• Changing Markets 

     

    As traditional European markets stagnate, what is the outlook for the UK food and drink industry? CARL PARASKEVAS, Director of Sector Economics, Lloyds Bank, discusses.

    The UK food and drink industry faced a multitude of challenges this year, which have all contributed to an expected decline of 4% in the sector’s output in 2012.

     

    There has been a number of contributing factors to this including slow economic growth at home, a weak export market, changing consumer tastes, and the wider global industry trend of shifting production to emerging markets. While best estimates suggest domestic output will stabilise in 2013, quintessentially British products, such as Scotch whisky, remain bright spots within the industry and are likely to benefit from a more stable global marketplace next year.

     

    There has been a recent trend in Britain of seeking a healthier lifestyle which has consequently led to a reduced demand for confectionary, takeaway, convenience and other non-essential food products. Moreover, labelling requirements are also making consumers more health conscious of the types of food and drink they consume. This has put a strain on traditional manufacturers’ existing offering, not least in the case of alcoholic beverages, where UK per capita consumption has been in steady decline since 2006. Although our forecast growth in household consumption next year is expected to be supportive of domestic food and beverage consumption, these trends are unlikely to fade anytime soon.

     

    Even as domestic demand improves, Britain still relies on imports to meet 50% of its food needs and this situation is unlikely to change for the foreseeable future. Although the country only exports about 7% of its domestic food production, these exports make a material difference to underlying performance within the sector. Last year was an extremely successful one for the industry, with output expanding by 3.2%, largely driven by drinks exports. A slowdown in export demand, particularly from the Eurozone, where close to 77% of UK food exports are shipped, remains one of the key reasons for slower activity this year.

     

    While the ongoing crisis in the Eurozone makes it unlikely that the pace of sector growth seen in 2011 will be repeated over the next few years, the drinks segment is still likely to be a key performer when general economic conditions do show improvement. An example of the segments’ success has been the Scotch whisky industry. The industry has seen exports grow by 12% for the year ending June 2012 (according to data published by the Scottish Whisky Association). This was based on strong demand from North America and key emerging markets, which more than compensated for weak Eurozone sales.

     

    The outlook for 2013 is marginally more optimistic and the sector should, at the very least, stabilise as UK household expenditure improves and export markets become increasingly more receptive.

     

    Food price inflation for key ingredients is a key concern over the coming years. Corn, wheat and soybean prices were contributors to the rise in commodity prices for 2012, due to weather issues affecting the harvest. However, these prices are set to fall in 2013 with the market expecting a return to normal weather conditions and recent prices encouraging extra planting this year.

     

    Emerging market demand for food and drink is likely to grow faster than demand in the UK’s domestic market, as they benefit from a faster rise in incomes and a growing middle class. These markets are likely to offer continued growth opportunities for Britain’s food and drink industry, either through exports or direct investment in the home market.

     

7/23/2019 4:40:52 PM