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United Kingdom Food and Drink Report Q3 2008

http://www.companiesandmarkets.com/Summary-Market-Report/united-kingdom-food-and-drink-report-q3-2008-49321.asp

Report Summary

The amount of focus given to private labels versus branded goods is a key decision for both Mass Grocery Retailers (MGRs) and food producers. Nearly all retailers carry at least some private label goods, and some, such as upmarket retailer Marks & Spencer (M&S), carry exclusively private label products. Meanwhile, many of the UK’s largest food and drink producers manufacture both branded and private label goods. With the market share for private label goods growing, there is a strong argument for producers to focus production in this area.

However, producers that focus on branded products have the advantage of negotiating with retailers from a point of strength, particularly if consumer demand for their products is high, and can generally achieve greater margins. These issues have come to the fore in the second quarter of 2008. In May, Marks & Spencer revealed that it would start selling some of the country’s most popular branded products, such as Nestlé coffee and Heinz baked beans. Meanwhile several manufacturers, including the UK’s largest retailer, Premier Foods, began downsizing their private activities to focus on higher-margin branded products.

Marks & Spencer’s decision to sell branded products has been prompted by the growing popularity of upmarket private label ranges at other UK retailers. All of the major UK MGRs now have their own premium private label ranges, reducing the competitive advantage that Marks & Spencer once enjoyed. All of these retailers have enjoyed considerable success with their private label ranges and J Sainsbury (Sainsbury’s) recently reported that its upmarket ‘Taste the difference’ along with its economy ‘Basics’ range were among the most important drivers of growth throughout 2007. Despite the rise in importance of private label products for retailers many food manufacturers are less enamoured with the sector.

As production of private label products can be shifted between manufacturers, retailers generally have a strong position when negotiating supply terms. As an example of this, in May 2008, Northern Foods announced that it is to close a factory in Lincolnshire that supplies ready meals to M&S after it could not agree acceptable supply terms. Northern Foods claims that the factory is only just breaking even and that the new terms demanded by M&S make the factory unviable.

This highlights the wafer thin margins that many firms producing private label products are forced to operate on. Another firm reducing its reliance on private label products is Premier Foods. The firm is planning to sell its RF Brookes subsidiary, which supplies chilled food to major retailers and the food service industry, and its Avana Bakeries unit, which is one of the main suppliers of cakes and confectionery to Marks & Spencer. Both Premier Foods and Northern Foods have a portfolio of very strong consumer brands, such as Hovis bread and Goodfella’s pizza respectively. Although both firms are unlikely to leave the private label sector entirely anytime soon, this downsizing may be a signal that the major UK food producers may not be willing to go on supplying private label products if the returns cannot match the returns that can be achieved by focusing on brands.

Table of Contents

Executive Summary .7

Business Environment ....8

Western Europe Food & Drink Business Environment Ratings .. 8

Table: Western Europe Food & Drink Business Environment Ratings Q3 2008 11

Table: Global Food & Drink Business Environment Ratings – United Kingdom’s Peer Group 13

SWOT Analysis . 14

Food And Drink 14

United Kingdom Food And Drink Industry SWOT ...... 14

Mass Grocery Retail ...... 15

United Kingdom Mass Grocery Retail Industry SWOT . 15

Macroeconomic Outlook ..... 16

Table: United Kingdom - Macroeconomic Forecasts . 19

Food ......20

Industry Forecast Scenario . 20

Food Consumption 20

Table: UK Food Consumption Indicators – Historical Data & Forecasts . 21

Canned Food / Prepared Food . 21

Table: Canned Food Value/Volume Sales – Historical Data & Forecasts 21

Confectionery . 21

Table: Confectionery Value/Volume Sales – Historical Data & Forecasts 22

Industry Developments . 22

Market Overview 24

Food Production ... 24

Prepared Food ...... 24

Livestock 25

Dairy ... 25

Seafood .. 26

Organic Food 26

Drink .....27

Industry Forecast Scenario . 27

Hot Drinks . 27

Soft Drinks And Bottled Water 27

Table: Soft Drink Value Sales – Historical Data & Foreca 28

Alcoholic Drinks ... 28

Table: Alcoholic Drink Value/Volume Sales – Historical Data & Forecasts .... 29

Industry Developments . 29

Market Overview 31

Soft Drinks . 31

Alcoholic Drinks ... 31

Agriculture At A Glance .33

Table: United Kingdom Agricultural Sub-Sector Production .... 33

Table: United Kingdom Dairy Industry Data .... 33

Table: United Kingdom Organic Agricultural Data ... 33

Agricultural Commodity Price 34

Mass Grocery Retail 35

Industry Forecast Scenario . 35

Table: Structure of UK Mass Grocery Retail Market – Sales By Format (US$bn) – Historical Data & Forecasts 37
Table: Sales Breakdown By Retail Format Type 37
Industry Developments . 37
Market Overview 40
Online Retailing 43
Table: Structure Of The UK's Mass Grocery Retail Market By Estimated Number Of Outlets.. 44
Table: Structure Of The UK's Mass Grocery Retail Market – Sales Value By Format (US$bn), estimates ... 44
Table: Annual Average Sales Per Outlet By Format (US$mn) – 2006 45
Competitive Landscape .46
Key Players. 46
Food And Drink 46
Key Players in the UK's Food & Drink Sector - 2006/2007. 46
Mass Grocery Retail ...... 47
Key Players in the UK's Mass Grocery Retail Sector . 47
Company Analysis ...... 49
Food ... 49
Associated British Foods . 49
Dairy Crest Group Plc ... 50
Drink ... 51
Diageo 51
Cadbury Schweppes Plc . 52
Mass Grocery Retail ...... 53
Tesco ... 53
J. Sainsbury Plc 54
Asda .... 55
Deep US Recession Scenario ..56
Global Scenario 56
Table: World GDP Growth ..... 56
Table: US GDP Growth, Investment Growth And Private Consumption Growth ...... 57
Table: Eurozone GDP Growth 58
Table: Asia, Excluding Japan, GDP Growth ..... 59
Table: China GDP Growth ..... 60
Table: Mexico GDP Growth ... 60
Table: Africa GDP Growth ..... 61
Western Europe Recession Scenario ..... 62
Table: Impact Of Deep US Recession On Total Food Consumption In Selected Western European Markets – Cumulative Difference Between
Core And Recession Scenarios (%) .. 63
Appendix 65
Food & Drink Business Environment Ratings ...65
Ratings Methodology . 65
Ratings Overview 65
Ratings System ...... 65
Indicators... 65
Limits Of Potential Returns ..... 66
Risks To Realisation Of Potential Returns 67
Weighting... 68
Weighting... 68
BMI Food & Drink Industry Glossary 69
Food & Drink . 69
Mass Grocery Retail .. 69
BMI Food & Drink Forecasting & Sourcing ...71 How We Generate Our Industry Forecasts .... 71 Sourcing ... 72