Our expert panel discusses current issues and opportunities in the sector
Alasdair Northrop, editor, Insider - chair
John Campbell, chairman, Glenrath Farms.
Hill farmer who diversified fifty years ago; Glenrath is now Scotland's largest eggproducer.
Robbie Galloway, managing director, Scotbeef.
Heads100-year-old, family business that has evolved from retail butcher to processor. Has about twenty per cent export turnover.
Paul Grant, chairman, Mackays.
Marmalade and jam maker Mackays does about 20 percent of its business in UK supermarkets, 40 per cent in the independent trade with 40 per cent now exported.
Alan Kelly, partner, MacRoberts.
Specialises in mergers and acquisitions, joint ventures and food and drink investment.
Ronnie Miles, finance director, Bells Food Group.
Scotland's market leader in pies - its major customers are supermarkets.
Stuart Nickerson, managing director, Glenglassaugh Distillery Company.
The Portsoy distillery just produced its first young whisky and is exporting older stock worldwide.
Jim Walker, managing director, Walkers Shortbread.
Family company which makes shortbread, oatcakes and other Scottish specialities. Business is forty per cent export.
Gina Wilson,partner, MacRoberts.
Specialises in employment law.
Rob Wilson, chief financial officer, Scottish Salmon Company.
Produces about 20 per cent of Scottish salmon; plans to double production to 40,000 tonnes.
Iain Wisely, senior associate, MacRoberts.
Specialises in commercial contracts and intellectual property.
Q What are the growth opportunities for food and drink companies in the UK, including your company?
Grant: We're dealing in the supermarket business and the independent trade. As far as the supermarket business is concerned there are business opportunities. The question is what level of margin do you want to go to to secure that business or to maintain that business? In our portfolio we have choices, either into the independent market or into export.
We've recently invested in a substantial factory with more capacity so we're looking to increase our output. We would obviously prefer branded business but the likely business is own label. The supermarkets expect you to be supportive and to achieve very attractive price-orientated deals, and it's a commercial decision of what you are prepared to make or not, depending on what the status is of your business in terms of capacity and ambition.
So my view would be there are opportunities but it's a question of whether it suits your business and your circumstances as to whether you go for it.
Galloway: We are very much aligned to UK retailers. We have seen, since 2008, that there has been a swing from the volume of meat consumed outside the home to meat consumed inside the home, which has given us a good opportunity. Within that we have had to develop exciting products consumers are used to getting in restaurants so we can recreate a Saturday night experience.
The other opportunity is that there is a move to consumers wanting more local and regional sourced products where they have the opportunity to know more about their food and where it comes from, and with what we are doing in Scotland in terms of brand values of Scottish beef this has given us another opportunity.
R Wilson: We've mainly been concentrating on export for our growth. We see that the UK, and Scotland in particular, has a great reputation for premium, value-added foodstuffs and this is through both environmental excellence and the high standards we set ourselves.
This is particularly evident in the salmon sector, with Scottish salmon being a premium product across the world, but it's seen across all seafoods, langoustines, oysters, shellfish, and agriculture with Scottish beef and Scotch whisky, of course.
So, we're looking at building upon these core values, especially in export markets, to create further growth.
Walker: I think there are growth opportunities in the UK but I think it depends what development stage each company is at. We're a hundred and fifteen years old, with the result that sometimes there are fewer avenues leftas there would be for a newly established company.
The challenge for small family companies is getting profitable growth opportunities. There's no prizes for huge turnover with no margin. It's fairly easy getting increased sales with marginal products under private label. Private label is fine if it's profitable but it's more challenging to make it very profitable. I think getting the profitable growth opportunities is the challenge for smaller companies and probably most Scottish companies fall into that category.
The other challenge is the fact we're in a situation now where inflation is relatively static and it's forecast to be fairly flat over the next few years. However, many food products are escalating dramatically in price and the supermarkets obviously aren't very happy with accepting price increases when we're in an atmosphere of zero inflation. They just don't want to know price increases no matter what the reason. For those within bakery there are huge increases because of the cost of feed and everything else. Raw materials sometimes go up by totally unprecedented levels and it's hard getting the price increase through for these. So there are growth opportunities but you've got to be quite selective, I believe.
Campbell: In our business the market is set fair because we have invested. A lot of farmers have just said 'that's enough' and they didn't invest and, of course, they've got no market leftso it is an opportunity for us. We're number two egg company in the UK and we're late getting into brands. We have always been very much a belt and braces operation and didn't bother about brands but we have launched two new brands.
Miles: Bells have spent the last three years investing heavily in equipment to increase capacity and make us as efficient as we can in terms of keeping our costs down. There are opportunities for growth but we will only target growth where it's possible to make a decent margin. Almost all our products are branded products selling to all the major supermarkets so one area of growth for ourselves is own label. We have excess capacity so we are planning to try and break into new markets through product development and product innovation
Nickerson: For the Scotch whisky industry the UK is very, very competitive, it probably produces fewer opportunities than those abroad and the way that we have to try and differentiate is to focus on quality and exclusivity of our product and by selling through specialist retailers rather than the multiples where the margins are very small. Kelly: There are opportunities that are not obviously related to the core business. An example that springs to mind in the whisky industry is the Rothes Project, where whisky producers are using the 'draff' byproduct from the distilling process to produce bio-energy. I think some of these less obvious opportunities can, understandably, be overlooked by businesses, especially when trading is difficult and management are concentrating on the core business and cash flow. Some of the successful businesses though are the ones that spot the less obvious opportunities. I think investing for growth at the right time is fundamental.
Again it can be a difficult decision though to make these investments when all the focus might be on cash flow and margin. Consideration must be given to how much you invest in your own brand and how much you rely on the unbranded option. Where are the margins and how do they differ? It is a real challenge for businesses but I think the building of a business' own brands is fundamental to long-term success.
Wisely: If you trade using your own brand you can benefit from retaining the goodwill in that brand. While you're ultimately responsible for protecting it that goodwill constitutes an intellectual asset of your business.
On the other hand, if you invest in your customers' brands by white-labelling your products, your customer will retain the goodwill generated from retail sales and the resultant reliance on your customer can be problematic, particularly when it comes to price negotiations.
Q What obstacles, if any, are slowing down or preventing growth of food and drink companies in the UK, including yours?
Galloway: The biggest thing preventing our company from growing, despite good growth over the previous three or four years, is the availability and cost inflation of our main raw materials - cattle and sheep. That has caused tremendous problems as we have only been able to pass a fraction of this inflation through our selling prices. R
Wilson: Our company has a strategy for growth but our main obstacle is gaining the permissions to do that. Our production licences are determined by complex licensing and planning regulations, governed by both SEPA and local planning authorities. The process to gain a new fish farm, for example, from start to finish will take somewhere in the region of a year and a half. The Scottish Government are consulting on a new Aquaculture Bill which the industry believes could lay more burden and bureaucracy to further slow down that ability for growth.
Walker: I think there are lots of obstacles and challenges. The biggest issue we face is volatile commodity prices and, over the last three years, butter, flour, sugar and eggs have all increased in price. In this environment the supermarkets don't want to accept any price increases as the grocery market is so competitive.
Campbell: Our biggest challenge is planning permission. It took us about three years to get through a big planning application which was going to create quite a lot of jobs. It was all about 'not in my back yard'.
Miles: Like other companies round this table our obstacle is the volatile commodity prices and the pressures this brings on already tight margins. Food regulation is another area of concern. You have to be food safe, however some of the regulations are extreme and go beyond common sense. I also cannot see my European counterparts in the food and drink industry operating under the same level of constraints.
From our own company's perspective it's more about brand awareness. We're a very young company so it's getting the brand name out there and competing with people that have no end of pounds to spend on marketing and advertising. Grant: We face similar challenges on price as everyone else. Let's hope we've had a phase of it and it's coming to a bit of an end sometime.
Nickerson: From an industry point of view the biggest obstacle is that excise duty is not harmonised across alcohol drinks. High strength alcohol drinks like Scotch whisky are taxed much more heavily than wine and beer so that always gives a difficult playing field.
Kelly: As regards the issues our clients face, a common denominator is 'uncertainty', whether it's uncertainty about the relationship with your customer and the likelihood of losing a key contract on re-tender; uncertainty about commodity pricing; about potential bad debts or cash flow generally; or uncertainty about the wider economic cycle. Uncertainty can stifle growth. How you react to that uncertainty is, therefore, important.
Difficulty getting credit and the reluctance to take credit - even when available - in an uncertain climate are definitely factors that slow down growth. Even where funding is available to help finance the right growth opportunity, faced with this backdrop many understandably take the view they will not pursue that opportunity.
G Wilson: In terms of what I see my clients doing to try and grow their business, in the food and drink sector the focus on quality is probably the biggest thing. This is particularly the case where, depending on the nature of the business, the threat from the BRIC countries is becoming greater for some producers and suppliers; that's where good quality really is fundamental.
Wisely: It's interesting to note a common concern raised among today's attendees is that regulation is being seen as an obstacle to growth. A lot of the regulation we've discussed today should, in theory, be harmonised across Europe, given that it comes from a common source. Accordingly, Scottish businesses shouldn't be at a disadvantage to their European counterparts. I believe, however, it's rather a different story in reality.
Q Are overseas markets more important to food and drink companies, including yours, than before and, if so, why?
Galloway: We have been exporting for more than 50 years and have an outstanding relationship with our oldest export customer whom we are still trading regularly with three times a week. We have always had a fairly consistent 80/20 split between UK and export business.
We see our export market as a complement to our UK business. Growth in our export business is down to making long-term commitments to certain markets. Even though these markets are more volatile than our UK business because of exchange rates and our changing economic climate we have remained committed where our competitors have retracted when there is less opportunity. This has helped us strengthen our relationships with our customers. We were still able to maintain our service and relationship and for us the time and effort we invested has been rewarded with good growth.
The other thing that has happened over the last two or three years is there has been a change in the European market, which has seen what was strong demand in the southern European countries declining due to the crisis in the Eurozone. However, demand has increased in northern Europe and up into Scandinavia, which is now becoming a much stronger and better structured market.
R Wilson: The whole salmon farm industry has been built on a very good home market and an export market predominantly, firstly into Western Europe, France and Spain but, as the market for fish is expanding so is salmon and we're seeing new opportunities in Russia, in China and the Middle East, all of which we have seen new sales in over the last twelve months.
Scottish salmon is a premium position over other salmon so as our competitors in other countries are opening new markets we're also jumping on the back of their bandwagon.
Walker: For us, and most other companies, it is extremely important but it's a smaller part of the business. I always claim it's taken us forty years to be an overnight success! It was harder for us because when we started there was no market for shortbread and nobody knew the product overseas. I think we were the first company that really tried to make a job of shortbread and we had to create our own market.
However, there's no getting away from it, export is very hard work. It needs a consistent effort and sustained commitment both by companies and at government level. I think the Scottish Government is very, very supportive of export and rightly so. But in export everything happens more slowly. It takes a lot of commitment, it takes a lot of time and money. and for a small company starting to export it's not easy by any stretch of the imagination.
I always think a company should be on its feet and pretty well established before it starts to export. It's a lot easier to sell your product down the road in the UK than export and a lot of the fledgling companies try to export but really they would be well advised to build a good, sound, solid home base for a start and then export on the back of that.
Campbell: There are practically no exports in our industry but the country imports a considerable amount of eggs. We're worried products which don't comply with new EU regulations and are produced considerably more cheaply and made into powdered eggs will come in and threaten our market. Miles: Tried once, failed miserably I'm afraid! However, export is something we are considering and we have developed some pie, pastry and cake products that are suitable for export. Exports are zero per cent of sales but if we meet again in a year, who knows?
Nickerson: Over eighty per cent of my product is exported and I see that growing. It's exciting times in the Scotch whisky industry. There are consumers all around the world that see Scotch whisky as a desirable and aspirational drink. I think the other factor is Scotland itself is becoming a very desirable location. I have one importer who started only with Scotch whisky and now he imports crisps and cider from Scotland too.
Grant: Companies looking to export need a home market for two reasons. One is credibility; being able to tell people you're supplying high profile customers in your home market is fundamental. The other reason is that if you can supply a UK multiple competitively then you should be a competitive exporter. If you're not supplying a scale UK multiple you'll never have a cost base that is likely to be competitive in an exporting sense.
Kelly: The overseas market definitely offers good opportunities but there has to be recognition that it does require a degree of investment, not just in terms of cash but also in terms of resources, time and focus. The approach a business should take depends on the stage it's at. The need for strong relationships is key, whether that's in terms of partnering or how you distribute.
One of the trends we've also seen is growth by international acquisition to facilitate exploitation of overseas markets. For example, we acted in the purchase of a Scottish drinks business by a French wine group that was already exporting to more than fifty countries; the aim of the acquisition was to allow the business to grow quickly by tapping into that existing customer base.
Wisely: While the scale of a business is relevant to international market growth, it does depend a bit on the end product as well: some foreign markets are particularly challenging for certain food and drink sector products. For example, food safety rules have impeded the potentially lucrative export of traditional Scottish haggis to the Scottish diaspora in the USA.
Additionally, while it can take a long time for an early-stage business to acquire the necessary knowledge to succeed independently in a foreign market, collaboration - such as by contracting with an agent based in that territory - can help them catalyse export sales growth.