Production is moving to cheaper locations, while an increasingly small number of powerful buyers squeeze every last chance for profit out of processing. Or can UK food processing build a rosier future? The Institute of Grocery Distribution's annual convention last week looked at the truth behind the fears of the UK food sector. Chris Lyddon reports.

"As a sector we have more than held our own during a period of de-industrialisation," Iain Ferguson," president of IGD and chief executive of Tate and Lyle, told the convention. "Securing the future of food and drink manufacture in the UK is in our own hands."

The transfer of production facilities abroad was not necessarily bad news. "We should not look at offshoring as a loss to the UK economy," he said. US studies had shown that one dollar of work offshored was worth $1.47 to the global economy. "The country that exports the activity must have sufficiently flexible labour relation to replace the jobs offshored," he said.

IGD chief executive Joanne Denney-Finch contrasted the attitude of the industry with that of shoppers. "On the ground (in the industry) it feels like people feel it feels like a recession," she said. "That's not where shoppers are. They feel right now they're winning. They feel they've never had it so good." The current satisfaction level among food shoppers was over 80%, higher than it had been in five years of IGD surveys. "They've got problems. They feel right now you're solving them"

In the IGD convention's audience, drawn from all parts of the food industry, 87% felt that there would be fewer food outlets in five years' time. Among consumers surveyed, 38% thought there would be more and 46% as many as now.

Tesco chief executive Terry Leahy made a spirited defence of the supermarkets. They were good for consumers, good for local communities, good for public health, good for their staff and good for suppliers. Tesco would do more to listen to suppliers.

Tesco wants anonymous feedback

"The key to a good relationship is trust, and I know there is work for us to do in building that trust," he said. "One of the things we are trying to do is make it easier for suppliers to give us anonymous feedback so that they don't feel inhibited in what they say."

Tesco has a programme called "Viewpoint," which involves every one of its staff filling in a questionnaire once a year on how they feel about their job. "We are now going to introduce that system for our suppliers to give you the chance anonymously to tell us what you really think," he said. "I hope this will not only help build mutual trust, but also give us valuable insights into how we can work better with you."

"We want to work with suppliers to deliver efficiency through the food chain and share benefits of that" he said. "For example on transport, on packaging, on scheduling, on electronic tracking, on recycling."

His approach to suppliers was, "happy supplier, happy retailer, happy customer" he said.

Farmers the first link in the food chain

He also assured farmers that Tesco had their best interests at heart. "As the biggest customer of British agriculture, we need British agriculture to do well," he said.

Tim Bennett, president of the National Farmers Union, said that the latest reform of the EU's Common Agricultural Policy which "decouples" support payments from production would mean more market oriented farming.

Farmers should see themselves as "the first vital link in the food chain, not just rearers of animals and crops," he said. "You may think this is just playing with words, but words create perception."

Supermarkets could not necessarily take farmers for granted. "Up until now there has generally been an abundant supply, indeed in some sectors an oversupply of good quality British farm produce," he said "This has encouraged a promiscuous approach to sourcing and buying and has resulted in a downward pressure on price."

Despite reports of an increase in farm profitability, it was in real terms 50% below where it was ten years ago. "This situation is untenable," Bennett said. "What is more, if it leads to a reduction in production, there is a real risk in some sectors that there will be insufficient availability."

Importing was risky. "We know that customers prefer to buy British when in season and when competitive on quality and price," he said. "We all also recognise that the logistics, due diligence and assurance requirements make sourcing from the UK the more preferable option."

He welcomed some retailers' positive moves, singling out Marks & Spencer and Waitrose for praise. "We welcome the initiative Asda has taken to try and encourage the involvement of producers and bring some clarity to the troubled dairy sector," he said.

"Equally, we become disheartened when retailers who have had justifiably good reputations for firm and collaborative buying principles, then abandon them in return for short-term margin improvement." All too often decisions were taken at junior levels for short tem gain, with no regard for the longer-term impact for the supplier or the industry. "Good business practice is not about squeezing until the 'pips squeak'," he said. "It is about dialogue and partnership."

John Bowes, chief general manager - strategy of the Co-operative Group, was concerned by the size of groups like Sainsbury and Tesco and their large scale move into convenience stores. "The price of acquisition of convenience stores has doubled in the past two years," he said. It meant a jolt forward for the standard of convenience retailing in the UK, but there would be losers. "The reality is that a large number of stores will close," he said "Even greater power will end up in even fewer hands." He called on the competition authorities to take another look at the power of the big multiples.

Unilever closes plant

One man personally affected by consolidation in the food manufacturing sector was James Hill, chairman of Unilever Ice Cream and Frozen foods. "A week last Thursday we announced the closure of our factory in Grimsby with the loss of 600 jobs," he said. There had been no choice. "Our facility was at a marked competitive disadvantage."

Having to tell the staff of the plant that they would have no jobs had made him think hard about UK food manufacturing and the jobs that depend on it. "Nobody has a divine right to operate in a sector where somebody else is doing a better job," he said Globalisation was a key driver to which everybody would have to respond.

But it was possible to be successful in UK manufacturing. "I'm personally confident that there is a role for food manufacturing in the UK," he said. "To keep manufacturing in this country we need to go and stay relatively upmarket and add value. For the companies that get it right the future in the UK will be extremely bright."

Another company which has moved production in the face of international competition is Uniq. It had moved some of its activities from Germany to Poland, which had a 75% cost advantage, said chief executive Bill Ronald. To succeed, food companies had to concentrate on what they were good at. "Stick to the knitting," he said. "Do a few things that you know you can beat the competition at." For Uniq that meant a new concentration on chilled desserts. "Deliver an inexorable increase in productivity," he said.

Food still the most important thing to supermarkets

Non-food may be becoming more important, but it is still the food that matters to the supermarkets, according to Angela Spindler, trading and marketing director of Asda. "Without a healthy and growing food business we wouldn't be doing nearly so well in non-food," she said in an interview with the convention's chairman, television presenter Michael Buerk. But there was still scope for growth in non-food "Only 7% of the general merchandise market is now within grocery," she said. "So there's a whole world of opportunity out there."

The takeover by Wal-Mart had helped both improve their position. "As ASDA has got much better at general merchandise over the last five years so Wal-Mart has got better at food," she said

She made no apology for Asda's concentration on price. "The importance of price has become an absolute given in the market," she said. "I would never apologise for our price position. Price is still the number one driver of our customer loyalty."