Scottish food and drink manufacturers gearing-up for year of expansion

Scotland’s £11bn a year turnover food and drink sector is seeking to expand in the near future due to rising business confidence, product innovation and investment in automation, according to a new report published today by accountancy and business advisory firm BDO.

The food and drink manufacturing sector in Scotland is worth £10,922m and employs 45,620 people.

This comprises a turnover of £5,304m and 33,030 employees in the manufacture of food products and £5,618m and 12,590 employees engaged in the manufacture of beverages.

BDO’s latest Food & Drink Report 2016, in association with the Institution of Mechanical Engineers, found that 79 per cent of those surveyed are positive about the future of the industry, with 86 per cent of firms expecting revenue growth of up to 20 per cent in the next year.

Although pricing pressures, the volatility of raw materials costs and skills shortages are major challenges for manufacturers, product innovation, improved management and increased investment is counteracting these difficulties. Indeed with 70 per cent of surveyed firms arranging fixed price agreements with energy suppliers the sector has become increasingly efficient and smart in dealing with market pressures.

Nearly two thirds of firms surveyed said that new product development would be a major source of growth, with 60 per cent and 43 per cent saying access to new UK markets and export markets respectively will be increasingly important part of their growth strategies. Organic growth is the priority as, for a sector that is usually a vibrant source of mergers and acquisitions, only 15 per cent expect growth to come from transactional activity.

Martin Gill, head of BDO in Scotland, said: “Pressures on pricing and margins remain hugely challenging, but the overall sentiment of the sector is a positive one. It’s been a tough few years for food and drink companies, but it appears they are strongly focusing on future growth.

“It is well knows that the manufacturing sector plays a critical role in rebalancing the Scottish economy and driving long-term sustainable growth so it is essential that the sector receives all of the Scottish and UK government support possible.”

“The proposed tax on sugar will have a huge impact on food and drink manufacturers and could dent the current performance of the food and drink sector. The Chancellor needs to be cautious in considering any additional taxation on sugar and ensure that he supports the food and drink sector in his Budget next month. One action which would aid the sector would be to increase the annual investment allowance to £5m for five years in support of automation investment and introduce a temporary reduction in Employers’ National insurance for manufacturers to recruit the talent they need.”

Mr Gill concluded: “The food and drink sector is hugely important for the Scottish economy and it is vital that it is encouraged to invest and expand in the coming years. Scotland is rightly proud of its food and drink products and, as a sector, it will be with us for decades to come so we need to ensure that it is nurtured and developed in the future.”

Automation has become an important issue on the boardroom agenda, with more than half of the food and drink firms questioned by BDO and the Institution saying they are increasing investment in this area.

According to the report, some companies have been slow to adopt automation on production lines, due to the downtime and disruption it could cause in a busy factory. However, the realities of a modern business needing to compete on quality and cost, combined with the impact of the introduction of the National Living Wage on many manufacturers, is prompting more automation investment for the year ahead.

Operating margins continue to be squeezed, according to 82 per cent of companies, and pricing pressures remain the top challenge for food manufacturers and processors. Interestingly, attracting and retaining skilled labour was named the second biggest challenge, on a par with the volatility of raw materials. Nearly three quarters (70 per cent) of those surveyed said they were experiencing difficulties in recruiting the skilled people they require, which has been historically blamed in part by engineers’ desire to work in the more attractive aerospace and automotive sectors.

Dr Tim Fox, Chair of the Institution of Mechanical Engineers’ Food & Drink Engineering Committee said: “Food and drink manufacturing plays a hugely important role in the UK and it is encouraging that the manufacturers surveyed as part of this report are so optimistic about the sector’s future.

“However, this report highlights the critical skills shortage the UK is facing. About 70% of the food and drink manufacturers surveyed said they were struggling to recruit people with the right skills. We need to encourage more people to pursue engineering careers and to champion the diverse and exciting career prospects for engineers and technicians working in food and drink manufacturing.”