Food and Drinks Cluster, Scotland
Scottish Enterprise's new Network Strategy was launched in January 1999. It was created through a wide-ranging consultation process, involving all parts of the network, along with hundreds of partners in the public, private and voluntary sectors. At the heart of the new strategy lay some new thinking in economic development - the "clusters approach".
A "cluster approach" is actually a very simple notion. We all know that successful businesses create a successful local economy. What lies behind a cluster approach is the idea that the opposite is also true - that business success depends on being connected to a well functioning, supportive local economy. This is made up of customers, competitors, suppliers, advisers, research facilities, universities, training providers and so on. All of these can provide a means of improving business performance - by providing support, new ideas, new demands, encouragement and - most importantly - competitive pressures.
In a fast changing world, standing still is not an option. At a time when virtually all industries are under extreme pressures and changing quickly, businesses are finding that they have to innovate and move towards more productive activities. A dynamic local environment encourages everyone to improve performance through working with - and competing against - others.
This seems fair enough, if a little fuzzy. But when you combine this idea with some evidence from successful economies around the world, the mist clears a little more. Many of the world's top economies have these strong links - both competitive and collaborative - between businesses, customers, suppliers and research facilities. The strongest are centred around a relatively small number of industries, or groups of industries. These concentrations are called clusters.
In the SE Network, the clusters approach helps develop the potential of some of Scotland's key industries. They are piloting approaches in four areas: food, biotechnology, oil & gas and semiconductors. Cluster approaches will follow in other industries.
Food & Drink -- Diversity into Dynamism?
The central challenge for the food and drink sector is to bring the benefits of clustering to an industry that is, almost by definition, diverse, fragmented, and substantially composed of smallscale operations. Scale, location, structure, costs and market trends dictate that competing in global commodity markets is an unrealistic prospect for all but a very few Scottish companies. Success lies in differentiated, higher value, premium-priced products serving niche markets in the UK and beyond.
Scotland's food and drink industry brings some significant advantages to this vision. Many of its raw materials and finished products enjoy a merited international reputation. The quality of its environment is likewise widely admired. It has an agricultural research base of world class. And some of its products and players are powerful international ambassadors of quality.
Yet, there are no less significant shortcomings to be weighed against these assets. Competitiveness is poor, reflecting both unfavourable demand conditions and an inability of the company base to adapt to dynamic change. Fragmentation means a lack of the scale and confidence needed to market aggressively or innovate effectively. A heavy bias towards primary processing means vulnerability to the commodity cycle and the power of big buyers, like the supermarket chains. The dominance of private or family ownership means a lack of industry leaders and a tendency to introversion and low margins, and an aversion to collaboration.
There are world-class companies, but they are the exception not the rule. Unless the sector's weaknesses are actively addressed, there is a real risk of the Scottish food and drink cluster dwindling to become merely the raw material supplier to more competitive food clusters elsewhere, with a consequential loss to Scotland of ownership, value, and prosperity. Yet there are real market opportunities for the Scottish cluster if it can commit itself to a strategy founded on a culture of continuous innovation and value-add, appropriate scale, and building strong brands and linkages.
Global Trends
The world food market is currently valued at $3,000 billion. Almost two thirds ($1,900 billion) is spent by affluent customers, and this spend is projected to reach $3,650 billion by 2010.
This massive increase will be powered by an upsurge in demand for both lower-cost and higher value-added foods. Over the coming decade, the number of potential customers for low-cost foods will rise by a billion to 4.3 billion, while the numbers buying higher value-added food will more than double from 800 million to 1.7 billion. UK market growth over the period will be marginal, but fundamental changes in consumer demand, distribution and the competitive environment will present new and significant opportunities.
The rewards in this highly competitive environment will fall to companies which are constantly alert to new opportunitites and which have the capability - people, plant,
processes and technical know-how - to respond rapidly. Exploiting opportunities in the developing world will generally require large-scale operations, coupled with either a production base or a strong partnership in the target market, and will be largely driven by volume and price. Scotland is not well-placed in this regard.
But in the developed world there will be opportunities for small-to-medium sized companies, provided they can offer the right price, quality, technology and service specifications. This will require a blend of customer responsiveness, flexibility, continual innovation and speed-to-market. If the Scottish food cluster can address its competitive weaknesses, it has the potential to compete effectively in developed markets with sophisticated infrastructures -- like the EU, US and Japan -- where the emphasis is on customised, added-value, niche products.
Food & Drink in Scotland
The sector plays a significant part in the Scottish economy, employing 52,000 people (17 per cent of manufacturing employment) in more than 1,800 businesses with combined sales of £7.3 billion and export sales of £2.7 billion, representing15 per cent of manufactured exports.
But this aggregate position conceals a highly variable picture. Both the employment total and the company base are in marginal decline. All but 16 per cent of the export sales are attributable to whisky. Structurally, the industry is conspicuously fragmented, with a high proportion of small-scale processing companies, three-quarters of which employ fewer than 50 people and only 5 per cent of which employ more than 250.
Recent years have brought about some shift towards more value-added products, like the move among fish companies from basic processing towards speciality breaded products and recipe dishes, and there are several strong companies in the emerging ready meals market. Quality assurance standards in the primary sector, driven largely by hygiene and safety legislation, are now among the toughest in Europe, and are beginning to pay marketing dividends through programmes like the Scottish Pig Industry Initiative and Scottish Quality Trout.
Yet significant parts of the industry remain very traditional, particularly the primary production base, which lacks market and commercial focus. The red meat sector suffers from over-capacity in slaughtering and has been slow to react to market forces with better branding and product development, retaining instead a commodity focus. Without radical change, much of it is likely to come under Irish ownership, merely supplying raw materials to other food clusters.
Linkages, equally, are weak at key points in the value chain, notably between the science, skills and company bases. Overall, the industry lacks the scale, structure, profitability and confidence to focus on the activities like research & development (R&D), innovation, new product development, branding and effective marketing which it needs to embrace to achieve higher added value.
A Cluster Strategy for Scottish Food & Drink
International research identifies a number of interdependent elements in a competitive food cluster: a central core of highly innovative, efficient and flexible manufacturing companies; high exposure to sophisticated demand; advantageous cost profiles in fields like materials, labour and utilities, or strong differentiation strategies where such costs remain high; a commercially-focused science and skills base; a highly integrated and co-operative value chain; and, preferably, the presence of supporting industries like equipment, packaging and distribution. The Scottish food and drink cluster has some way to go to achieve this sort of profile.
Two clear goals emerge: the ability to exploit sophisticated demand in the UK, and a comparable ability in overseas markets. If these can be achieved, the realistic potential exists to generate powerful business opportunities for the sector and to bring significant economic benefit to Scotland. To get to that position will in turn require three connected aptitudes on the part of the food industry: the ability to work together; the ability to exploit technology; and the ability to develop the right skills.
Only with all these objectives functioning interdependently, can the cluster attain its full potential. For example, stronger connections with sophisticated buyers, both home and overseas, will afford better understanding of the marketplace, of shifting demand patterns, and therefore of the opportunities which arise. Equally, stronger linkages throughout the value chain will enhance and transfer key skills like category management, smart packaging and shelf-life extension, thus making the sector fleeter of foot in implementing innovation.
In all these areas, the Scottish sector has both strengths and weaknesses, and each objective requires specific action. For example, in the UK marketplace, Scotland benefits from exposure to highly demanding customers like the big retail chains, and is securing a growing share of their custom. Safeway's purchases from Scotland are projected to reach £600m in 1998-99, up 50 per cent on 1996-97. But big retailers are increasingly looking to rationalise their supplier base through strategies like category management, which allow them to source a wide product range on a single account, and Scotland's fragmented manufacturing capacity is ill-suited to that challenge. The lack of a major Scottish-based retailer aggravates the somewhat unsophisticated nature of local demand, encouraging a bias towards primary commodities and away from high-value, marketing-intense products. Emerging opportunities like foodservice and electronic shopping are under-exploited in Scotland.
To meet these challenges, Scottish food needs to upgrade its marketing and branding capabilities to suit more demanding market segments, and do more to exploit the quality of its primary products. It needs to develop better, and better-disseminated, understanding of market change; and to exploit strategic alliances and high-tech systems to improve distribution and communications.
Similarly, Scotland has a strong and positive image in key overseas markets through the success of exports like whisky, premium seafood, and a growing range of niche
gourmet products. A good supply of raw materials and an international reputation for pure, high quality provender are valuable assets. But the exports base needs to be
broadened, and the relatively narrow range of export products at present means the lack of an "export mindset" across much of the sector. This should be addressed through a range of initiatives -joint ventures, alliances, and licensing agreements -and through a general strengthening of partnerships in key markets. Better information needs to be shared on international opportunities and market dynamics.
Some parts of the sector already work together through local networks, informal partnerships and joint branding ventures. Trade associations do valuable work, but there are -at more than150 -too many, and they tend to overlap or compete unhelpfully. The predominance of family ownership likewise nurtures rivalries and discourages collaboration. Above all, linkages are weak at key points of the value chain, notably the lack of market focus in the primary sector, and structural change is unavoidable. Trade associations and industry bodies need to be rationalised and refocused on international best practice, linkages within the cluster need to be made stronger and more coherent, and knowledge diffusion greatly enhanced.
Scottish agricultural science is world-class in many areas, but technology transfer into the food industries is poor. Much Scottish scientific expertise is better exploited by food producers elsewhere, and Scotland's fragmented company base fails to generate the R&D needed to achieve the innovation retailers increasingly expect in techniques like processing, packaging and preservation. Once more, redressing this position requires better linkages throughout the cluster, better information dissemination about technology, and the fostering of networks to promote technical innovation. Funding support mechanisms for R&D are part of the answer, but the cluster also needs to refocus existing provision better on common priorities. Targeting strategic inward investment in food R&D may also yield benefits.
The skills base is another mixed picture. Labour costs are low in UK comparative terms, and educational attainment, up to graduate level, high. There are impressive examples of good practice in using Scottish Vocational Qualifications and other skills enhancement programmes to build business performance. Yet the lack of a critical mass of visionary managers makes investment generally across the sector in skills development low. Collaborative initiatives are needed to align skills more closely to strategic priorities (management, marketing, quality, innovation), and to improve companies' understanding of how skills upgrading can enhance business performance.
Next Steps
The Scottish food cluster has the potential to become globally competitive. It can both strengthen its own performance and contribute towards the wider development of a more knowledge-based economy in Scotland. What is needed is consensus and commitment among all the key participants in the cluster to address systematically the competitive weaknesses identified above.
A strategy development team, drawn from both the public and private sectors, is now working with the industry and across the Scottish Enterprise network to build agreement on strategic options, a cluster strategy, and a supportive action plan for implementation by the network. Both the strategy and the plan are scheduled to be drafted by Spring.
For further information, please contact:
Jonathan Tait
Food Cluster Team
Scottish Enterprise
120 Bothwell Street
GLASGOW
G2 7JP
Scotland
In a fast changing world, standing still is not an option. At a time when virtually all industries are under extreme pressures and changing quickly, businesses are finding that they have to innovate and move towards more productive activities. A dynamic local environment encourages everyone to improve performance through working with - and competing against - others.
This seems fair enough, if a little fuzzy. But when you combine this idea with some evidence from successful economies around the world, the mist clears a little more. Many of the world's top economies have these strong links - both competitive and collaborative - between businesses, customers, suppliers and research facilities. The strongest are centred around a relatively small number of industries, or groups of industries. These concentrations are called clusters.
In the SE Network, the clusters approach helps develop the potential of some of Scotland's key industries. They are piloting approaches in four areas: food, biotechnology, oil & gas and semiconductors. Cluster approaches will follow in other industries.
Food & Drink -- Diversity into Dynamism?
The central challenge for the food and drink sector is to bring the benefits of clustering to an industry that is, almost by definition, diverse, fragmented, and substantially composed of smallscale operations. Scale, location, structure, costs and market trends dictate that competing in global commodity markets is an unrealistic prospect for all but a very few Scottish companies. Success lies in differentiated, higher value, premium-priced products serving niche markets in the UK and beyond.
Scotland's food and drink industry brings some significant advantages to this vision. Many of its raw materials and finished products enjoy a merited international reputation. The quality of its environment is likewise widely admired. It has an agricultural research base of world class. And some of its products and players are powerful international ambassadors of quality.
Yet, there are no less significant shortcomings to be weighed against these assets. Competitiveness is poor, reflecting both unfavourable demand conditions and an inability of the company base to adapt to dynamic change. Fragmentation means a lack of the scale and confidence needed to market aggressively or innovate effectively. A heavy bias towards primary processing means vulnerability to the commodity cycle and the power of big buyers, like the supermarket chains. The dominance of private or family ownership means a lack of industry leaders and a tendency to introversion and low margins, and an aversion to collaboration.
There are world-class companies, but they are the exception not the rule. Unless the sector's weaknesses are actively addressed, there is a real risk of the Scottish food and drink cluster dwindling to become merely the raw material supplier to more competitive food clusters elsewhere, with a consequential loss to Scotland of ownership, value, and prosperity. Yet there are real market opportunities for the Scottish cluster if it can commit itself to a strategy founded on a culture of continuous innovation and value-add, appropriate scale, and building strong brands and linkages.
Global Trends
The world food market is currently valued at $3,000 billion. Almost two thirds ($1,900 billion) is spent by affluent customers, and this spend is projected to reach $3,650 billion by 2010.
This massive increase will be powered by an upsurge in demand for both lower-cost and higher value-added foods. Over the coming decade, the number of potential customers for low-cost foods will rise by a billion to 4.3 billion, while the numbers buying higher value-added food will more than double from 800 million to 1.7 billion. UK market growth over the period will be marginal, but fundamental changes in consumer demand, distribution and the competitive environment will present new and significant opportunities.
- Consumers will become more affluent and demanding, and will have diminished time and skills for preparing food. They will increasingly seek meal solutions rather than ingredients. The consequential trend, in the developed world, will be towards customised products, one-to-one marketing, stronger brands and therefore the creation of many new niche opportunities.
- Distribution channels will change radically. By 2010, 60 per cent of affluent customers will be in the developing world, where distribution systems are currently unsophisticated. Meanwhile, in the UK, food consumed outwith the home will account for half of food spending, against less than a third at present, placing an increasing importance on the foodservice (catering) sector, which is becoming more centralised in major commercial organisations. Retail chains will, however, continue to play a significant, albeit a changing, role in the marketplace and electronic food shopping will become a major force throughout the developed world.
- These forces will have significant implications for competition. Multiple retailers and the big foodservice companies will require their suppliers to compete on scale, service standards and quality, at national and sometimes international levels. Niche retail and foodservice customers will be no less demanding, expecting their suppliers to compete on innovation, flexibility, technology and service.
The rewards in this highly competitive environment will fall to companies which are constantly alert to new opportunitites and which have the capability - people, plant,
processes and technical know-how - to respond rapidly. Exploiting opportunities in the developing world will generally require large-scale operations, coupled with either a production base or a strong partnership in the target market, and will be largely driven by volume and price. Scotland is not well-placed in this regard.
But in the developed world there will be opportunities for small-to-medium sized companies, provided they can offer the right price, quality, technology and service specifications. This will require a blend of customer responsiveness, flexibility, continual innovation and speed-to-market. If the Scottish food cluster can address its competitive weaknesses, it has the potential to compete effectively in developed markets with sophisticated infrastructures -- like the EU, US and Japan -- where the emphasis is on customised, added-value, niche products.
Food & Drink in Scotland
The sector plays a significant part in the Scottish economy, employing 52,000 people (17 per cent of manufacturing employment) in more than 1,800 businesses with combined sales of £7.3 billion and export sales of £2.7 billion, representing15 per cent of manufactured exports.
But this aggregate position conceals a highly variable picture. Both the employment total and the company base are in marginal decline. All but 16 per cent of the export sales are attributable to whisky. Structurally, the industry is conspicuously fragmented, with a high proportion of small-scale processing companies, three-quarters of which employ fewer than 50 people and only 5 per cent of which employ more than 250.
Recent years have brought about some shift towards more value-added products, like the move among fish companies from basic processing towards speciality breaded products and recipe dishes, and there are several strong companies in the emerging ready meals market. Quality assurance standards in the primary sector, driven largely by hygiene and safety legislation, are now among the toughest in Europe, and are beginning to pay marketing dividends through programmes like the Scottish Pig Industry Initiative and Scottish Quality Trout.
Yet significant parts of the industry remain very traditional, particularly the primary production base, which lacks market and commercial focus. The red meat sector suffers from over-capacity in slaughtering and has been slow to react to market forces with better branding and product development, retaining instead a commodity focus. Without radical change, much of it is likely to come under Irish ownership, merely supplying raw materials to other food clusters.
Linkages, equally, are weak at key points in the value chain, notably between the science, skills and company bases. Overall, the industry lacks the scale, structure, profitability and confidence to focus on the activities like research & development (R&D), innovation, new product development, branding and effective marketing which it needs to embrace to achieve higher added value.
A Cluster Strategy for Scottish Food & Drink
International research identifies a number of interdependent elements in a competitive food cluster: a central core of highly innovative, efficient and flexible manufacturing companies; high exposure to sophisticated demand; advantageous cost profiles in fields like materials, labour and utilities, or strong differentiation strategies where such costs remain high; a commercially-focused science and skills base; a highly integrated and co-operative value chain; and, preferably, the presence of supporting industries like equipment, packaging and distribution. The Scottish food and drink cluster has some way to go to achieve this sort of profile.
Two clear goals emerge: the ability to exploit sophisticated demand in the UK, and a comparable ability in overseas markets. If these can be achieved, the realistic potential exists to generate powerful business opportunities for the sector and to bring significant economic benefit to Scotland. To get to that position will in turn require three connected aptitudes on the part of the food industry: the ability to work together; the ability to exploit technology; and the ability to develop the right skills.
Only with all these objectives functioning interdependently, can the cluster attain its full potential. For example, stronger connections with sophisticated buyers, both home and overseas, will afford better understanding of the marketplace, of shifting demand patterns, and therefore of the opportunities which arise. Equally, stronger linkages throughout the value chain will enhance and transfer key skills like category management, smart packaging and shelf-life extension, thus making the sector fleeter of foot in implementing innovation.
In all these areas, the Scottish sector has both strengths and weaknesses, and each objective requires specific action. For example, in the UK marketplace, Scotland benefits from exposure to highly demanding customers like the big retail chains, and is securing a growing share of their custom. Safeway's purchases from Scotland are projected to reach £600m in 1998-99, up 50 per cent on 1996-97. But big retailers are increasingly looking to rationalise their supplier base through strategies like category management, which allow them to source a wide product range on a single account, and Scotland's fragmented manufacturing capacity is ill-suited to that challenge. The lack of a major Scottish-based retailer aggravates the somewhat unsophisticated nature of local demand, encouraging a bias towards primary commodities and away from high-value, marketing-intense products. Emerging opportunities like foodservice and electronic shopping are under-exploited in Scotland.
To meet these challenges, Scottish food needs to upgrade its marketing and branding capabilities to suit more demanding market segments, and do more to exploit the quality of its primary products. It needs to develop better, and better-disseminated, understanding of market change; and to exploit strategic alliances and high-tech systems to improve distribution and communications.
Similarly, Scotland has a strong and positive image in key overseas markets through the success of exports like whisky, premium seafood, and a growing range of niche
gourmet products. A good supply of raw materials and an international reputation for pure, high quality provender are valuable assets. But the exports base needs to be
broadened, and the relatively narrow range of export products at present means the lack of an "export mindset" across much of the sector. This should be addressed through a range of initiatives -joint ventures, alliances, and licensing agreements -and through a general strengthening of partnerships in key markets. Better information needs to be shared on international opportunities and market dynamics.
Some parts of the sector already work together through local networks, informal partnerships and joint branding ventures. Trade associations do valuable work, but there are -at more than150 -too many, and they tend to overlap or compete unhelpfully. The predominance of family ownership likewise nurtures rivalries and discourages collaboration. Above all, linkages are weak at key points of the value chain, notably the lack of market focus in the primary sector, and structural change is unavoidable. Trade associations and industry bodies need to be rationalised and refocused on international best practice, linkages within the cluster need to be made stronger and more coherent, and knowledge diffusion greatly enhanced.
Scottish agricultural science is world-class in many areas, but technology transfer into the food industries is poor. Much Scottish scientific expertise is better exploited by food producers elsewhere, and Scotland's fragmented company base fails to generate the R&D needed to achieve the innovation retailers increasingly expect in techniques like processing, packaging and preservation. Once more, redressing this position requires better linkages throughout the cluster, better information dissemination about technology, and the fostering of networks to promote technical innovation. Funding support mechanisms for R&D are part of the answer, but the cluster also needs to refocus existing provision better on common priorities. Targeting strategic inward investment in food R&D may also yield benefits.
The skills base is another mixed picture. Labour costs are low in UK comparative terms, and educational attainment, up to graduate level, high. There are impressive examples of good practice in using Scottish Vocational Qualifications and other skills enhancement programmes to build business performance. Yet the lack of a critical mass of visionary managers makes investment generally across the sector in skills development low. Collaborative initiatives are needed to align skills more closely to strategic priorities (management, marketing, quality, innovation), and to improve companies' understanding of how skills upgrading can enhance business performance.
Next Steps
The Scottish food cluster has the potential to become globally competitive. It can both strengthen its own performance and contribute towards the wider development of a more knowledge-based economy in Scotland. What is needed is consensus and commitment among all the key participants in the cluster to address systematically the competitive weaknesses identified above.
A strategy development team, drawn from both the public and private sectors, is now working with the industry and across the Scottish Enterprise network to build agreement on strategic options, a cluster strategy, and a supportive action plan for implementation by the network. Both the strategy and the plan are scheduled to be drafted by Spring.
For further information, please contact:
Jonathan Tait
Food Cluster Team
Scottish Enterprise
120 Bothwell Street
GLASGOW
G2 7JP
Scotland
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