Competing through quality and innovation

Adam Crouch

After gaining a degree in Accountancy with Finance at University in Hull, Adam worked in an accountancy practice until he joined Grampian Country Food Group in 1991. The Cranswick acquisition in the same year led to Adam taking production and site responsibility for the fresh pork operation, which includes processing of livestock, the complete butchery operation and value added facility. He became General Manager in 1998, Operations Director in 1999 and Managing Director Fresh Pork (Main Board) in 2003. He is also a BMMA processing representative, sitting on BPEX.
He has focused on developing an efficient pork processing facility that can rival the best in Europe and was instrumental in the development of the JS Hampshire project.

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The UK pork processing industry continues to be subject to raw material from both within Europe and beyond, produced by a competition with lower costs of production and favourable exchange rates.

I have been asked to give an outline view of the current UK market regarding pork and pork products and to highlight the efforts being made by the processing sector in this increasingly cost-driven market.

The UK market has taken great strides to de-commoditise its product offering and reach out to the consumer to add value. UK prices are significantly higher on average than our European counterparts. This gap obviously fluctuates, however a 10% premium is not uncommon. When one considers the global market, the comparison is even more pronounced. Despite Brazil’s inability to supply the European market their influence in Russia continues to have a profound effect on our industry and in the long term they are expected to become a major force.

Add to this the complexities of our own UK retailing market where 80% of product is sold through limited outlets and it becomes apparent that the pig industry can be caught between cheap imports and a customer base unable to pass on increased costs. To qualify this point a recent survey of manufacturing costs shows an increase of 5% in the last 6 months alone - a phenomenon with which we are all familiar – however, less than a half of all suppliers to the retailing sector have been able to pass these costs on. A typical processor has seen utility costs increase of 106% in the last 2 years. As a result many processors may find themselves in a state of perpetual deflationary pressure. This is further demonstrated by price matching, where retailers require that their margins are maintained when comparing individual lines with their competitors.

We are all familiar with the decline of the UK pork industry. Weekly slaughtering has decreased from a peak of over 300000 pigs per week in 1998 to current levels of circa 150000 per week. Compare this to larger players in Europe, Germany circa 800000 per week, Spain 700000 per week and Denmark 400000 per week. Include the relative strength of the pound to this equation and we may deduce the susceptibility of cheap imports will remain.

Despite this, the continuing relative stability in pig prices gives confidence that a sustainable industry will remain.

How may this be possible when indeed the processing sector itself has seen abattoir closures from 403 in 2000 to 250 in 2005? (1962 this figure was in excess of 3000)

By competing through quality, innovation, speed to market and flexibility.

As stated earlier, the retailing sector accounts for approximately 80 % of all fresh pork, bacon, sausage and ham purchases. It is this area which therefore requires our focus.

With the reduction in UK pig processing and the inevitable rise in imports it has become increasingly important to develop a point of difference. Competing on price alone is quite simply not an option and where commodity pricing has been the preserve of imported products so must the UK position itself at the premium, quality end. This has been a concerted effort and somewhat understandable considering the size of the UK industry and its positioning regarding welfare and our premature imposition of certain regulatory requirements.

If we examine where imported meat are intended we may see that much finds its way into the value end of the market, special purchases, foodservice and lower grade sausages and pies. This opens the ground for the UK to develop itself at the premium point and much work has been done in the retailing sector driven by consumer demand.

These own labels tend to focus on British product and as such can be considered relatively immune to the fluctuations of the market. In addition it has the effect of cementing the value chain between producer, processor and retailer. This market may often be considered small, however its growth has been impressive and a more generous description should be SPECIALIST VOLUME.

Consumer trends indicate a reduced % of income is spent on foods; more time is spent on leisure. There is also much less time spent on meal preparation. Take the proliferation of TV chefs; The Jamie Oliver school dinners project, Gordon Ramsey’s chicken nugget focus and the River Cottage theme have all conspired with the government drive for improving the public’s health by reduced fat and salt intake. Add to this dietary requirements, allergen concerns along with more recent developments regarding food mile initiatives and the UK pork industry is better placed than ever before to take advantage. We must resist the temptation to dismiss these initiatives as nanny state and embrace and include them as an integral part of the recovery of the UK industry. It presents itself at a most opportune time. We need to go to these lengths as our European and world competitors will always be cheaper or faster or have something with which to outgun us, so these issues provide a breeding ground for unique propositions.

The retailing sector has been quick to pick up the baton and now all the major retailers have significant premium retail brands.

TTD TESCO FINEST SO GOOD EXTRA SPECIAL AND BEST

As we can see, the total premium private label sales trends have grown from circa £10 million in 2000 to levels in excess £80 million at today’s levels.

How may the pig industry benefit from this premium sector? Examples include the JS TTD contract, and the Waitrose Link contract. Duchy and Organic are also examples.

Currently these tend to be specialist breeds or Outdoor Reared related contracts but also give the opportunity for the mainstream commercial sector to prosper by offering the processing sector its ideal commercial pig i.e. 80–90 kg to 12 mm. If the processing sector intends to maximise efficiencies to compete with our European peer group, then this is the weight of carcass required.

Admittedly much of the pork requirement centres on loin demand. Typically this accounts for only 15% of the weight of the carcass but up to 40% of its value. This weighting was always typical of standard product until more recent years; however the proliferation of Special Purchases through imported meats and the influence of continental pricing have devalued this primal to closer to 30% of the carcass value. The reasoning behind this is explained by lack of differentiation. In purchasing terms there is little perceived difference between UK and European meat. This is countered by this premium category. It has also allowed a more adventurous array of new product development. This opens up to the consumer innovative ideas and recipes for pork products. Sea salted roasting joint and cracked pepper joints to name just two. However, relying on this one cut clearly could not suffice. The processing sector has had look to add value to each and every primal:

The work that has taken place in recent years to decommoditise the UK sector and add value has been hugely successful. Indeed the following slides indicate much of this improvement.

Pork, which has clearly suffered through cheap imports, is showing consistent growth in the premium sector. In addition it also cements the relationships in the areas which are inevitably open to cheap imports.

Sausages, one of the earlier beneficiaries of Premiumisation, continue to show solid growth and may be considered the shining example in an area once considered purely at the value end. It is the utilisation of both shoulder and belly cuts which have helped shore up the value of the carcass and reduce the dependency on the loin cut. As we can see from sales trends all the major retailers have shown considerable growth and are in strong positions. The key point here however is the utilisation of British meat.

Every year we can see the awareness increase in areas such as Sausage Appreciation Week. This is one area where the UK industry can steal a march. If we concentrate our efforts in this period at the quality end we are in effect guaranteeing the promotion of UK pig meat rather than the benefit being gained in areas not supporting our industry.

Bacon is the next target market. This product has long been considered the domain of the Danes and Dutch, however the growth of quality dry cured product with typical meat contents in excess of 120% should set this area on similar growth patterns experienced in premium sausage.

The premium ham market is another area where UK pig meat is the preferred option; indeed this is not limited to pork products. The last 5 years have seen a shift of significant proportions

But for all this we are not immune from price pressure. We view our business as leaders not followers and can often find ourselves vulnerable to competitors willing to offer cash incentives to take such volumes.

The processing industry is continually reinventing itself. New Product Development along with Existing Product Development sees innovative products introduced in an attempt to be first to market. This way it is possible to try and hold some margin whilst maintaining core business. Speed to market is essential and if we are to react to consumer trends we must be willing to adapt production processes and investigate new sourcing of ingredients short notice.

The polarisation of the retailing sector has led this type of innovation being developed in tandem as they wish to align themselves with strong businesses.

Their partners need to be strong in terms of human resource, we employ development chefs in each of the categories ham, pork, sausage and bacon, along with marketing analysts to examine customer trends and organise focus groups for feedback. In addition the technical capabilities are taken as given and the highest level of accreditations are a prerequisite to commencing business.

They must also have financial strength - the latest bacon slicing line including vision slicing technology for example, comes with a price tag in excess of £500,000.

Innovation is not the sole preserve of products alone. We must also consider efficient processing methods and the development of new technology in the processing arena. The UK market is recognised as one of the most advanced in the world when it comes to employing packing technology and retail presentation. Only by being at the forefront in utilising the latest equipment may we exploit the full potential when packing any product. An example here may be the employment of vision slicing machinery, which is uniquely able to maximise yields on natural faced products where previous high-speed slicers were unable or inadequate.

By differentiation we are able to distinguish ourselves from the pure commodity- focused countries with which we are competing.

It is essential not to lose focus of efficiencies and it is possible to be a scale producer of premium products. We must continue to further examine ways in which to exploit carcass utilisation to add value to those cuts which have been undervalued.

By remaining customer focused and reacting to exacting requirements the UK processing sector can not only compete, but can indeed prosper. The most critical part in making this work is the individuals employed within industry. We are fortunate to have some of the most energetic, capable and dedicated people at all levels.