Category crunch: UK pork processors focus on growth
The UK pork sector is in a state of flux. Pig meat prices have been forced up by a number of factors - ranging from higher input costs to constricting supply and pending European animal welfare regulations. Cost increases are therefore being passed down the chain as retailers look to balance the need to secure supply against the pressure of operating in a constrained consumer environment. In part two of our Category Crunch, Katy Askew looks at the different strategies that pork processors are employing to grow revenues.
Amid pressure on costs, the UK pork sector has made progress in passing rising input prices down the supply chain. The country's retailers have recognised the need to secure lines of supply in the face of various structural challenges, including changes to EU welfare regulations and escalating input costs in the form of higher feed prices.
As a consequence, value sales of pork products have risen over the last 12 months. However, volumes are under pressure.
UK consumers have cut back spending as household incomes have felt the pinch in the weak economic environment. Average incomes have fallen thanks to rising unemployment or underemployment and a reduction in state support due to government austerity measures. At the same time the cost of living has increased. Higher utility and fuel bills coupled with price inflation on non-discretionary goods, such as food, have all taken their toll on consumer sentiment in the country.
This situation presents a considerable challenge for pork producers attempting to grow sales and margins, Shore Capital analyst Clive Black tells just-food.
"Input price rises when consumer incomes are under pressure is a clear source of concern for supplier and retailer. This is currently the case," Black observes. "The greatest pressure for processors today are input price rises and a constrained consumer."
In order to overcome this, the UK's largest pork processors have looked to increase consumer appeal and add value to their products through innovation.
According to Danish Crown, there are a number of trends driving innovation in the UK. Flemming Enevoldsen, chairman of processed meats at the Danish farmer-owned cooperative, tells just food the company's UK arm, Tulip, has "a lot of focus on NPD".
"In the food market right now is there is a lot of focus on packaging, one of the trends is back to basics, there is a lot of focus on heritage products," Enevoldsen, who is acting Tulip CEO, says.
However, he says NPD in the pork sector tends to be "evolutionary rather than revolutionary" due to the conservative nature of consumers.
"We don't have the drive from consumers and from retailers - and from ourselves - to introduce totally new products. When you talk to British families they basically are very conservative when it comes to their food. And we are basically very conservative when it comes to product development: there are very few products launched that are game changers - you have evolution rather than revolution."
Tulip therefore focuses its innovation efforts on updating its existing line-up through product upgrades or recipe adjustments.
Cranswick chief executive Adam Couch tells just-food the UK pork processor also hopes to grow its business through new product development, by "expanding into new areas" such as pastry and pies. The group is also expanding in cooked meats, where Couch says Cranswick is "under represented".
Meanwhile, Couch says Cranswick is leveraging its knowledge of pork products to develop ready-to-cook products. "We are developing a lot of foil tray ranges. The kind of bang it in the oven type operations if you like. We are very much at the forefront of developing those. I wouldn't say [this is] a new development: it is expanding on what our knowledge-base is already. We do know where the market is when it comes to RTC but its becoming a greater and greater point of difference that we can exploit."
Another way that food companies frequently look to add value to their offer is through the development of brands. However, fresh meat categories traditionally have very few strong brands. While some smaller niche brands are starting to make headway in the pork category, it remains dominated by retailer's own label offering and the larger players in the sector are primarily own label suppliers.
For both Cranswick and Tulip, innovation is about more that product development: it is about investing in processes, technologies and facilities.
"Innovation is not only new products - it is in processes, doing everything smarter and quicker. Certainly in terms of the annual investments we are making in our factories, we are putting a lot of money into making them the fastest and most efficient," Enevoldsen says.
This sentiment is echoed by Cranswick and Couch insists the company is focused on making its factories best in class. To this end, the group has invested GBP100m (US$161m) in its fresh and cooked meat production facilities over the last five years.
Couch says the level of efficiency achieved and its drive to expand in fresh pork categories has provided Cranswick with the "headroom" to increase investments in developing its broader offering.
"We are very much at the forefront of having the best technology, systems and processes within the industry. That allows us to take up some of those opportunities that would have otherwise been difficult to manage. We do have headroom and flexibility to manage our way through, but we are very mindful that we can't rest back on out laurels. We've got to keep pressing ahead and being aggressive in terms of our product development and our robustness in dealing with operating efficiencies."
The importance of having a broad-based offering in the UK pork sector is evident. Operating across a number of sub-categories has the advantage of reducing dependency on any one product, while the ability to utilise the entire pig carcass reduces waste and boosts efficiency.
"Our success rests very much on the fact that we have a broad range covering the main categories. We have 19 manufacturing sites. We are basically covering most parts of the pork meat requirement. [A broad offering] gives us less dependence. We have also in this country have seen examples where a manufacturer has had to close down because they have lost one account. If you rely too heavily on one product, this is the fear," Enevoldsen says.
For UK-based pork processors, such as Cranswick or Hilton Food Group, having a broad base can also mean having a wide geographic spread.
Couch says exports have been "extremely important" for Cranswick and reveals that the company is looking to develop its overseas presence further as UK volume gains provide "greater opportunities" to increase investments internationally.
Cranswick is eyeing expansion in China, the US and Australia. The US is a particularly important market for ribs, a cut that suffers from low UK demand. Similarly, Chinese consumers are attracted to cuts of meat that are less popular domestically and Cranswick is reaping the rewards of having direct access to Chinese customers because both of its processing sites are approved to export into mainland China.
Meanwhile, Cranswick hopes to receive approval to begin exports to Australia by the end of this month. The company will then export "premium products much more akin to the UK market", Couch says. "We have quite high expectations of that market because we believe we can make some significant points of difference on our premium range."
The benefits of having a geographically diverse footprint have also been evident at Hilton, with growth in western and central Europe offsetting a slowdown in Sweden and product-mix pressure in the UK.
A spokesperson for Hilton tells just-food the company plans to grow sales by organically moving into new markets and increasing its product offering in existing ones.
"The strategy is to grow organically into new markets. For example, with Denmark they've opened up a new market with a new customer, which involves putting a facility in on the ground and growing sales there. That is an example of a new customer. They will also look to grow with existing customers into new territories," the spokesperson reveals.
Hilton is also working with existing customers to expand its market-specific product offering and roll out new lines, thereby increasing penetration, the spokesperson said.
"Hilton follow an organic growth strategy that remains the focus to grow into new territories with either new or existing customers," the spokesperson said.
However, the company has also indicates it has not "ruled out" M&A. This is significant because, while there are a number of strong UK players, there are also quite a few companies that are afflicted by underinvestment in facilities and innovation and are certainly feeling the pressure from poor consumer sentiment. As a consequence, consolidation in the industry is expected to heat up. The exit of Vion from the market - announced last month - could be viewed in this context.
"I think there will be a degree of consolidation in the sector. It is certainly, one could say, what is needed. Other than ourselves there is a level of underinvestment that has been a feature in the last five years or so. It needs a much more structured format: the sector has not been as well structured as it could be... we will have a much more structured approach in the next 12 months than that we have enjoyed, or not enjoyed, over the last 2-3 years," Couch predicts.
For Danish-owned Tulip, consolidation in the pork sector is viewed on the wider European stage. Enevoldsen is upbeat about the prospects for Danish Crown as the company looks to come out on top of this process.
"If you look at the processors right now, and a lot of them are being squeezed. I expect the consolidation of our industry to continue both in the UK and elsewhere. There are people getting out of the industry. There is a need for consolidation and we certainly want to take part in that. I see a good future for us."
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