Food Market (UK)

Executive Summary

REPORT COVERAGE

This report reviews key trends and developments in the UK retail food market. The core segments covered are:

meat and meat products

fish and fish products

fruit and vegetables

dairy products, eggs, oils and fats

bread, cakes, biscuits and cereals

miscellaneous foods, such as sugar, meal enhancers (sauces and pickles), ready meals, pizza, soup, rice and pasta.

As well as industry and market trends, there is also a consideration of corporate developments, consumer purchasing patterns and advertising expenditure.

MARKET SIZE

In 2000, total retail sales in all the sectors covered by this report were £44.29bn at current prices — an increase of 2.5% on the figure for 1999. There was also a 2.9% growth in sales at constant 1995 prices. This was the best year-on-year growth for many years. Price increases and some notable increases in consumption in sectors such as meat and meat products, milk, and biscuits and cakes have helped to raise sales.

The food-processing and food-retailing industries are both 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' supermarket multiples continue to dominate, although the convenience-store sector improved its sales in 2000.

The UK is a net importer of food, and the trade deficit in the food market reached £7.42bn in 2000. Exports continue to struggle, and imports are filling gaps in UK supplies of certain products.

KEY NOTE CONSUMER RESEARCH

In June 2001, Key Note commissioned BMRB International to carry out original research on the eating habits of UK adults. The survey questioned 1,019 adults aged over 16, and the results confirm that UK consumers are eating healthier foods.

UK adults have reduced their intake of foods that are generally considered to be less healthy than others, such as cooked breakfasts, hot lunches and take-away food. A high percentage of adults (83%) eat fresh fruit during a typical day, and fresh fruit appears to be more popular with young people than it was in 2000. There has also been an increase in the consumption of organic/health foods compared with the previous year.

Over the last few years, there has been some decline in traditional meals and meal times, as flexible working and leisure lifestyles have required more flexible eating habits. Savoury snacks are popular, and a prepared lunch is now the typical midday meal for most adults. Despite the decline in traditional meal times, the overwhelming majority of adults still take an evening meal with others during a typical day.

INDUSTRY STRUCTURE

The food-processing industry is still in the process of structural change and rationalisation. Many of the traditional diversified food companies have been dismantling their businesses and disposing of underperforming and non-core assets. A refocusing on higher-margin sectors such as convenience foods and further-processed products has also resulted in some commodity businesses being sold.

Tomkins has left the food industry completely, after selling Rank Hovis McDougall (RHM) in late 2000. Other significant recent deals include the purchase of Hazlewood Foods (and the subsequent disposal of assets) by Greencore, the acquisition of Bestfoods by Unilever, Tate & Lyle's disposal of its US businesses, and the spinning off of Kraft Foods by its parent company, Philip Morris.

Food retailing continues to be dominated by the `big four' supermarket chains, and these chains are extending their reach through new store outlets on forecourts, in High Streets and in suburban areas. These smaller outlets are mostly targeted at the busy shopper looking to purchase a few items after work, or as a `top-up' during the week, between main shopping trips. Online grocery shopping is growing, but it still takes a very small share of total sales.

MEAT AND MEAT PRODUCTS

Consumer expenditure on meat and meat products increased by 4.9% at current prices in 2000. There was also real growth in the market, with sales increasing by 4.2% at constant prices.

This sales growth has been achieved through a combination of higher prices, more sales of added-value products and real growth in volume consumption. In 2000, weekly per capita consumption of meat and meat products increased by 6%, and there was even an increase in the consumption of beef and veal, which has struggled in recent years.

One of the main problems for the UK meat sector has been supply bottlenecks. UK supplies of most meats fell in 2000 as cattle, pig and sheep numbers were reduced. The long-term decline in herd numbers has worsened in recent months, with outbreaks of swine fever and, of course, foot-and-mouth. The result is that an increasing share of UK sales is taken by imports. The meat export market has been decimated by the BSE (bovine spongiform encephalopathy) crisis, and the foot-and-mouth epidemic is another setback.

Retail sales in the largest sector, carcass meat, increased by 4% in 2000, helped by improved sales of beef. Sales of poultry increased by 4.2%, and sales of bacon and ham by 2.8%. One of the largest markets is the `other meat and meat products' market, and this continued to expand in 2000 as more consumers shifted from economy lines to premium products.

FISH AND FISH PRODUCTS

Consumer expenditure on fish and fish products increased by 6.5% at current prices in 2000. There was also some real growth in the market, after 3 years of decline. Volume consumption of fish and fish products fell marginally in 2000, but value sales were boosted by increased sales of premium products in categories such as ready meals, canned fish and fish-based snacks.

The market can be divided into three core categories: fresh and chilled fish, frozen fish and canned fish. The fresh and chilled sector increased in value by 5.3% in 2000. Salmon has overtaken traditional favourites such as haddock and cod as the most popular household purchase. More farmed salmon is available in supermarkets, while North Sea cod supplies are under pressure and further restrictions on cod catches are being implemented.

The largest sector is frozen fish, which saw an increase of 1.6% in market value in 2000. Fish fingers represent the largest market segment, but household penetration of these products is declining as sales of value-added items such as coated fish and fish meals increase. Canned fish is the smallest and most mature market, but sales in this sector still grew by 1.8% in 2000. Traditional popular lines such as standard canned tuna and salmon have been joined by new products, such as fish with sweetcorn or rice, and fish-based snacks, to increase sales.

FRUIT AND VEGETABLES

Fruit and vegetables is the second-largest food market, but it increased in value by just 0.8% at current prices in 2000. However, the market experienced real growth in the same year, with sales at constant prices increasing by 2.5%.

The retail market includes both fresh and processed products. Fresh produce accounts for 61.3% of all sales, and this sector grew by 1.2% at current prices in 2000, primarily as a result of increased sales of fresh fruit and fresh green vegetables. The processed sector also experienced some value growth as more snacks and premium products stimulated sales.

Demand for fresh potatoes continues to decline as diets become more varied and consumers look to other foods, such as rice and pasta, for carbohydrates. However, sales of fresh green vegetables grew by 3.3% in 2000, with strong growth for prepacked green vegetables, salads and mixes. Sales of fresh fruit have increased in the last few years as consumers have eaten more fruit as snacks and light meals. Bananas and apples are still the most popular fruits, but demand for more exotic fruits is increasing.

In the processed sector, growth in sales of frozen potato products weakened in 2000 as own-label products brought some price discounting. Other product areas such as frozen peas and vegetables and baked beans have a very high household penetration. The former segment has seen little growth, but the latter sector is benefiting from new product ideas, such as baked-bean-based meals and low-fat versions.

DAIRY PRODUCTS, EGGS, OILS AND FATS

Sales in the dairy products, eggs, oils and fats market increased by 2.6% at current prices in 2000. The long-term trend has been for many product sectors to lose sales as consumers opt for healthier and lower-fat foods. However, in 2000, many market segments, including commodity and mature markets such as fresh milk and cream, experienced growth. Some of the more dynamic sectors in the past, such as yoghurt and chilled deserts, experienced weaker growth than the market average in 2000.

Value sales of milk increased by 3.3% in 2000 as new varieties, such as low-fat milk, organic milk, and milk enriched with vitamins and minerals, stimulated consumer interest. A major generic milk-marketing campaign also helped to increase volume consumption of milk for the first time in many years. Cheese sales increased by 3% in 2000, and there was also an increase in volume consumption as more speciality cheeses, mini-cheeses and cheese-based snacks and light meals encouraged demand. Value sales of yoghurt and chilled desserts increased by 2%, with limited brand loyalty and more own-label products affecting the strength of some leading brands. Sales of yellow fats and eggs increased by 1.2% and 1.4% respectively.

Fresh milk, cheese and eggs are amongst the most mature sectors of the UK food market, and their household penetration is extremely high. New product developments are maintaining interest in the first two sectors, but the egg market is likely to remain static.

BREAD, CAKES, BISCUITS AND CEREALS

Sales of bread and morning goods, cakes, biscuits and cereals increased by 2.7% at current prices in 2000, and every sector of the market experienced real growth. Traditional commodity-led markets such as bread have benefited from more speciality breads, and from organic and healthier varieties. However, the market is becoming increasingly polarised, with expanding premium and speciality bread sectors but a static standard bread segment, where prices have been set artificially low by the supermarkets.

Sales of cakes and biscuits increased by 1.8% at current prices in 2000. Increased demand for bite-sized cakes, individual portions and cake bars has been the market driver. Sales growth for whole cakes has been less strong.

The cereals market as a whole (including all processed cereals, such as rice and pasta, in addition to breakfast cereals) saw its sales increase by 3.8% in 2000. However, the breakfast-cereals market remained static, with the leading brands coming under increasing pressure from own-label offerings, which are available at lower prices. The market is increasingly segmenting into adult, children's and healthy cereals. The leading brand owners are also diversifying into cereal bars and combination snacks (i.e. yoghurt and cereal), which cater for other meal and snacking occasions and have helped to grow the market.

MISCELLANEOUS FOODS

The `other foods' sector, as defined by National Statistics, declined in value by 4.4% at current prices in 2000. Nevertheless, the sector includes some products that are suited to consumer demands for convenient and healthy products, and that are experiencing strong growth, such as meal enhancers, sauces and pizza. Sales of pizza increased by 5.7% at current prices in 2000.

Also described in the Miscellaneous Foods section of this report, but not included in the market size figure for `other foods', are ready meals. (Sales of ready meals are included in the relevant sector figures, i.e. for meat and meat products, fish and fish products, and fruit and vegetables.) Ready meals has been a dynamic market since the 1990s, and sales in this sector increased by 4.3% at current prices in 2000. The market is benefiting from trading up to more premium products.

The main sector of the miscellaneous foods market that is failing to generate growth is sugar, which is suffering from long-term declines in sales and per capita consumption. Sales of sugar fell by 11.9% at current prices in 2000.

FORECASTS 2001 TO 2005

In 2001 and 2002, value growth in the UK food market should remain around the same level as that achieved in 2000. However, firmer prices will mean that real market growth will be limited. There is also the likelihood of some downturn in the economy, which may have a negative impact on sales in some of the expanding premium segments of the market. Between 2001 and 2005, sales are forecast to increase by 7.8% at current prices.

Socio-economic influences on the market will include the ageing population and the increasing numbers of single-person households and working women. Convenience foods and snack-based foods will continue to be growth areas. 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 local stores. Supply problems in the UK are likely to increase the role of imports.

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