Select Committee on Scottish Affairs Minutes of Evidence




  Some initial comments, observations and assumptions are offered here which provide the context for this document.

  1.1  Scottish Enterprise's (SE) principal interaction with the Scottish Food and Drink Industry is through the Scottish Enterprise Food and Drink team in Bothwell Street, and through the wider team dispersed throughout the SE Network.

  1.2  Within the broad cluster of food and drink, SE's principal focus does not rest with the whisky industry (which is seen as a sophisticated global industry for which public sector intervention is largely inappropriate). The vital significance of the drink's industry to Scotland is however fully acknowledged. It is assumed however that the Committee will have received very full statistics on this from other bodies and it was felt inappropriate to replicate this here.

  1.3  The Scottish Enterprise Network's approach to the broader drinks industry (noting the remark on whisky above) is not markedly different from its approach to the food industry. The same consumer and customer behaviours are driving these businesses. As a consequence, SE's approach has been to develop with the industry a strategy for the food and drink cluster in its entirety. Within that strategy, SE, in conjunction with other public and private sector partners, is driving forward group and one to one activity.


2.1  Introduction

  2.1.1  Through a rigorous programme of research, consultation, and analysis, a cluster strategy for the Scottish Food and Drink Industry was developed and launched by the industry and the Minister for Rural Development, Ross Finnie, in June 1999.

  2.1.2  This 18 month strategy development process was co-ordinated and facilitated by Scottish Enterprise—the strategy and its subsequent implementation is however very much led by industry.

2.2  A Vision of Scottish Food and Drink, 2010

  The strategy determined what kind of industry we would want to have in 10 years time.

    "In 2010 Food and Drink from Scotland is now thriving internationally. The country has built an unrivalled reputation in food, drinks and in related products and services. They are perceived as natural, high quality and completely in tune with today's world and consumer tastes.

    By 2010 Scotland has succeeded. Perceptions have altered, and the changes go deep. Organisations linked to food have changed in a very real sense and operate in an environment of trust and mutual respect.

    Scottish business recognised the changes happening in the industry; markets becoming more international; food consumers becoming more sophisticated. They were more intimate with consumers' changing lifestyles, and gained advantage from strong linkages between farmers, fishermen, processors and customers—from the table, counter, car and on the go.

    Once these shifts were identified; the trick was to make sure the Scottish industry made the most of the opportunities. It used its international connections to sell more abroad and its inherent innovativeness to offer new products and services to a fast changing market. It exploited the best technologies and made the most of its image to boost perceptions of quality and service.

    Some companies could do this alone, but the impact was so much greater when the whole industry got together and pulled in one direction. A culture of real innovation flourished enabled by connections between producers, scientists and production companies. Businesses invested in their people, their processes and the marketing of their products to the customers who really mattered. These shifts in attitude attracted ambitious young people into a vibrant industry".

2.3  The Targets

  Scotland's food and drink industry stands today on the brink of momentous change. With focus and by joining together to achieve common goals, Scotland can implement such a vision. The economic aspiration is to grow current sales of food and soft drinks from £4.2 billion to £7.4 billion and increase value-add from £1 billion to £2.5 billion. This equates to a compound annual growth rate of 6 per cent of sales and 9 per cent in value-add. Exports will treble to £1.5 billion and food manufacturing employment should increase from 48,000 to 54,000. Increases assume a food inflation value of 2 per cent. Improvements will be driven by increased sales volumes, unit price increases and supported by labour productivity gains.

2.4  How is this being achieved?

2.4.1  We need to work differently

  In a global market, in which size increasingly matters, it is essential for individual companies to co-operate and share ideas if they are to achieve sufficient scale to compete effectively. By combining to co-operate on specific issues, they can develop muscle way beyond what any one company can hope to achieve alone and in the long run better preserve their independence. Ironically, it is by surrendering some small part of their independence that companies can best preserve it.

  The purpose of a cluster strategy is to enable businesses in related industries to work together to concentrate on reducing costs and build competitive advantage by focusing on common issues. It is an approach which can yield cost savings for every company involved eg in the area of logistics and supply chain management, or IT, shared resources can drive down unit costs for all the resource users.

So what is a cluster?

  At its simplest, a cluster is a group of organisations in related industries that are linked together because they buy and sell from each other, and/or because they use the same infrastructure, customers or skills base. A competitive cluster is underpinned by high levels of innovation and characterised by co-operation and collaboration. The Scottish cluster embraces the drinks, agriculture, fishing, aquaculture, science and education base, in addition to the food processing industry and other supporting organisations.

2.4.2  We need to prioritise

  Our market analysis highlighted that Scotland's competitive position lay primarily in offering differentiated, high-value primary and secondary products, to be sold at premium prices in key markets within the UK and northern Europe. However, niche positions (such as smoked salmon) will be developed further afield, where the economics of distribution are viable.

  Two specific priorities were developed to provide the market focus for actions, Excellence in Raw Materials and Developing Value-Added Meal Components.

    (i)  Excellence in Raw Materials

  We have some real strengths here already. This priority seeks to build on Scotland's competitive position in primary sectors through:

    —  Increasing international market share, price premiums, and adding value to primary materials (especially meat and fish), by emphasising Scottish branding, improved packaging/presentation and advanced supply chain and category management capabilities.

    —  Creating a significant position in healthy/natural/organic animal protein and related segments, through differentiation around Scottish branding, sustainable farming, natural preservation techniques and a stringent regulatory regime. This is a very high growth market, with strong underlying competitive potential.

    (ii)  Developing Value-Added Meal Components

  To enhance Scotland's competitive position in value-added meal components through:

    —  better use of food technology, creative recipe expertise, category management capabilities, and an understanding and exploitation of new opportunities in the food service sector.

    The principal targets will be premium growth segments of the food service sector and value-added meal solution within the retail sector.

2.4.3  We need to exploit these opportunities

  Five key areas for action were identified, initiatives and activity developed under each, and significant progress made already. Briefly, these are:

    (i)  To develop and grow leading suppliers and processors of food and drink

  We will create more innovative and far-sighted organisations capable of competing in tomorrow's markets, by creating an environment and culture where collaboration can prosper.

  An industry leadership group has been established, comprising key players from the industry, wider cluster and public sector, to drive forward the implementation of the strategy. Other key activity areas here include mentoring, graduate placement, inward investment, learning journeys and infrastructural alignment with key partners and grant schemes.

    (ii)  To build our reputation, as suppliers to the premium, sophisticated retail and food service markets of the UK and Europe.

  Key activity areas here include:

    —  Scottish Food and Drink International—an integrated programme of activity to assist companies to increase exports and other forms of international business development.

    —  Consumer and Market Intelligence Centre—which will provide market intelligence on key premium retail and food service markets in the UK and Europe. The first stage of this, Food Facts, is now operating across Scotland.

    —  Organics—to maximise the opportunity presented by the rapidly growing organics market in the UK.

    —  Market Advantage—an integrated market development programme developing skills and capability in key areas (eg key account management, advertising and promotion, category management, best practice visits, etc).

    —  Meet the Buyer—where Scottish Enterprise acts as an honest broker in bringing together Scottish suppliers and key customers (eg multiple retailers, food service companies).

    (iii)  To grow advantage through innovation, including our exploitation and application of technology.

  We must develop innovative processes, services and products to gain competitive advantage. Technology will be an important driver and enabler. There is a specific focus on the application of biotechnology, e-commerce and packaging technology, supporting the aims of value-add, supplying to the premium market segments and extending shelf-life to exploit markets further afield.

  Key activities include:

    —  Food Innovation Network—creation of facilities and expertise to support innovation and technology transfer into the food and drink industry.

    —  Functional Food—identification of, and assistance with, market opportunities for Scottish companies within this high growth area.

    —  Proof of Concept Fund—research/commercialisation fund which can drive focussed activity in this area.

    (iv)  To build an efficient and competitive supply chain

  This will be essential in meeting increasingly demanding customer product, service and delivery requirements. Key activities here include:

    —  Loadshare—the reduction of costs in transport/distribution element of chain by encouraging co-operation and load consolidating among companies.

    —  Seafood Scotland—industry led organisation which seeks to improve the quality and market position of Scottish seafood.

    —  Quality Meat Scotland—industry led organisation which seeks to improve the quality and market position of Scottish red meat.

    —  Smart Farms—assist farmer to become more market focussed and strengthen their links with the manufacturing base.

    —  Sector Strategy Development—initially, the development of strategic action plans for the dairy and sheep sectors.

    (v)  To develop the capabilities of our people, working together, active in local and global networks.

  We need to change attitudes, and build world-class standards in our skills and competencies. The industry must work together to overcome fragmentation and destructive rivalry and we must make the industry attractive for tomorrow's graduates and school leavers as well as for aspiring leaders.

  Key activities include:

    —  Food Skills group—led by industry and learning organisations, it provides strategic direction for the skills elements of the cluster strategy.

    —  Scottish Food Skills—one door approach for advice, information and assistance with SVQs.

    —  Food Learning Network—provide rapid access to learning information and opportunities through the collaboration of the learning industry.

    —  Create Interest—the promotion of the industry to potential recruits and key influencers.

    —  Develop Leaders—to address current low demand for leadership development.

2.4.4  Moving Forward—Making it Work

  Significant progress and key achievements have been made already against the action areas outlined above. The industry at its broadest needs to radically change its cultures, values and behaviours. For the cluster to continue to improve its competitiveness, the most important need is the creation of an atmosphere where collaboration and competition can co-exist and which encourages innovation.

  This shift is more vital than any individual action—and highlights the continuing need for the strategy to be led and owned by the industry itself.


  Through the strategy development process, the current Scottish competitive position was analysed, best practice from overseas was examined and the key market and consumer drives were researched. Headlines from these key areas are as follows:

3.1  Where is Scotland now

  The size and structure of Scotland's food and drink industry

  The food and drink industry is already a major contributor to the Scottish economy with sales of £7.3 billion (including whisky sales of £2.6 billion) and employing 17 per cent of Scotland's manufacturing employees.

  Whisky accounts for 35 per cent of the sales, by value, of Scotland's food and drink industry and has made the major contribution in building a positive image of Scottish food and drink in overseas markets. A long-term aim is to seek closer involvement of the well-developed and sophisticated whisky industry with the wider food and drink cluster.

3.1.2  Scotland's Competitive Position

  The Scottish "Brand Image"

  Scotland enjoys a world-wide reputation disproportionate to its size and population. This is due to its status as an international tourist destination, its cultural exports and the significance of whisky as a globally consumed product. This translates into powerful, relevant imagery for Scottish foods, emphasising naturalness, purity and tradition. In conjunction with Scotland the Brand, we have begun to tap this potential.

  World Class Food Science Base

  Scotland has a world-class food science base. The network is extensive and world leading in certain agri-food related disciplines, where Scotland has a high share of world publishing. However, most of the output is in core (rather than near market) science and take-up by the domestic food industry is low—much of Scotland's research expertise migrates to other parts of the UK and the rest of the world.

  Proximity to the UK Multiple Retailing Sector

  Approximately 65 per cent of Scottish output is supplied to the UK multiple grocery sector. This is one of the most demanding markets in the world in terms of category management, innovation and supply chain efficiency. However, although Scotland has strong home demand, we are not strong in the supply of higher value-added categories.

  Scotland has a low export dependency, especially when you take whisky out of the picture. Despite a smaller land area, and similar overall share of world agricultural exports, Denmark and New Zealand have shown far superior export activity. This performance is mostly due to market innovation and branding capability.

  The Scottish food industry is still very fragmented, lacks scale and is predominantly privately owned, which can sometimes lead to rivalry. It is still firmly rooted in primary processing and its potential for value-add lies largely untapped. The most important need is to create an atmosphere where collaboration and competition can co-exist in order to drive innovation.

3.2  What did we learn from elsewhere?

3.2.1  Why the cluster approach offers a way forward

  There are examples of successful, competitive food and drink clusters to be found in other countries. For example, the US has a world-leading poultry cluster, Denmark's pork cluster is among the most competitive in the world and New Zealand's economic existence is dependent on a thriving food industry cluster, covering many sectors from dairy and meat to fruit and seafood. Lessons can be drawn for Scotland from these and other internationally successful food clusters.

3.2.2  Lessons from America

  The US poultry cluster has successfully exploited the sophisticated demand within its domestic market, which has spurred industry innovation. The US industry is characterised by significant co-operation as well as competition between the players.

  The whole industry benefits from high levels of co-operation and rapid diffusion of innovation and best practice. Co-operation is limited to basic processing and slaughtering, however, with further processing ring-fenced as a free and highly competitive arena.

  Companies in the cluster develop good performance and efficiencies at the processing level, enabling investment and concentration on differentiation and value-add.

  As a result, intimate and enduring networks emerge and real trust and co-operation result.

3.2.3  Lessons from New Zealand

  The national culture of New Zealand reflects an export mindset with open collaboration and widespread knowledge sharing:

    —  acknowledgement of the importance of exports and the overwhelming need to be globally competitive, despite discrimination against New Zealand in many markets via tariffs, drives a culture thriving on adversity—"us against the world";

    —  an open, information-sharing culture promotes rapid diffusion and cross-fertilisation of knowledge; and

    —  farmers understand market needs and are able to respond quickly to emerging trends.

3.2.4  Lessons from Denmark

  Denmark has similarities to Scotland—it is a small country with a focus on agriculture. Denmark, however, has been highly effective in building a successful export industry, dominating world pork exports with a 20 per cent share, way ahead of its 3 per cent share in commodity exports and even managing to break into the Japanese market.

  The industry has established powerful networks and institutions for knowledge sharing, skills building and technology transfer.

  It also has a highly focused and well developed research infrastructure.

3.3  What will the marketplace look like in 2010?

3.3.1  The changing global market and the business opportunities

  Scotland's food and drink industry will have to compete in a dynamic and fast changing global marketplace. The globalisation of the world's food supply means that around 75 per cent of the global food and drink industry is controlled by just 200 companies—none of them Scottish owned.

  The global market is worth approximately $3 trillion world-wide and some $800 billion in Europe. Though the developed world market is quite mature, changing trends will create significant new opportunities for food and drink products and services. These trends are:


    —  are becoming more affluent, with a further 850 million consumers for higher value-added foods by 2010;

    —  food is seen for its functionality eg health;

    —  the move to less formality, snacking and grazing is advancing;

    —  the time spent in shopping, preparation and cooking is decreasing; and

    —  food is seen not as an ingredient, but as a meal solution.

Food Sales:

    —  food service is of growing importance, accounting for 50 per cent of the consumer food dollar in the US. It is becoming more centralised, less fragmented and concentrated into major, commercial organisations;

    —  the retail multiples are of growing importance in the developing world too, even emerging in parts of Latin America and Asia; and

    —  home shopping is the new form of distribution emerging particularly in the US but now also in Europe.


    —  supply chains are becoming increasingly sophisticated with techniques like Efficient Consumer Response and Category Management;

    —  there are more multinational companies, as a result of consolidation;

    —  there is a constant search for lower costs, more innovation and flexible processes;

    —  we see faster change than ever before, including shorter product lifecycles; and

    —  scale is very important, but there will be an increasing number of significant niche opportunities for small players from retailers to manufacturers.


  4.1  The strategy is challenging and ambitious—the need to meet these challenges and achieve the vision is however essential, if Scotland is to sustain and grow its competitiveness in an increasingly dynamic global marketplace.

  4.2  The drinks industry, most notably whisky, is a vital component of Scotland's food and drink industry.

  4.3  The strategy is relevant to all parts of the food and drink industry, given that it is the same consumer and market drivers which shape demand for their products.

  4.3.1  The industry leadership group has initiated conversations with the Scotch Whisky Association, to explore areas of mutual interest, and in particular the whisky industry's key strengths in global consumer marketing and logistics.

  4.3.2  Whilst there is, as yet, no defined sub-strategy for the beer and soft drinks industry, both they and smaller independent whisky companies can and do benefit from the activity which flows from the strategy, in one of two ways:

    (i)  through joint activity organised nationally (eg Meet the Buyer, Scottish Exhibition Programme, Market Advantage, Scottish Food Skills); and

    (ii)  through one to one business development activity with their Local Enterprise Company.

Scottish Enterprise

January 2001

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