Having contributed to and benefited from Ireland's sustained economic growth, the country's food industry is suffering acutely as a result of the downturn. Ben Cooper examines why the food sector in Ireland has proved more exposed than in other countries and what the industry is calling for the Government to do to mitigate the problems.

The suggestion that the food sector suffers less acutely during downturns than other consumers markets, while generally true, would one expects not go down too well in Ireland.

In reality, food is being affected to varying degrees across many EU countries, but the Irish food industry can probably claim the unwelcome honour of being the worst hit, and it is not hard to see why.

Having seen strong and sustained growth for many years during the 'Celtic Tiger' boom, Ireland is now suffering from the deepest of recessions. In addition, it is a country where the food sector is massively significant, not just for providing food but as an employer and an exporter.

"The food and drink industry is Ireland's most important indigenous sector," says Paul Kelly, director of Food and Drink Industry Ireland (FDII), the Irish food industry association.

According to the FDII, the food sector employs 46,000 people directly and some 60,000 people in distribution and other services. It has a gross output of over EUR18bn (US$24.38bn), and exports over EUR8bn worth of goods annually, accounting for 65% of exports by indigenous Irish manufacturers. Indeed, Ireland has the highest food exports per capita in the EU after the Netherlands. The food sector purchases EUR8.4bn worth of Irish goods and services, almost 50% of the total sourced by manufacturing industry in Ireland as a whole.

In addition, the food sector purchases over EUR5bn worth of agricultural products from Ireland's 120,000 farmers annually. "Total employment linked to the sector is thus almost 230,000," Kelly adds. "It is as important to Ireland as car industry employment is to Germany."

As for the recent performance of the sector, the picture is unsurprisingly bleak. According to the Irish Central Statistics Office, retail sales of food, beverages and tobacco rose by 1.5% in value but fell by 2.4% in volume. Moreover, Kelly says "anecdotal evidence from food and drink companies indicates that much larger decreases were evident in some categories - particularly those that sell into the convenience retail sector".

Food and drinks exports fell in 2008 by 6.5% to EUR8.16bn. With 43% of Irish food exports destined for the UK, the 30% devaluation in sterling has had "disastrous consequences" for Irish food exporters, says Kelly.

"Effectively our EUR3bn worth of exports to the UK is now worth almost EUR1bn less," says Kelly. "At the same time, we face a cost base here that is just not sustainable - the second highest electricity costs in Europe and labour rates that are now 40% higher than in competitor factories in the UK. Trading through such difficulties is not possible where credit availability is tight and exporters are further constrained by limited and expensive credit insurance."

To help food companies exposed to adverse currency movements, FDII is calling for employers' PRSI (pay related social insurance) payments to be suspended for a period of two years for companies in sectors where exports to the UK account for more than 40% of total exports, with a special marketing compensation grant introduced for companies to overcome exceptional market distortions where they can demonstrate that the loss of sales was due to exchange rate fluctuations.

Moreover, with the lack of credit a major problem, FDII is pushing for a loan guarantee scheme to support working capital for firms of any size; a new risk capital investment programme to be developed to provide investment of up to EUR2.5m per enterprise; a dedicated loan guarantee scheme for SMEs; a loan subsidy programme for SMEs; and the postponement of three months' worth of income tax and PRSI payments for up to two years for companies experiencing liquidity problems.

In addition, FDII says the Irish government should work with private-sector insurers with a view to developing a state-backed guarantee scheme for export credit insurance, while also urging the Government to introduce a number of immediate measures to reduce energy costs for business.

FDII estimates that 2,000 food industry jobs were lost in the first two months of the year, and a further 2,000 will be lost by the end of April. While so far the job losses have come about through companies downsizing, Kelly predicts that "many of the future losses will be in SMEs and that it will be accounted by companies going completely out of business rather than simply shedding jobs".

Certainly, news coming out of Ireland in recent months supports the fairly bleak prognosis. As early as January, Irish dairy and nutrition group Glanbia warned of a "very challenging" year ahead, and last month confirmed that it would be making job cuts, with around 50 posts expected to go.

Irish food group Greencore said in February that its half-year profits, to be published in May, would be "in line" with its last fiscal year but warned that the weak pound would continue to weight on earnings and sales. Also last month, Irish food maker Kerry Group said it plans to make 70 job cuts at its Shillelagh plant in County Wicklow.

Another company to have announced job cuts in recent months is the Irish food retailer, Superquinn, underlining how the economic downturn has impacted on the food retail market. Superquinn announced in January that it would be cutting 400 jobs, representing around 10% of its workforce, and closing one store in Dundalk as it looked to cut costs.

Not only has the weakness of sterling created problems for Irish exporters. It has also exacerbated the problem of cross-border shopping, with Irish consumers in border regions increasingly crossing into Northern Ireland to do their food shopping.

"With the weakness of sterling there has been huge growth in the numbers of people travelling to Northern Ireland to do their shopping," says Kelly. Indeed, Kelly points out that Asda and Sainsbury's now have a combined 2.5% market share in the Republic of Ireland despite not having any stores south of the border. "This is having a devastating impact on retail sales in border regions," he adds.

In addition, the economic conditions have resulted in a general increase in price consciousness among consumers and a growth in discount retailing. The discount sector currently has less than 10% of the market but has been increasing its share; both Aldi and Lidl have stated their intention to open more stores in Ireland.

"Consumers are focusing on value and price to a greater extent than for example convenience," says Kelly. "Retailers in turn are responding and this in turn affects the products that the food industry can successfully sell and also the extent of promotional activity."

Research by the National Consumer Agency (NCA) published last month suggested the price gap between the main Irish supermarket chains and discount stores is narrowing. Although Lidl and Aldi remained more than 20% cheaper for own-label goods, the NCA figures showed keener competition between the main supermarket groups, Dunnes Stores, Superquinn and Tesco, on branded goods,

In response to the hardships being seen in the retail sector, the Irish retail trade body, Retail Excellence Ireland, last month proposed a raft of measures, including state action on providing credit to retailers, the postponement of new business rates calculations until late 2011, a reduction in the minimum wage and a cut in VAT to 15%.