firms would pay a higher price to primary producers in the UK to guarantee supply security and maintain the provenance of their products, 78% said yes.

And almost a third (28%) plan to export for the first time within the next five years.

Businesses are taking steps to manage their supply chain by reviewing their supplier and customer relationships. 41% said they had taken steps to improve how they manage payment terms and 33% have reviewed credit terms.

Firms are also looking to banks for support with their supply chain. While 28% already use factoring/invoice discounting and 19% use asset-based lending, half (54%) said they would appreciate more advice on cashflow/working capital financing options from their bank.

INDUSTRY FOCUS – THE SUPPLY CHAIN

Which of the following are the biggest threats to ingredient/supply chain security in the next five years?

Leaving the EU

Volatility of raw material prices

Government policy

Continuity of supply

Energy prices

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2016 was a record-breaking year for food and drink exports and firms seem optimistic that momentum will be maintained in 2017.

Likely buoyed by the depressed pound, which is making exports more attractive, the number of firms investing to secure new international customers has bounced back to 69% after falling to 55% in 2016.

While 43% plan to enter new markets inside the EU, 39% now have their eyes on new markets outside of it.

When asked, manufacturers said their future export targets are Western Europe (43%), the Far East and Asia (43%), Australia and New Zealand (41%) and North America and the Middle East (both 36%).

Currently, just one in five food and drink companies are exporters4, so it is heartening to see more than a quarter (28%) say they plan to export for the first time at some point in the next five years.

But businesses face challenges when it comes to international trade. Firms said that regulatory issues, political uncertainty at market destination, international regulation and domestic regulation are all barriers to exporting (all 54%).

Half of producers (51%) cited a need for UK government policy to assist the sector going forward and 37% believe that there is a need for regulatory/legislative changes.

Percentage of firms planning to engage new international customers in the next five years

HOME AND ABROAD

4 UK Food and Drink International Action Plan 2016-2020

<£25m turnover

£25m - £750m turnover

>£750m turnover

Uncertainty around Brexit, which continues to impact value of sterling is influencing firms planning ahead to engage new international customers in the next five years.

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Methodology: Field research for this report was undertaken in July 2017 by Coleman Parkes Research. To gather representative data, a cross section of 100 food and drink businesses in England and Wales were interviewed. Companies ranged in size, from less than £25m (SME), to between £25m and £750m (mid market), and more than £750m (global corporates) annual turnover.

References: 1 - Food and Drink Federation, FDF Manifesto 2017 2 - FDF Economic contribution and growth opportunities, June 2017 3 - Mansion House 2017: Speech by Chancellor of the Exchequer, June 2017 4 - UK Food and Drink International Action Plan 2016-2020

THE SUPPORT YOU NEED

HELPING BUSINESSES TO GROW

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Issue date: September 2017

Elena PaitraManaging Director, Head of Food, Beverages and Tobacco, Global Corporates

0207 158 6097 elena.paitra@lloydsbanking.com

David AtkinsonUK Head of Manufacturing, SME

07764 625666 david.atkinson@lloydsbanking.com

Andrew ConnorsHead of Capability and Propositions, Mid Markets

0121 625 6552 andrew.connors@lloydsbanking.com