Executive Summary

INTRODUCTION

This report reviews trends in the UK food market, focusing on the major sectors of meat and meat products; fish and fish products; fruit and vegetables; dairy products, eggs, oils and fats; bread, cakes, biscuits and cereals; and miscellaneous foods such as sugar, ready meals, pizzas, rice and pasta. As well as industry and market trends, there is a consideration of corporate developments, consumer purchasing patterns and advertising expenditure.

Aggregate sales for all the sectors and products included in this report were £43.62bn in 1999, representing an increase of just 0.7% on the previous year's sales. Measured at constant 1995 prices, there was a 0.3% decline in sales in 1999. The weak performance in 1999 was due to further declines in the per capita consumption of core foods, and to price stability — and even price reductions — in many food sectors. Total consumer spending has been increasing at a faster rate than consumer spending on food in recent years, with the result that food items now take a smaller share of overall household spending. In 1999, only 7.8% of total consumer expenditure was devoted to food, compared with 8.2% in 1998 and 9.1% in 1994.

Both the food processing and food retailing industries are becoming increasingly concentrated. In food processing, a number of large vertically-integrated companies are market leaders in most sectors. In food retailing, the `big four' grocery multiples continue to dominate, although the convenience store sector improved its sales in 1999. The power of the big retailers has forced margins down at many food suppliers. Price discounting by the large supermarkets has been passed on to suppliers, and a number of suppliers have lost contracts as supermarkets have rationalised their supply arrangements.

Despite its traditions as an agricultural and food producing nation, the UK is a net importer of food, and the trade deficit in the food industry increased in 1999. The strong pound had a negative effect on exports, while imports increased. Around 3.3 million people are employed in food-related activities, although 1.3 million of these are in the hotels and catering trade. Food retailing is the largest employer in the core food market.

KEY NOTE CONSUMER RESEARCH

In June 2000, Key Note commissioned BMRB International to carry out original reasearch on the eating habits of UK adults. The survey questioned 1,032 adults aged over 16, and the results confirmed the trends towards healthier eating and more convenience and snack foods.

An overwhelming majority of respondents, 86%, stated that they ate fresh fruit during a typical day; fresh fruit has established itself as a healthy and convenient snack product, and its use at meal occasions, such as breakfast and lunch, has also increased. A majority, 64%, also stated that they had a snack during a typical day.

There is some decline in traditional meals and meal times as flexible working and leisure lifestyles require more flexible eating habits. The popularity of the cooked breakfast, for example, is declining, and non-cooked breakfasts are increasing their penetration. In the survey, 67% of respondents ate a non-cooked breakfast during a typical day. Despite the difficulty of sticking to set meal times, 72% of adults still had an evening meal with others on a typical day.

INDUSTRY STRUCTURE

In the UK, significant deals have included the purchase of Unigate's dairy business by Dairy Crest, and the merger of Bluecrest and Young's to form the UK's largest seafood company. The food businesses of Tomkins were also up for sale when this report went to print. Many smaller deals have contributed to the restructuring and increased concentration in the UK food industry as many leading companies sell underperforming or non-core food businesses.

Food retailing is still dominated by the `big four` supermarket chains, and the major event in the last couple of years has been the purchase of ASDA by the US retailing giant Wal-Mart. Wal-Mart's first UK store under its own name opened in Bristol in July 2000. Earlier, the ailing food discounter Kwik Save was purchased by Somerfield. The power of the supermarkets is currently under investigation by the Competition Commission.

The convenience sector has expanded in the last 12 months, with more outlets selling food, and improved margins.

MEAT AND MEAT PRODUCTS

Consumer expenditure on meat and meat products was valued at £11.61bn in 1999, a decrease of 1.4% on the previous year. Total supplies to the UK market increased by 5.8% in the year, with all sectors except bacon and ham showing increases. The sales decline was partly due to a decline in volume consumption and partly due to only limited price increases during the year.

Sales of carcass meat were £3.16bn in 1999, and sales of beef and lamb/mutton experienced an upturn. Value sales of pork fell. Sales of poultry fell by 0.2% to £2.52bn, due mainly to weaker prices and some supply shortages. The bacon and ham market, valued at £1.89bn, increased by 2%, but in the largest sector — meat products — sales fell by 3.4%, to £4.04bn.

Household penetration of meats such as bacon and sausages is high. The weakest market sector is tinned meats, where there is an image of low-quality products.

FISH AND FISH PRODUCTS

Sales of fish and fish products were £2.19bn in 1999, an increase of 3.3% on the previous year. This made it the fastest-growing sector in 1999, but virtually all the growth was due to price increases. Volume consumption of fish and fish products remained static in 1999; in real terms, the value of the market has declined since 1997.

The market can be divided into three core categories: fresh and chilled fish, frozen fish and canned fish. The fresh and chilled market was valued at £524m in 1999, an increase of 6.7% on 1998. Salmon has now overtaken traditional favourites such as haddock and cod as the most popular household purchases. Concerns from environmental agencies about the long-term stocks of cod may limit future supplies.

The largest sector is frozen fish, with sales of £632m in 1999, an increase of 1.9% on the previous year. While fish fingers form the largest product category, sales growth has been hampered by the launch of various budget brands and market growth in the frozen sector is being driven by value-added items such as coated fish and fish meals. Canned fish is the smallest and most mature market, and sales growth was limited in 1999.

Two of the UK's leading fish companies — Bluecrest and Young's — merged in October 1999 and investment by the new company is concentrating on value-added lines such as fish meals.

FRUIT AND VEGETABLES

Demand for fresh potatoes continues to decline as diets become more varied and consumers look for carbohydrates in other foods such as rice and pasta. However, sales of processed potatoes — and particularly frozen chips — are growing. These latter products contributed to an increase of 2% in sales of potatoes in 1999, with the market reaching £3bn. Sales of other vegetables grew by 2.7% in 1999, to £5.22bn. Prepacked green vegetables and salads are a strong growth area.

Fresh fruit sales have increased in the last few years as consumers eat more fruit as snacks and light meals. Bananas and apples are still the most popular fruit, but demand for more exotic fruits is increasing.

The banana trade war between the EU and US looks set to continue, and the genetically modified (GM) food debate is also of particular concern to the fruit and vegetables sector.

DAIRY PRODUCTS, EGGS, OILS AND FATS

Sales in the dairy products, eggs, oils and fats market increased by just 0.7% in 1999, with many product sectors losing sales as consumers opted for healthier and lower-fat foods. The total market was valued at £7.62bn at current prices, but there has been no real growth since 1994. Commodity markets such as milk, eggs and cheese are all struggling to maintain sales. One of the few growth areas is yoghurts and chilled desserts, although even here 1999 growth was weaker than in previous years.

The largest market sector is liquid milk, with sales worth £3.53bn in 1999, an increase of 0.4% on 1998 . Milk consumption per capita is falling and the majority of sales have shifted from doorstep deliveries to supermarket sales. Milk prices in the latter retail outlets are much lower than the traditional doorstep delivery. Cheese sales increased by 0.9% in 1999, to £1.61bn, but the largest growth came in yoghurts and chilled desserts, where sales were £985m, an increase of 1.9% on the previous year. Yellow fat sales rose by just 0.6%, to £810m, hampered by falling demand and price competition in some areas.

Markets such as fresh milk, cheese and eggs are among the most mature markets in the UK food industry, and household penetration is extremely high. In these markets, the potential for further growth must be limited, and, in 1999, household penetration fell slightly.

Recent corporate developments include the abolition of the Milk Marque scheme in April 2000, and its replacement by three regional milk buying and selling cooperatives. A major name in the industry, Unigate, is also set to disappear with the purchase of its dairy businesses by Dairy Crest.

BREAD, CAKES, BISCUITS AND CEREALS

Bread sales were £2.14bn in 1999, a decrease of 0.8% on 1998. The market is becoming increasingly polarised, with expanding premium and speciality bread sectors but a static standard bread segment. The market for bread is probably the most mature of all food sectors, with virtually every house in the country a purchaser.

Cake and biscuit sales were valued at £2.36bn in 1999, a decrease of 1.2% on the previous year. Alternative snack products and healthy eating concerns were partly to blame.

The cereals market generated sales of £3.3bn in 1999. Breakfast cereals, valued at £1.13bn in 1999, is still an expanding market, with new product developments such as cereal bars and single-portion servings boosting sales. However, the leading brands are coming under increasing pressure from own-label offerings. The market is increasingly segementing into adult, children's and healthy cereals.

MISCELLANEOUS FOODS

The one sector of the miscellaneous foods market failing to generate growth is sugar, which is suffering from a long-term decline in sales and per capita consumption. The sugar market was valued at £213m in 1999, and the annual sales decline of 14.8% was the third annual double-digit sales decrease in succession.

The `other foods' sector was valued at £2.17bn in 1999, an increase of 2.3% on 1998. There has been steady growth in the sector in recent years, and it contains many products which are suited to the convenience and health demands of consumers. The product range includes meal enhancers, sauces, rice, pasta and pizzas.

The pizza market had another good year in 1999, with new products such as crusty pizzas and pizza pies, along with more authentic pizzas, helping to grow sales.

Also described in this section of the report, but not included in the market size figure, are ready meals (individual ready meal sales are included in the appropriate sector chapters, e.g. meat and meat products, and fish and fish products). Ready meals has been a dynamic market in the 1990s, although sales growth weakened in 1998 as new product development activities were reduced. In 1999, the fortunes of the market were revived and sales increased by 6%. Consumers are beginning to appreciate that premium ready meals offer good-quality meal options and that the ready meals sector does not just offer cheap alternatives. The result is a market that is benefiting from trading up.

FORECASTS 2000 TO 2004

The limited food market growth of the last 2 years should be replaced by stronger growth in 2000, although a sales increase of 2.4% is still modest. Sales are expected to reach £44.65bn in 2000. In the forecast period from 2000 to 2004, sales are forecast to increase by only 9.6%, to produce a market valued at £48.95bn in 2004. With the growth in overall consumer expenditure expected to outpace the growth in food sales, food purchases will take an increasingly smaller share of total household purchases.

The fruit and vegetables market is expected to show the strongest growth, with fresh fruit continuing to benefit from the moves towards healthier eating.

The socio-economic influences on the market will include the ageing population, the growth in single-person households, and more working women. Convenience foods will remain the potential growth area, with consumers likely to trade up to more expensive lines. Health foods and organic foods are likely to become more prominent, and more time-starved shoppers will turn to Internet-based grocery shopping for their major weekly purchases, topping these up with visits to the local store.

Twelth Edition 2000
Edited by Jane Griffiths
ISBN 1-85765-979-1

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