UK: An Appetite For Change - Food and Beverage 2012

It has never been tougher to build a successful food and beverage business in the UK than it is today. Food and beverage companies face an array of increasingly complex issues and questions. The manner in which they choose to respond to these challenges will shape the future of the industry for many years to come.

Over the past twelve months the Food and Beverage team at Deloitte has carried out interviews with board level executives at more than seventy leading manufacturers, retailers and food service companies. We have spoken to relevant government bodies and undertaken a survey of more than 1000 consumers. This research has given us a unique insight into the current challenges facing the industry.

This report is just a snapshot of what we’ve discovered and has thrown up some interesting findings. We have focused on the six most prevalent issues that you have told us are affecting your businesses:

• Health, nutrition and corporate accountability

• Tougher regulation

• Greenhouse gas emissions and the carbon footprint

• Food miles versus sustainable development

• Manufacturing strategies: outsourcing and private label

• The role of private equity

Many people have contributed to this report, and I would like to thank those who have shared so many important insights with us. We hope you find this report useful and look forward to your feedback and the opportunity to discuss the future with you.

Consumers are ever more demanding – expecting and getting more and more for less and less. Competition is getting tougher, downward pressure on process and margin continues, distribution and other input costs are rising. Most recently, growing preoccupation with climate change and the wider corporate responsibility agenda are colouring industry and consumer priorities. Such topics as the need to manage food miles or reduce carbon footprint would rarely have made it onto a boardroom agenda 2 or 3 years ago. Today the need to go green and be seen to be going green are vital elements of business strategy.

Society and its eating habits are also changing. A decade or so ago coffee shops of the Starbucks or Costa variety were still a novelty in UK high streets, sushi was available in Japanese restaurants not on mainstream supermarket shelves as a ready-made lunch-time snack and local produce was confined to a handful of embryonic farmer’s markets and village stores. Today it is different. Health, nutrition, provenance, localness and authenticity are on the agenda. The "slow food" movement is gaining ground and, as our consumer survey reveals, families are once more making "eating together" a priority. We may all love the conveniences of ready-meals but a growing number of households are reverting to "cooking from scratch" to create a more healthy alternative. Keeping pace with these fastmoving consumer trends offers great opportunities but is not always easy: get it wrong and fingers can be badly burnt.

Understanding and responding to ever tougher and more complex regulation is a current priority. While today traceability, removal of hazardous substances, animal welfare and the vexed question of nutritional labelling and health warnings dominate the regulatory agenda. Tomorrow it could additionally be carbon emissions and carbon labelling businesses are responding to. Government and consumer pressures to reduce emissions and introduce some sort of labelling that can enable consumers to make informed choices are increasing. While calculating the carbon footprint of products is not yet well developed as a science, the pressure to limit emissions and burn less fossil fuel will only increase. Whether this will involve adopting new forms of heat recycling, lowering supermarket lighting levels or an end to free plastic carrier bags. No one can be sure, but the one certainty is that we can expect the green agenda to increasingly impact operations as we approach 2012.

While the market is changing, so too are food and beverage companies. Private equity investment is, in particular, focusing attention on management efficiency. With any company delivering materially less value than it is capable of, is likely to find itself a candidate for acquisition. The growing trend towards outsourced manufacturing is prompting many to rethink their core raison d’être: are they brand owners or food processors or both? In retailing the big continue to get bigger – concentrating more and more power in the hands of a few dominant players with the power to delist or demand additional allowances from their suppliers when times get tough.

As we look forward five years to 2012 what new challenges is the industry likely to face? Certainly these current issues will not go away: the oil price is unlikely to fall; pressures to be environmentally friendly will grow; health and nutrition will remain a priority; low cost economies offering cheaper production opportunities will not disappear; and consumers will not lose their taste for novelty, variety and great value. But there will be new challenges as well. The emphasis on health highlighted in our study could pave the way for a new generation of "nutraceuticals" and wellbeing products. Expect the emergence of new food retailing concepts that attract more affluent consumers away from the homogeneity of the majority of our hypermarkets and supermarkets. Growing use of alternative channels such as the Internet could lead to a growth in direct to consumer sales by food suppliers. Perhaps, too, we shall see greater regulation to control salt, sugar and fat content by governments obsessed with a need to address the long-term economic consequences of current public health issues.

It is clear that the next 5 years will present an increasingly complex set of issues and challenges for the food and beverage industry to resolve. The ability of individual businesses to identify relevant challenges and opportunities, develop appropriate responses and execute effectively will be critical to their short term and long term success. However, one thing is clear, by 2012 the debate about the responsibility of the industry to promote good nutrition and a healthy lifestyle will be over. Doing the right thing, and being seen to do the right thing will be considered core to brand relevance, and ultimately business success across the industry.

Changing consumers

Today’s consumers and shoppers are sophisticated and complex. They are constantly changing, becoming more diverse and sometimes demonstrate seemingly contradictory behaviours. The days when retailer and manufacturer marketeers could neatly assign individuals to five or six fixed segments are long gone – 20 or 30 are far more typical now, while Tesco’s permutations for its Clubcard mailings regularly run into six figures. In reality fixed consumer segmentations are becoming less and less relevant with occasion and outlet being just as important determinants of purchasing behaviours. Today’s shoppers are "deal seekers", "cherry pickers" or "foodies" all at the same time. As our research highlights, they will be tempted by "three for two" and "buy one get one free" promotions while adding highly-priced premium products and luxury treats to their shopping baskets, often demonstrating substantial discrepancies between intentions and actual behaviour.

Although shopping behaviours may be less predictable, the demographics of the shoppers themselves are not. The population is ageing: by 2012, some 23% will be over 60 – an increase of 14.5% on 2004 figures. These older people will, however, be very different from the elderly of a couple of decades ago. They are the "baby-boomers"; the so-called "me generation" who have transformed society in the past 30 years. Many of tomorrow’s pensioners will be well-educated, active, health-conscious, demanding and, for the most part, rather more affluent than the elderly of previous generations.

We also know that the numbers of working parents will continue to increase adding to time pressures and growing demand for both nutritious ready-meals and good quality casual dining restaurants. On average, consumers in our survey spent 27% of their weekly food budget on eating out with restaurants and pubs topping the list of preferred meal destinations.

Ethnic diversity is also set to continue to grow as more immigrants from Eastern and Central Europe, Africa and Asia become long-term residents. These different groups are spread unevenly across the country and, as the recent influx of workers from the EU accession countries well demonstrates, they can significantly impact local demand for specific foods. While many ethnic communities are well established, large numbers of newcomers can change demand patterns very quickly with major implications for targeted ranges and local merchandise assortment strategies. The 333% year on year growth in the consumption of Polish beer in the UK is an interesting example.

For the majority of today’s shoppers, large format superstores with extensive product assortments are the norm. They expect to find whatever they want on the shelves and are increasingly intolerant of out-of-stocks. More than half of our shoppers (53%) put convenience to home as the most important factor when deciding where to shop. Lower prices (42%), value for money (42%), the availability of fresh fruit and vegetables and quality also ranked highly. Loyalty cards were cited by just 17%.

In contrast, when asked what both supermarkets and food producers can do to better meet customer requirements, our survey puts "more choice and variety" at the top of the list (16%).

In recent years, many UK consumer surveys looking at shopping patterns have tended to put price at the bottom of the list of influential factors which has been something of a contrast to consumer behaviours in other major European countries. This survey suggests that price is now becoming rather more important in the UK. This may well reflect the growing strains on consumer spending caused by the increase in fuel and housing costs with price-led competition between certain retailers also generally raising price-consciousness in the mind of the consumer.

More than two-thirds of our shoppers actively looked for "buy one get one free" deals and similar special offers – although they were also reluctant to give up treats: 29% of the deal seekers also reported buying more premium products now than they had done so in the past. Asked what supermarkets and food producers could do to meet their food shopping requirements, just over 15% put more choice and variety at the top of the list , however lower prices cited by 8% of shoppers came second. The UK shopper is still less pricesensitive overall than his or her continental European counterparts.

As important as novelty, variety treats and bargains in food and beverage selection, are of course health and wellbeing. More than half of shoppers surveyed are likely to read the food label before buying while the "five portions a day" message has clearly been noted. Some 80% of women shoppers regard eating more fruit and vegetables as important for a healthy diet. The food and beverage industry is already very aware of these trends with 77% of those interviewed in the leading manufacturers, retailers and food service companies identifying "health and wellbeing" as today’s key consumer trend.

This emphasis on nutrition and health is hardly surprising. Our children have one of the worst diets in the developed world including the highest levels of per-capita expenditure on confectionary and carbonated soft drinks. Government, healthcare professionals, consumer groups and the media now deliver a steady stream of healthy eating messages. There is tough new regulations especially focused on childhood diet, designed to limit promotion and access to unhealthy foods and thereby reduce obesity, prevent numerous ailments, improve social behaviour and encourage learning in schools.

Over the past few years, numerous studies have highlighted both a general lack of culinary skills and declining numbers of families eating regularly together. Our survey suggests that these tendencies may be changing. More than a quarter (27%) of those surveyed say that they are spending more time preparing meals than they did in the past, while 25% claimed to be spending less time. Inspiration for this cooking does not, despite the media hype, come from celebrity chefs and TV cookery programmes. "Upbringing and habit" was the most commonly cited inspiration for eating with recipe books in second place and family and friends in third. Perhaps of particular concern, the consumer research suggests that children in less privileged families with the worst diets are most likely to follow their parents dietary example. The good news is that almost twothirds say they regularly eat meals together with family or household members. The emphasis on healthy living is a clear driver for these changes. As various respondents said:

"I am spending more time preparing meals from scratch because I want to make sure my kids have a healthy home cooked meal."

"I’m doing my best to teach my family good eating habits and making them aware of eating the right foods."

"We have children now, so we try to cook together, talk to one another, and really make it a family experience."

While making healthy meals from scratch at home may be a priority for many, time pressures are still apparent. 66% of those surveyed purchased and ate a snack meal outside the home at least once a week with 22% eating on the move five or more times a week. The trend was most apparent in younger age groups with around a quarter of the 18-24s and 25-34s admitting to "eating many of my meals on the move".

Obviously, many of these people will be eating snack meals at lunchtime during the working day with those eating out most often citing coffee shops (35%), sandwich bars (26%) and fast food outlets (25%) as the most likely destinations after restaurants (80%) and pubs (50%). Only 17% of those eating out regularly mentioned a workplace canteen as a possible eating destination, perhaps reflecting a downturn in corporate ability to provide subsidised staff benefits. Interestingly, the smoking ban which comes into force this summer looks like encouraging rather than deterring consumers from eating out: a third of those surveyed suggested they would be more likely to eat out after the ban with only 9% suggesting they would do so less often. We are already seeing the impact of the smoking ban reflected in higher quality food and beverage offerings across the hospitality industry.

However, while diners across the UK have stated that they prefer a healthy, smoke-free atmosphere, health does not appear to be a priority when it comes to much eating out – that is when we revert to our self-indulgent treat mood. Healthy food options were mentioned by only 11% of consumers we surveyed with a restaurant’s reputation and variety topping the list . Price was in third place for those eating out frequently and significantly lower down the list for those eating out less than once a month.

Taken overall, the survey suggests rather more interest in quality, variety and good food than would perhaps have been suggested by the average shopping basket a few years ago. Media and Government messages about healthy eating are clearly having an impact. Price has not been seen as a significant issue affecting consumer buying decisions. However as costs of transport, housing and fuel continue to rise, price is clearly starting to become more significant. Maintaining low prices while delivering the good quality and variety consumers demand will clearly be a challenge in future.

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In summary – a taste of things to come

The food and beverage sector in the UK is substantial, with consumer expenditure both in and away from home totalling around £153billion1 in 2005. While there is little overall top-line growth in the sector, this masks substantial changes in mix – both in what is consumed and where it is consumed. It is these changes that present both the challenges and opportunities for food and beverage businesses.

A successful future depends on how individual businesses, and the industry as a whole, respond and prepare to do business in what will be a somewhat different environment going forward.

Today’s consumers are sophisticated. They understand value versus price and are used to filtering the multitude of marketing messages aimed in their direction selectively. Tomorrow’s consumers are going to be even harder to identify, convince, convert and retain, especially as media consumption habits fragment and new media became more important than old.

The impact of these changing consumer trends, behaviours and attitudes will continue to grow. This will further drive complexity and heighten the challenges facing the food and beverage business community.

Interestingly, the industry view of the future from our research is that the major future trends are, for the most part, all known quantities. The key challenge facing the industry would appear to be how best to deal with those future trends which afford the greatest opportunity for either success or failure. Anticipating the importance of these trends and the resulting impact on consumer demand and preferences will be key to future success. Whilst some of these trends will be generic in nature, there are many which will have very specific implications for individual sectors, channels and categories.

Whilst the industry may believe that the major future trends are all currently known this does beg the question as to what would be the impact of an unconsidered event or trend emerging. The chance of a significant geopolictical or economic discontinuity occurring sometime in the next 5 years is significant given current global conditions. The ability to respond to the unknown as well as the known issues is clearly going to be a differentiator for the would be winners.

In addition to understanding the evolving complexity of consumer decisions and motivations, successful food and beverage businesses are going to have to contend with a shift in the demographic make up of the UK population. As noted earlier, over the next five years the UK population will continue to age with the percentage of people over 60 reaching 23% by 2012, representing a growth of 14.5% for that age group when compared with 20042. With the post-war "baby boom" generation entering retirement, this segment of the population will include a significant portion of well educated, active, health conscious and affluent older citizens.

Business strategies that respond to the opportunities that these different groups represent will become more and more important to mainstream grocery retailers and food and beverage manufacturers. An additional factor for the longer term is that the next few decades will see a massive shift in consumer wealth: as the affluent baby boomers eventually die. They will pass on to the following generations far more wealth in the form of property and assets than any previous generation. Indeed, some commentators regard this transfer of assets as the greatest since the Black Death in the 14th century.

That transfer fuelled a spending boom among the inheriting survivors. While the predicted 21st century asset transfer may not be on quite the same scale, it is likely to lead to greater affluence at an earlier age in the next generation with a tendency to buy premium and luxury products as well as enhanced leisure experiences.

As we have seen, industry is already well aware of the emerging nutrition, health and wellbeing agenda. As this increases in importance, stimulated by a virtuous circle of education, consumer preferences, regulatory action and commercial response, then it will become a Board-level priority for all major food and beverage businesses. Appropriate governance arrangements such as the appointment of a CNO (Chief Nutritional Officer) or similar corporate watchdog will become the norm, dedicated to ensuring appropriate standards. Nutrition and food safety will increasingly be seen as two sides of the same coin, both of great strategic importance to the business.

Moving towards 2012 we also expect that the industry will, for reasons of brand, reputation and a preference for self-regulation, choose to become even more actively involved in issues such as:

• Consumer education through the school curriculum and through other channels.

• Food labelling, both the ongoing debate around the pros and cons of alternative approaches to front-of-pack nutritional labelling plus the emerging discussion of possible carbon footprint labelling.

• Industry bodies taking a more proactive approach in representing the industry and publicly reassuring and educating the consumer.

Consumers may still demand unhealthy treats in 2012, but the industry may need to both modify formulations and couch its promotion of such products in the clear context of a balanced overall diet.

As is increasingly obvious, going green is firmly on the agenda – for governments, businesses, lobby groups and consumers. Cutting greenhouse gas emissions, managing the carbon footprint and reducing food miles are all aspects of environmental concern that we expect will become increasingly important aspects of business and operational strategies across the industry in future.

Retailers and manufacturers alike will be expected to report progressive improvements in performance in these areas, as well as reduced waste, improved energy efficiency, increased recycling and more environmentally friendly approaches to national and local distribution, the wider global supply chain and manufacturing processes. We will see new consumer packaging approaches including an increase in re-usable transit containers and the end of the plastic carrier bag as we know it. All of these issues will also present significant opportunities to differentiate.

Attitudes to water use will also have changed significantly by 2012 with clean, fresh water increasingly seen as a precious resource that will become more and more expensive. Manufacturing strategies will be increasingly influenced by the availability of high quality, cost effective water sources.

We can expect a greater focus on animal welfare standards and the provenance of meat, dairy and other agricultural products. Tomorrow's affluent consumer will be willing to pay a premium for high quality, naturally produced foods. As a result, however, we can expect to see much tougher policing of provenance-related claims such as "organic". Difficulties such as avian flu, combined with concern about food miles, are likely to give a substantial boost to food produced close to home.

By 2012, we also expect that sensitivity to the social impact of business activities will have reached new levels. Major retailers and manufacturers will place an even higher priority on understanding how their stores and factories integrate into the local economy and community and must be able to demonstrate the positive nature of that impact. Both retailers and manufacturers face the need to strike the right balance between ensuring good employment practices wherever they do business around the world whilst reflecting local circumstances as appropriate. This also extends to sourcing strategies and the employment practices of suppliers. We can expect FairTrade and similar schemes to become much more widespread.

The future regulatory environment will demand much greater transparency of information about the environmental and social impact of both retailers’ and manufacturers’ activities. Comprehensive "triple bottom line" reporting will increasingly be the norm, covering the financial, environmental and social performance of the business.

What is clear is that consumers still love brands. However, the brand landscape is becoming more complex. Retailers are now as much in the brand marketing business as the traditional branded manufacturers. Consumer research consistently demonstrates that retailers’ brands are more trusted than those of food manufacturers, which reinforces the need for the manufacturing segment of the industry to better present its case.

Private label products will continue to take a growing percentage of available shelf space, making major inroads into many of the areas which were once the sole preserve of the branded suppliers. The retailers have cornered some key high growth and high margin categories. Fresh chilled ready meals are an obvious example, almost to the exclusion of major branded suppliers. In addition, as discussed earlier, private label delivers some excellent lessons in brand extension and portfolio management. For many food manufacturers, the choice of whether (and how) to compete with or embrace private label is a key strategic choice which will shape the future development of their businesses.

As a result of the continued war for shelf space we predict that there will be as few as 1,500 brands in the average supermarket in the UK, with many familiar brands disappearing. The growing space allocated to non-food products will put further pressure on brand and product ranges.

It is not all doom and gloom though for branded suppliers. Retailers continue to look for innovative new products and categories to meet ever changing consumer demand. We will undoubtedly continue to see new emerging innovative brands and products such as Innocent or Walkers Sensations, which will claim significant share of mind and ultimately consumer spend. New products also typically command better prices and margins which should be good news for supplier and retailer alike.

In line with the growing multi-cultural society in the UK, we would expect to see more and more assortment and merchandising decisions being informed by the tastes and preferences of the local communities that each retail store supports. Loyalty card programs will continue to offer valuable insight into which brands and products should be stocked by an individual store, reflecting the different preferences and needs of particular demographic and ethnic groups.

The high levels of assurance dedicated to ensure the integrity of our food supply is very good news for consumers. For suppliers, new regulation in areas such as nutrition labelling, complete removal of hazardous substances, guarantees of traceability and production hygiene practices can also be a significant burden. This burden of regulation can be expected to grow further and enforcement will become more rigorous.

Smaller businesses may struggle to keep abreast of the changes, let alone fully comply. This will give added impetus to consolidation.

Industry consolidation will continue unabated. This will be driven not only by the desire of companies to achieve category leadership and economies of scale, but also by the need to make the appropriate levels of investment in consumer and shopper insight-led innovation. We will see continuing bifurcation of acquisition strategies – some driven by regional and global category leadership strategies, others by national market and channel domination. We will also continue to see larger businesses which struggle to drive successful innovation-led growth seeking to acquire smaller businesses that bring innovative ideas, products and services. This will further encourage consolidation in the industry.

Scale and industry leadership will therefore become even more key enablers of business success in these areas. By 2012 we will see substantial further category consolidation, particularly of global brand-led businesses. We will also see other businesses more focused on building strong national brand portfolios acquiring complementary local businesses and taking over national food brands that are not viewed as strategic assets by global players. Contract and private label manufacturing businesses will also consolidate further to achieve effective economies of scale.

The European hard discount movement started in Germany and has spread widely across Europe. Mainstream grocery retailers (assuming can still make this distinction) generally struggle to find strategies that successfully compete with the value proposition offered by companies such as Aldi, Lidl and Netto. The store-in-a-store concept does not seem to meet great consumer favour. Establishing separate stores under a different fascia as part of a balanced portfolio seems to work a little better.

The hard discounters offer simple ranges and keen prices, with stores typically close to the town centre and offering easy parking. Their spread is causing another downward turn of the screw on prices and margins. The hard discounters also present new challenges to brand owners who will need to balance brand and merchandising values with the need for consistent volume. It is likely that leading branded manufacturers will do more business with the hard discounters as the norm going forward.

By 2012 we will finally be experiencing widespread adoption of much hyped but slow to take hold new technologies such as RFID and Global Data Synchronisation (GDS) for product information in the end-to-end supply chain. This will be encouraged by the combined pressures to improve availability on-shelf, take further cost out of the supply chain by reducing losses, improve labour efficiency, and the need to provide ever higher levels of assurance of process integrity and traceability.

We also hope and expect to see real progress in integrating demand and supply planning processes across retailer and supplier facilitated by the GS1 sponsored alignment of data standards. This will have significant implications for the business processes and systems of both retailers and manufacturers. It may lead to the wider benefits of "favoured supplier" status for certain leading manufacturers with key retail customers, but such integration platforms will need to be seen as offering a level playing field and benefits for all.

Private equity is already a major force in the industry and we expect this to continue into the future. It will play a substantial role in some of the changes described in this report.

Given specific business turnaround opportunities and the still fragmented nature of the industry, we expect to see private equity playing a role in future consolidation – both in building strong category positions and brand portfolios and in accessing the opportunities presented by economies of scale. If the potential returns are there – and they are – the availability of funds is not a problem. Private equity may cause businesses to radically challenge traditional operating models. For example, how can food businesses mirror the levels of innovation-led growth achieved by cosmetics and personal care products companies. How many branded consumer goods companies will own the majority of their manufacturing facilities in 2012? These questions are easy to ask. The challenge private equity investors face, lies in finding the management talent that can develop and execute the strategies that will drive both revenue growth and eliminate unnecessary costs and create value for the investors.

There are challenging times ahead, certainly, as we move towards 2012. But there are also real opportunities for substantial growth within the food and beverage sector. Consumers, as we have seen, want more variety, greater choice, healthy products, occasion-relevant offerings and better quality and, of course, good prices. Businesses are faced with rising costs, increased regulatory controls, dynamic shifts in global economics and ever more demanding customers. So, against the backdrop of this changing and challenging landscape, what can food and beverage businesses do to drive profitable growth and value creation? We strongly believe that there is real opportunity to create substantial value in the industry. Doing so requires businesses to do three things:

• Make the right strategic choices, decide where to play.

• Develop the right strategies, mobilise to win.

• Get the basics right.

Making the right strategic choices now to prepare your business for 2012 is, we believe, essential. Every business has its unique strengths and core attributes and it is vital to identify and build on these – even if it requires some tough reassessment of strategy and, in some cases, significant cultural change.

For suppliers key issues will focus on brand marketing effectiveness, innovation and operational excellence. Is the company essentially focused on marketing and product development or does a significant part of its strength ie in cost-effective but high quality production servicing retail and other major brands? Many will conclude that they will need to do both?

How close is the business to its customers – be they trade or consumer? In the US CPG companies are increasingly selling direct to consumers via the Internet, often using an alternative trading name to avoid upsetting major retail customers. While only 17% or so of consumers in our survey bought regularly via the Web, multichannel retailing is expected to increase steadily over the next five years. For a niche business, is going direct a possible solution?

For mainstream players closer collaboration with channel partners will be key. Again, from the US, we are seeing growing interest in "flowcasting" with retailers sharing highly detailed store level data with suppliers in order to improve demand forecasting and enable production planning throughout the supply chain, not just one or two weeks ahead but up to 65 weeks out for longer term planning purposes. Many manufacturers will come to the conclusion that this sort of collaboration essential for the efficiency, profitability and growth of their businesses The challenge for manufacturers will be to make the case that the investments required and associated returns are shred equitably with retail customers.

On which geographic markets should you focus? In the past major retailers like Wal-Mart, Metro, Carrefour or Tesco rarely competed head-on in the same geographies. Now they do. How can global suppliers achieve and maintain their market share in such a competitive environment? How much retail brand differentiation will be required and how will it be achieved? What are the pricing and margin implications of head-to-head competition between such retailers. What collateral damage may occur unless regulators step in.

A summary of the strategic issues food and beverage businesses should currently be debating and the choices to be made include:

• Are we clear about our future category and product portfolio focus?

• In which geographies should we operate? Should we continue to focus on growing market share in our home market or should we enter new, higher growth markets?

• Are we clear about our branded versus retailer private label strategies?

• Which channels to market will we exploit?

• Do we have a clear strategy to make the right acquisitions and divest non-core businesses?

• Are we sufficiently close to our key customers, what do we need to do to get closer?

• Are we sufficiently in touch with evolving consumer trends?

• Do we have an effective innovation engine room in our business? If not, what do we need to do to put this in place?

• What do we need to do to be in the middle of the current trend to healthier, more nutritious products rather than be left behind?

• What position will we take on environmental and social issues and the wider corporate responsibility agenda?

• What does "doing the right thing" mean for our business?

Having established the strategic vision, how can your business achieve its goals? As we have discussed in this report, achieving that vision might require material business change. The talent agenda will sit at the heart of this.

Engaging and enabling staff, offering a clear career path and providing satisfying working conditions and adequate reward will all be important. Many areas of the food and beverage industry have a poor employment image: long or unsocial hours, uncomfortable working conditions and low pay rarely make the sector a career of choice for the most able. This image clearly has to change if companies are to succeed in meeting future challenges from their internal resources. The winners are tackling – and will continue to tackle these issues head-on.

Our study has highlighted that some sectors of the industry, notably foodservice and retailing, have particular problems finding staff of the right calibre, especially those with real leadership potential. The second most significant business issue for foodservice organisations cited by 53% of the sample. Mobilising to win requires businesses across the industry to invest in management skills to equip them for the future.

Incentivising and retaining employees to reduce debilitating churn – currently over 100% in many areas of retailing is an equally important priority for many.

Mobilising to win requires most businesses in the industry to address issues such as:

• Achieving a clearly defined operating model that supports the strategic aims of the business, potentially keeping separate and eventually divesting non-core assets.

• Equally importantly, ensuring readiness to integrate strategic acquisitions when they are made.

• Establishing a well-defined performance management framework linked to strategic goals and incentives.

• Investing in leadership and management skills.

• Building and promoting fulfilling careers.

• Strengthening commercial insight and decision making.

• Re-energising and focusing innovation.

• Driving the total value chain, not just the supply chain.

• Rationalising the business where appropriate.

• Retain and develop key talent within the business.

Private equity may have a role to play in such programmes of change, especially around acquisitions and divestments but also to provide the necessary working capital to complete the required restructuring programmes within a realistic timescale.

Having a clearly defined strategy and well thought-trough tactics are essential, but many companies must in parallel also address basic operational shortcomings as well. Stock management, wastage control, inadequate loss prevention, promotional compliance, poor planning and forecasting functions – the list of common inherent weaknesses goes on.

In buoyant times such shortcomings may be inconsequential but in difficult or highly competitive trading conditions they can make the difference between profit and failure. Some of these are also areas likely to be impacted by future regulation such as food traceability laws that demand much tighter control and awareness of inventory movements.

All are also areas where effective information technology solutions can be important enablers, but levels of investment in IT across the industry remain relatively low. IT costs currently run at no more than 1.5% of turnover in retailing and food manufacturing and are lower for many, in spite of the process and relatively information intensive nature of the industry. Recognising the important role that IT has to play is crucial in getting the basics right.

A summary of the operational issues most businesses need to address across the industry include the needs to:

• Eliminate unnecessary complexity – in particular rationalising brand and SKU portfolios and focusing effort and investment on the winners.

• Improve discipline in managing commercial spend – price setting, pricing execution and trade promotions.

• Achieve operational excellence – streamline and simplify, use 6-sigma techniques to underpin a culture of continuous improvement in manufacturing and operations more broadly.

• Establish strong sales and operations planning discipline – balancing demand and supply in the medium term, sharing data and working in close collaboration with customers and suppliers.

• Standardise, strengthen and streamline operational and administrative processes – eliminating non-value adding activities and redirecting resources towards innovation and growth.

• Ensure one version of the truth – establish and integrate information systems to ensure integrity, consistent and immediacy of operational performance information.

• Embed quality – regulatory compliance should come as a byproduct of a deeply help quality culture that is also reflected in integrity of process and systems design.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.