Ian Wright, chief executive of the Food and Drink Federation - which represents manufacturers of food and non-alcoholic drinks in the UK, sits down with Nick Peters to discuss the challenges facing the sector. There are plenty to go around.
This must be a busy and complicated time for the food and drink sector – what are the most important items on your plate?
Ian Wright: Inevitably there’s Brexit, but that’s not the only major challenge for the industry. We also face adaptation to new retail models; the vast majority of our product goes either into retailing or into what we call ‘out of home’, and both of those are changing fast.
We’re seeing concentration in the retail industry, acute competition on price and a complete turnover of formats in the out-of-home sector. A lot of fragmentation, vast numbers of different kinds of outlets, and also a whole new model in terms of delivery – online – plus, each of those models have a big impact on each other.
Today, 46% of all meals are eaten alone. That’s a remarkable change over the past 10 years. I don’t mean a snack or a bag of crisps. I mean someone’s concept of a breakfast, lunch or dinner. And it’s not just lunch or breakfast, there’s a huge increase in the amount of evening meals taken alone.
These are changing the format in which they’re retailed and therefore also changing the requirements demanded of manufacturers. Put that together with retail competition and you have an amazing series of changes.
If you want to look further down the track, consider that in some Chinese cities one in five homes are built without a kitchen. You can see the long-term direction of travel right there.
This article first appeared in the September issue of The Manufacturer magazine. To subscribe, please click here.
Let’s look at Brexit. What have you been saying to government about your paramount concerns, and have they been listening to you?
The big three issues for us are first, access to labour, because one-third of our workforce is European. Second, we need to know the regulatory framework under which we will operate post-Brexit, which is by no means certain even domestically; and third, there is the whole question of tariffs, customs arrangements and rules of origin.
We have got to be clear. I think probably 80%, maybe 90% of the industry will have voted ‘remain’, and if I was to be predicting, I think we’d vote for remain again.
But we have to respect the vote, and so have to work out the practicalities of how we manage an exit with the least possible damage to the food and drink industry itself, and more important, to its customers, the consumer and the shopper.
It’s not easy to see how you do that on those three issues, but yes, government has listened. Coming specifically to the issue of the white paper and the Chequers statement, I would have to say I’m ever so slightly concerned.
I thought the Chequers statement was a significant step forward from where we were – in particular for food and drink because we are mentioned very specifically as being in part of a customs arrangement, a customs union for goods.
What we didn’t see in the white paper was how the common rule book it talked about will operate, and whose rule book it will be, and that’s quite an important point, because at the moment the European Food Safety Authority is the risk assessment body and the Commission is the risk management body.
It’s not clear to me whether the intention is for us to remain under the auspices of the FSA or not, and that is important.
Around 96% of food and drink manufacturers are SMEs, many of them small, as opposed to medium. The smaller the companies, the more prone they are going to be to disruption in their markets, exports and sales. That applies to supply chains internally as well as externally.
Do you believe that those in the food and drinks sector are feeling vulnerable at the moment with this level of uncertainty?
Gosh, yes. I do. I very much doubt whether individual manufacturers go around worrying about how vulnerable they are, because these guys and girls tend to be very entrepreneurial and pretty bullish, but I do think that if you look at the sector and its prospects, then you’d have to assume that it’s a pretty fluid picture.
Let me give you a Brexit example that should be a massive concern, not just for my members and food manufacturers, but all manufacturers, and all SMEs.
We have no idea what the VAT regime is going to be after 29 March – absolutely none. We’ve no clue whether under the transition or under the long-term deal we’re in the European VAT scheme or not; so will that mean you have to pay on the nose? And if you have to pay upfront, then that is a massive change for millions of exporting business, 150,000 engineering businesses and so on.
That’s a huge change, and those companies 60 days later are going to find themselves in deep financial trouble. Now, I know the banks are already looking at this, at how they can provide lifeboat finance, but we’re only seven months or so away and we don’t know what the position is and that is really very difficult.
Strange that has not been flagged up as a concern.
No, and it’s only really begun to surface because we now think we know what the customs arrangements might look like. I suspect that you could get around this by the Treasury changing the rules.
They could find ways of suspending those on-the-nail payments, and if they do, that’s fine, but that would have an effect on the public finances. One way or the other, we need a decision, and we don’t have one.
That, I think, is one of the problems for all small and medium-size businesses, particularly those in the food and drink sector where there are tight margins and firms are quite narrowly financed. They’re vulnerable to shocks, as we saw with the CO2 shortage in the summer. We’ve seen this on various food safety issues.
We will undoubtedly see it on Brexit. If you happen to make plastic straws, you’ll see it now. All of these things are sudden hits, on top of what’s going to be a pretty ropy harvest.
It’s not just that there’s one or two of them a year, because I suspect most industries have that all the time, but it’s the kind of continuous nature of these shocks that’s making it very difficult. On the other hand, it’s an extremely entrepreneurial, extremely lively sector, so I’ve no doubt that people will get through, but I think they would be right to be feeling fragile.
We know from the way farmers and milk producers are subjected to very tight terms from the retail sector that it’s not easy out there. Is that reflected across the sector? Are they constantly having to fight terms battles with the retailers?
I’m not trying to cast retailers as the big bad wolf, but there is such insane competition between the four big retailers, the discounters and the other stores in the field that maintaining margins is really a struggle. Then there is online click and delivery, and the potential for Amazon coming in.
All of this makes for a fantastic set of choices for the shopper. UK shoppers have never ever had such a profusion of choice and of qualities at all price points. They are the best catered for shoppers of food and drink in the world, bar none; and it’s all done in an environment which is by and large pretty near to where they live.
The consequence of that is that retailers and manufacturers are engaged in extremely tough negotiations to maintain the quality of choice and the efficiency of pricing, and that is tough for the manufacturer.
The Manufacturer has recently put the UK’s food and drink sector under the spotlight, producing a range of interviews, features and analysis:
Liquid Gold – The UK wine and spirit industry is made up of whiskies (other than Scotch), gin and spirits distillers, brewers and winemakers, and they have an enviable reputation worldwide. Inevitably, however, their fortunes will rise or fall depending on the kind of Brexit that finally emerges, as Miles Beale – chief executive of the UK Wine and Spirit Trade Association – tells us.
Threats and Opportunities – Food and drink is by far the biggest sector in UK manufacturing. From small local producers to global brands, the country has a brilliant track record as an innovator, exporter and world-beater in products from Scotch whisky to chocolate and cheese. The sector faces much the same challenges as other parts of UK manufacturing, plus some of its own, as Nick Peters reports.
Open Innovation – A consortium of food and drink companies is successfully working together to harness the potential of ‘open innovation’. But what makes this collaborative approach to innovation such a compelling strategy for FMCG businesses and others?
The Spirit of Success – Forty-seven million bottles of gin worth £1.2bn were served up last year in the UK. That’s enough to make 1.32 billion G&Ts! Gin has never been more popular and varied, and innovative manufacturer G&J Distillers is making the most of this trend. Maddy White reports.
Automation at Sub-Zero Temperatures – Robots are commonplace on manufacturing assembly lines, but what can they offer the chilly world of ice-cream making? The short answer is ‘plenty’, as Maddy White discovered when she met ‘Cookie’.
Food and drink will be no different from any other manufacturing sector in their constant drive for greater productivity and efficiency. That leads inevitably to the level of uptake in the food and drinks sector of Industry 4.0 technologies, or digital tools, to bring costs down and margins up.
What is the uptake? Is it healthy, or is there caution out there?
I think there is caution on investment for all the reasons that we’ve talked about, Brexit in particular. But there is a bit of a feeling that food and drink processing is a little less susceptible to automation than other sectors. The example everybody always give is filleting
a fish, because they’re all different sizes and currently you need a human eye to do it. I suspect artificial intelligence will be able to cope with that quite quickly, but that all implies a fairly significant degree of investment, and one of the problems that we have is we don’t have deep reserves, and we don’t have a lot of businesses that are in 24/7 production – for obvious reasons to do with fresh food and all that.
I would like to see the government come forward with some incentives. Offering tax credits for investing in automation and digital equipment in the food and drink sector would make sense because to some degree that’s the consequence of the government’s imposed decision to end free movement from the EU. Remember, manufacturers did not ask for that. They didn’t choose it.
They’ve set up in good faith in a political system that appeared to guarantee free movement of labour in perpetuity. It’s the government’s political choice to end that. I don’t argue with their decision to do so, although I think it’s foolish, and I think it’s regrettable, but that’s the decision they’ve made.
However, it is now up to government to help manufacturers and others to ameliorate the consequences because it’s not a decision in which manufacturers have any hand at all.
And of course, notwithstanding that, there’s also a skills gap. Are you doing anything in particular to resolve that? Or do we just have to rely on the fact that the education system must improve?
Well, I have a two-part answer to that. Yes, there’s a significant skills gap. If you look at just the manufacturing element of the food chain, we have 400,000 workers, of which 130,000 are Europeans, and 120,000-130,000 are over 55, and there’s very little cross-over between those two groups.
The workforce has been aging at pretty much the same rate for the last 15-20 years. Not unreasonably in that situation, manufacturers have chosen to recruit from areas where they can get people, particularly Eastern Europe, and that’s why you’ve seen a steady growth in their number.
Now we have to find a way of going back to try and fish in the UK pool and that’s going to be a challenge because we don’t have an education system that currently produces people with those skills in great numbers. Interestingly, the reason for the bulge in the early-1980s was that there were HNDs and HNCs, which provided an excellent, very deep reservoir of highly qualified people with an engineering bent to go into the food manufacturing industry.
Unfortunately, Mrs Thatcher and Sir Keith Joseph got rid of them in the mid-80s and that’s where you see the beginnings of the gap, which then accelerates over the following 20 years. I think the education system does need to change to help fill the gap.
The second part to the answer, which I would cheerfully – or perhaps not very cheerfully, but completely admit to – is that the industry has not been good at recruitment. It’s not sold the food and drink industry as a great career for people until relatively recently. And I can’t honestly tell you why that is.
The industry I used to be in was ‘booze’ [previously corporate relations director at Diageo], and we never had any problem recruiting people, either in the beer industry in Ireland, in Guinness, or in Scotch whisky, gin, and vodka distilling and marketing.
We never had any difficulty in getting people into those jobs, so I don’t quite understand why it has been such a great challenge to do that in food and drink over the last 20 years, but it clearly has.
You’ve explained why food and drink manufacturers perhaps have more cause for concern about the challenges they face than other manufacturers. But there’s still more, no?
Of course. There’s the diet and nutrition issue, which is very significant for this industry, where we have to some extent been fingered as the culprit in the current obesity crisis. I would prefer to say that people’s body shape and obesity is actually a matter of personal responsibility.
I accept that all those who provide food and all those who provide the settings in which food is eaten, and that includes shops, restaurants, bars, and those who create the built environment have a responsibility too, but in the end what you eat and what you put into your body has to be your own personal responsibility, or if you’re underage, that of your parents.
The final area of concern is around the environment and the sustainability of the business model. Everything from packaging through to food waste are big issues which I suspect would be front and centre for us right now if it wasn’t for Brexit. Underlying all of that, you get the whole question of food safety and food security, issues which are always with us.