Sunshine breaks through Brexit clouds as industry gears up for growth

1) Good to grow​

More than one in two firms (52%) said the build-up to June’s referendum vote had had a negative impact on their business, but now the decision has been made it is time to look forward.

Food and drink companies in England and Wales have actually raised their growth forecasts and plan to create more than 75,000 new jobs over the next five years, according to Lloyd’s survey of 100 food and drink manufacturers and producers.

100 food and drink manufacturers and producers in England and Wales were interviewed from companies ranging in size from less than £25m, £25-£750m and more than £750m annual turnover. Business owners, managers, senior managers, directors and department heads took part in the survey.

The average growth forecast is 19% compared to current annual turnover and companies are set to commit 43% of their current turnover to investing in growth. They’re also planning to plough 29% of annual turnover into R&D between now and 2020.

Almost half the firms polled (44%) said investment in their business had increased; 18% said they would ramp up activity; and more than a third (37%) said their job-creation plans had grown since the EU Referendum result.

2) Suck it and see​

“Our research shows a relatively confident and upbeat sector,”​ said Andrew Connors, head of client propositions at Lloyds Bank Commercial Banking.

Indeed, it’s interesting to see how the clouds of negativity that gathered in the immediate aftermath of the vote on June 23, 2016, have begun to clear. Still, planning for growth and actually achieving it are two very different things – especially when the immediate forecast is unsettled.

The UK Prime Minister, Theresa May, has said “Brexit means Brexit”, but as yet no-one knows what that means. David Davis, the secretary of state in charge of negotiating the divorce appeared before parliament this week with no details of how he is expecting to embark on the negotiations. There’s no sign of Article 50 being triggered, either.

Hardly surprising, then, that Lloyds found an air of conservatism underlying the headline positivity amongst those it polled. “[​…​] firms appear more reticent to commit themselves to a particular growth strategy than they did last year,”​ the authors concluded.

3) New markets, not new products​

What we do know is that food and drink companies see more opportunities in new markets than in new product development (NPD).

In fact, the appetite for NPD continues to wane: two years ago, 77% were pursuing NPD; last year it was 55%; and this year it has dropped to 40%. Investment in existing products has also fallen back “considerably”,​ Lloyds noted.

Entering new markets in the UK remains the most popular route to growth between now and 2020 (43%), but that approach is also falling out of favour (56% listed it in last year’s survey).

Entering new markets overseas has rocketed up the strategy table from sixth to third (30%), but this very much remains an aspiration rather than an action. Indeed, the number of firms targeting Western Europe has retreated from 60% to 47% in the past 12 months.

The Brexit “bump in the road”​ does not appear to have impacted firms’ intentions to trade with partners overseas, though it has caused fewer of them to make practical moves to further this ambition, Lloyds noted.

“When we asked firms whether they were investing or planning ahead to engage new international customers in the next five years, the number had fallen back from 72% in 2015 to 55% in 2016.”​

4) The provenance paradox​

English and Welsh food brands tend to carry a decent reputation overseas, but far fewer brands see their national colours as an opportunity for their business than at this time last year.

In 2015, 88% said they were deriving benefit from the UK provenance of their products, whilst 73% felt the trend was an opportunity for their business. In 2016, these have fallen to 69% and 44% respectively. The number of firms who feel provenance is a challenge has also doubled (from 27% to 54%).

One theory is that cost-conscious consumers have pushed provenance to one side. “​Clearly this is still an area of opportunity for the sector but there is a rising challenge as to how to capitalise in any substantial way,”​ the report concluded.

5) What next?​

Many producers will be thinking through 
a number of issues linked to the EU, including any changes to EU financial support, the security of raw materials coming from the region and the supply of migrant labour. But there are other challenges keeping executives awake at night.

The proposed sugar tax on soft drinks is unsurprisingly among them – and yet not to the extent one might expect. The industry appears split on whether the levy is bad for business (38%) or presents an opportunity (35%). That the trend for healthy eating isn’t seen as the major opportunity it was 12 months ago – 67% versus 74% respectively – will also raise eyebrows.

Those who think the trend for healthy products will have a negative impact on their business has also more than doubled (from 8% to 20%). A rise in red tape seemed to be a key concern. Let’s not forget, however, that Lloyds’ survey carried out prior to the publication of the UK’s childhood obesity strategy – which was heavily criticised​​ for the lack of new regulation in areas such as advertising and reformulation.