Scottish Government

4. Processor Survey

4.1 Survey methodology

A telephone survey was undertaken of 247 food processing companies with operations in Scotland. These companies were identified from the Inter Departmental Business Register ( IDBR) a comprehensive list of UK businesses used by government for statistical purposes. From the companies identified in the sector, a sample was drawn that under-sampled small companies (those with less than 10 employees in total) in order to avoid expending a large amount of resources on companies that constitute a small proportion of overall sector activity.

The results below are reported unweighted and weighted, with responses from larger companies given more weight in the weighted results. The weights were assigned according to the expected average company size for three size bands:

• Small companies (with less than 50 employees) were given a weighting of 1
• Medium companies (with 50 to 249 employees) were given a weighting of 5
• Large companies (with 250 employees or more) were given a weighting of 12

The weighted results give a more complete picture of results in relation to sector activity while unweighted results simply illustrate survey responses.

4.2 Profile of respondents

Of the 247 companies surveyed: 64% were small, 23% were medium and 13% were large. Information was collected on companies by sub-sector, and the profile of the sample by sub-sector is illustrated in Figure 4.1.

The differences between the unweighted and weighted sample profile highlight that the meat, and dairy sectors all have more large firms than small, whereas the fish, drinks sector and other sub-sectors have more small firms. The dairy sector in Scotland is highly concentrated and dominated by a few large firms making it difficult to cover the sub-sector well in this survey. Findings for the dairy sector must, therefore, be treated with some caution.

Figure 4.1 Companies by sub-sector

Unless stated otherwise, the percentages referred to in the survey analysis are for weighted results.

4.3 Destination of Scottish processed food

Figure 4.2 shows the market type targeted by Scottish processors. The results show a higher proportion of companies aimed at mass markets (66%). The weightings highlight, unsurprisingly, that large companies are more likely to produce for the mass market and small companies for niche markets.

In the 2007 survey a larger proportion of companies indicated that they produced for the mass market (74%) suggesting a greater proportion of larger processors in last year's survey and a possible trend towards niche markets.

Figure 4.2 The nature of target market for main product

This year's survey explored the nature of niche markets further. Almost two thirds of respondents (66%) said that their niche market product lines included high quality and premium products.

The next most significant single category was organic at 10% followed by healthy at 7%. There is no comparative question from last year but it would be expected that these categories are growing in significance.

Figure 4.3 Niche markets

This year respondents were asked to comment on their main approach to branding (Figure 4.4). This question was included to understand the significance of companies own brands versus own-label for the supermarkets for example. Just over half (54%) said that they had developed own brands, while 20% said that they produce mainly own-label products. A further 26% expressed that both are very important. The picture suggests that Scottish companies do see own-brand building as an important part of their offer. Much of this branding emphasises 'Scottishness', quality, freshness and Scottish imagery and enables manufacturers to differentiate their products using a Scottish theme. This point has been recognised within the Scottish Food and Drink Strategy.

Figure 4.4 Main approach to branding

Figure 4.5 shows the destination of the majority of sales. The results show a majority of sales in Scotland at 44%, up from 32% last year. Exports outside the UK are much the same as last year at 15% (2007 16%).

Table 2.3 indicated that the rest of the UK was the main market for processed food in 2004. The trend is therefore one of an increasing proportion of sales being within Scotland. Exports overseas also appear lower than those recorded in 2004, probably because exports as a main sales destination will be most concentrated among a small number of very large companies and this is difficult to capture in a sample of the processing sector.

Other differences in the split between domestic, rest of UK and exports are probably due to the fact that the survey results ask companies about the single major destination, whilst the Input-Output Tables are based on value and cover all sales.

The large difference between the unweighted and weighted results suggests that larger companies are more likely to be selling outside Scotland.

Figure 4.5 Destination of the majority of sales

Respondents were also asked to estimate the percentage of their sales generated in Scotland. After weighting, the results show a polarisation at the low and high levels. More than a third of respondents said that Scotland accounts for 1-25% of their sales, while a quarter (23%) said that all of their sales are made within Scotland.

Table 4.1 Proportion of sales generated in Scotland

When the results are analysed by sub-sector, the following findings can be seen:

• The drinks sector (reflecting whisky exports) is the one with the largest proportion of activity focused on non- UK markets, having increased the share sold abroad from 35% to 42%.
• The dairy sector is concentrated on selling within the UK (57% outside Scotland).
• This year's survey found that 6% of meat companies sales were abroad, while last year none of them did highlighting a recovery in export markets following the BSE ban. This corresponds with the data presented in Table 2.3, which shows that that meat and dairy sectors export little outside the UK - 2004 being during the BSE ban.

Figure 4.6 Destination of the majority of sales by subsector

The initial desk research and consultation exercise indicated that some partially processed products are exported outside Scotland for further processing. This was further explored in the survey (Figure 4.7), with respondents being asked what proportion of their products were processed further. The majority of respondents (57%) said that none of their produce was processed further, 19% said 1-25% was processed further while 12% said that all of their sales are inputs to further processing reflecting the different markets that processors are operating in. There are no significant differences here with last year's survey

Analysis of these results by sub-sector suggests that the meat and fish processing sub-sectors are likely to have output used for further processing (62% and 57% respectively, compared to 38% for the survey as a whole). Again, these results are very similar to those of last year's survey. In the meat sector this may well reflect the nature of the supply chain, where abattoirs will undertake the first step in processing and then sell on to other meat processors. The fish sector results reflect the activity described above, where large quantities of white fish receive minimal processing in Scotland before being sold on for further processing elsewhere in the UK.

Figure 4.7 How much of your sales are being used as an input to further processing?

The companies were also asked their latest turnover figure, and two thirds of the companies provided an answer. The average turnover of companies was as follows:

• small companies £3.6 million,
• medium sized companies £17.1 million
• large companies £125.4 million.

It was also investigated (Figure 4.8) whether turnover related just to the site in question or whether the company operated at other locations as well.

• 54% had no other locations
• 20% had other sites in Scotland
• 9% had other sites in the rest of the UK.
• 17% had sites outside the UK.

Figure 4.8 Sites

Those companies that indicated that there were other operations in addition to the site in question were asked the proportion of turnover attributed to that site. As Table 4.2 shows, two thirds of the companies interviewed (63%) that did have other locations realised more than half of their turnover from the site interviewed.

Table 4.2 Proportion of turnover attributed to the responding site

This finding confirms that the survey sample mostly consists of Scottish companies or companies that concentrate their production primarily in Scotland rather than small sites of large multinational companies.

4.4 Origin of inputs of processors

The survey asked companies about the amounts of company purchases, however, more than half of respondents did not disclose information due to confidentiality or lack of knowledge.

Respondents were asked to identify the proportion of their food inputs to production that are sourced from Scotland. Almost all respondents (89%) said that they source at least some produce from Scotland. After weighting, the proportion of companies sourcing less than half of their inputs from Scotland increases (implying large companies are disproportionately in this group) and the proportion of companies sourcing all of their inputs from Scotland decreases (implying small companies are more likely to be in this group). Based on weighted results more than a quarter of activity in the sector (28%) is undertaken using inputs sourced entirely from within Scotland. There are no significant differences between the 2007 and the 2008 survey in this respect.

Further analysis by sub-sector suggests that the fish and the dairy sectors are most likely to source their inputs from Scotland - 56% and 50% respectively said that they source more than 75% of their inputs from domestic sources, while for the meat sector it was 38%. Last year's survey found that the drinks sector is more likely to use inputs that are not of Scottish origin, however, this year only 5% of drinks sector respondents suggested that no Scottish inputs were used compared with 8% overall.

Figure 4.9 What proportion of your inputs do you source from within Scotland?

Figure 4.10 shows that the majority of processors using Scottish produce use unprocessed produce as inputs. Almost three quarters of inputs are mostly unprocessed (74%), up from only two thirds (64%) last year. The difference between the weighted and unweighted results imply that large firms are more likely to process primary produce, and smaller firms are more likely to purchase products that have already undergone some form of processing.

Figure 4.10 Are the products sourced from Scotland mostly processed or unprocessed?

This year the nature of Scottish inputs was investigated further (Figure 4.11) as respondents were asked to estimate the proportion of processed inputs out of all Scottish inputs. More than half of those surveyed said that none of their inputs are processed (56%), while 15% use only processed inputs from Scottish sources. About a quarter said that they use some processed Scottish produce.

Figure 4.11 Proportion of processed inputs

The main food products purchased by processors are outlined in Figure 4.12. Almost a fifth of respondents said that dairy products were among those bought, similar to last year. The purchase of red meat is less significant this year than in 2007 (16% compared with 25% last year), though this change may simply be due to the sample of companies interviewed.

Purchases of fish and seafood were split further this year, into farmed (11%) and natural seafood (9%) categories showing them to be roughly equal.

This year more companies mentioned fruit and vegetables as main inputs than last year (13% versus 9% in 2007) which might be a reflection of the growing health agenda.

The 'other' category consists mostly of ingredients, which, in order of importance are, flour, sugar and salt purchases.

Figure 4.12 Main types of food purchased

4.5 Market conditions

Companies were asked to comment on what they consider main drivers of their markets. Respondents were asked to note the single most important factor but mention all that apply. Figure 4.13 shows the most important market drivers, while Figure 4.14 concentrates on all factors considered important.

Just less than half (45%) marked demand for quality as the main market driver, followed by price (34%). This reflects that price is more important for large companies, while smaller companies tend to concentrate on demand for quality. Other factors were selected by significantly fewer companies as main market drivers. If we compare result with last year's, we find that price has increased in importance, and demand for quality has decreased.

The price factor represents the financial pressure facing the processing sector at the moment through increased fuel costs etc. and is discussed further under market challenges.

Figure 4.13 The main factor driving our market

Results show that for other market drivers, around the same proportion of companies selected demand for quality and price as market drivers (both just below a third of answers).

Branding, distribution, seasonality and provenance (origin) are all of similar importance, with all of them mentioned by 8-9% of respondents. Ethics and organic inputs and produce were mentioned by only 4% of respondents each.

Figure 4.14 Other market drivers

Three quarters of respondents said that product origin is a consideration of their customers. About half of them said that it was the main consideration (similar to last year), and another half said it was a consideration, but secondary to other factors. Weighted and unweighted results were similar in this case, which suggests that the importance of origin does not depend on company size.

The importance of origin was investigated further, and results are outlined in Table 4.3. Almost two thirds of those that commented on product origin said that their customers prefer to buy Scottish produce. A low proportion of respondents suggested the importance of British and fair trade produce (after weighting 7% and 2% respectively). The balance (28% after weighting) indicated that the origin is important in another context.

Table 4.3 The importance of origin to customers

This year respondents were asked to explain the factors that drive customer preferences of origin. Almost half of respondents thought that better quality was one of the main drivers, and three quarters of those who mentioned better quality answered the previous question by stating that their customers prefer to buy Scottish produce. Quality and Scottish produce are therefore seen to be closely linked.

A fifth of respondents said that supporting producers and the economy is one of the main drivers of origin preferences. Food safety and food freshness, due to shorter distance, were mentioned by 12% and 9% of respondents each, while only 7 small companies said that shorter distance is important because it results in less environmental impact.

Other drivers (12%) mostly included good customer service and price.

Figure 4.15 Main drivers of origin preferences

More respondents said that the importance of origin has changed in the minds of their customers than in 2007 - 30% after weighting compared with just 20% last year. Almost all of them (93%) said that product origin was of increasing importance, similar to last year.

Respondents were asked to comment on this change. Reasons mentioned included greater media awareness on food origin, the freshness of food, healthy and organic eating and environmental impacts, and generally more publicity about the origin of products.

Table 4.4 Has the importance of origin changed?

Figure 4.16 In what way has product origin changed?

4.5.1 Organic Processing Outputs

Another addition to the survey this year was the investigation of processing organic products. Over two thirds of respondents said that none of their output was certified as organic. The weightings highlight that larger companies are more likely to produce some organic output.

Of the companies that do process organic products, a third (31%) had 1 - 25% certified as organic. Only 1% of companies produce 100% certified organic products. These companies are small and medium-sized which explains that after weighting the rate decreases to 1%.

Table 4.5 What proportion of your output is certified as organic?

Companies with less than 100% organic produce were asked whether they would consider getting involved in, or expanding their organic processing. 39% of respondents replied positively, (30% before weighting), highlighting a number of large companies considering increasing their organic production.

Just over half (56%) of respondents thought that organic produce is not a consideration to their customers, though this rate decreased to 56% after weighting. Of those who said that organic produce is important to their customers, most said that it is of secondary importance and only 6% thought that it is the most important factor.

Most respondents (75%) agreed that the importance of organic produce has not changed in the minds of their customers. More than 90% of those who said it had changed expressed that it was of increasing importance.

4.5.2 Market Research

34% of respondents said that they collect information on customers' views largely through informal discussions, while formal market research is important for 37%. The weightings highlight that larger companies tend to do more market research than small companies.

Sales trends are less important than last year; only 15% said that they collect this kind of information compared with 29% last year. Other sources of information include e.g. competitors and Internet sources.

Figure 4.17 What information do you collect on market trends?

4.6 Inputs and the way they are used

Respondents from three quarters (76%) of the companies said that they try to source Scottish inputs whenever possible.

Table 4.6 Do you try to source Scottish inputs whenever possible?

This clear desire to source Scottish inputs is confounded by a range of difficulties. Almost half of respondents (47%) said it was difficult to source Scottish produce, up from 34% last year. The main reason for difficulty in sourcing Scottish produce was availability (57%), followed by price (25%). Quality was less significant as only 5% of companies mentioned that it was a problem. Weather factors were also mentioned by some companies as an issue. However, it is clear that availability is by far the biggest issue across all company sizes. Availability was more of an issue last year at 81% while price has become more of an issue this year rising from 19% to 25%.

Figure 4.18 Reasons for difficulties in sourcing Scottish produce

Table 4.7 highlights that the ability to source Scottish produce is not really improving with two thirds finding the situation staying about the same and a further quarter (24%) finding it worsening. Only 14% find the situation improving. This finding is a concern for the future of the Scottish processing base. Meat companies were amongst those finding most affected by worsening supply.

Table 4.7 How is ability to source Scottish produce changing?

Availability is the most important reason for this change in ability to source, as more than half of respondents said. Interestingly about the same number of companies said that availability is behind the improvement in ability to source Scottish produce as those that said that it is behind the worsening of the situation. Price was mentioned by just over a fifth of respondents, most of them answering to the previous question that the ability to source Scottish produce is worsening. Quality was mentioned by only one company.

Table 4.8 What is the reason for this change?

Three quarters of respondents said that they do not use organic inputs, with the unweighted results highlighting that larger companies are more likely to use some organic inputs. Conversely a quarter of companies do use organic inputs in their production.

Figure 4.19 Do you use organic inputs in your production?

Most of those processors that use organic inputs use only a small proportion of organic produce of 1% - 25% (see Table 4.9). Only very few companies said that they use more than this. A few companies said that between 75% and 100% of their inputs are organic - about 2% of the total, these are mostly the small and medium sized companies that produce only organic output as shown in Table 4.5.

Table 4.9 What percentage of your inputs are organic?

Most organic inputs are unprocessed organic produce (60%). About a third of processors said that all of their organic inputs are processed (29%), while the rest of the companies (11%) said that less than half of their organic inputs are processed.

Table 4.10 What percentage of your organic inputs are processed?

Two thirds of processors that are involved in organic production do not find it difficult to source organic produce (68%). A third expressed that they have faced difficulties obtaining organic produce (see Table 4.11). However, it should be noted that these companies represent a small percentage of the sample total. Almost all of them expressed that the main difficulty as availability, while price was mentioned by four companies. Other reasons included regulations and crop problems.

About half of respondents that are involved in organic produce said that the ability to source organic produce is staying about the same, while a further 41% (after weighting) said it was improving. Only very few companies said that the ability to source organic produce is worsening. The main reason given for the improvement was availability.

Table 4.11 Do you find it difficult to source organic produce?

Further analysis by subsector suggests that the fish sector is more likely to source a larger proportion of their organic inputs from Scotland (about half of those that are involved in organic production said that they source more than two thirds of their inputs from Scotland). There were no significant differences in the answers of companies from other sectors.

Figure 4.20 How much of your organic produce do you source from Scotland?

Respondents were asked whether they were aware of the Scottish Food and Drink organisation. According to weighted results:

• two thirds of processors said that they are aware of Scottish Food and Drink and the services it provides.
• 17% said that they are aware of the organisation itself, but are unsure about its services.
• The remaining 19% were not aware of Scottish Food and Drink.

4.7 Challenges for businesses

The striking factor in terms of main business challenge is the change from last year when competition from other businesses in the UK and Scotland accounted for over 50% of responses. This year competition from UK and Scottish businesses decreased to 15%.

The main challenges mentioned were costs and financial issues at 15% and shortage of raw materials at 13% (down from 15% last year).

This striking change highlights a sector under financial pressure due to rising costs and static sale prices. It should be noted that the competitive threat is still very much there in the background.

Healthy eating and recruitment were the third and fourth most cited challenges at 10% and 9% respectively, similar to last year.

Regulation issues were a challenge for 20% of the sector last year, falling to 8% this year.

Figure 4.21 What are the main challenges facing your business?

The cost and financial impact was particularly high in dairy and other sectors at 34% and 38% respectively while only 24% of meat companies highlighted cost.

As last year, raw material shortage was a more frequently cited challenge in the fish processing sector (41% compared to 11% overall), while the drinks sectors was more in line with the average (12% compared with 11%) than (22% last year). Raw material shortage was less of an issue for the dairy and meat sectors as very few companies from these sectors said it was a challenge they face. The meat supply situation could tighten in future as the suckler herd continues to decline and if feed costs remain at current high levels.

Figure 4.22 highlights the nature of raw material challenges. While in 2007 about a third of respondents said they were unable to source enough Scottish produce, in 2008 this rate is more than half. Shortages of British and produce from any source were also highlighted. Organic produce was only mentioned by 2% of companies. Other issues included legislation and weather factors.

Figure 4.22 What is the nature of raw material shortage?

The respondents unable to source enough Scottish produce said that weather factors were the main reason, while a third said that high price is the main factor. Very few mentioned quality and a few mentioned a small number of large companies who buy most of the produce leaving little for other companies.

Only a third of companies that said raw material shortages were an issue said that they had made changes in response to these challenges. Examples included sourcing elsewhere as well as R&D investment.

Almost half of the companies had suggestions in terms of how their Scottish primary produce purchases could be increased. These suggestions included