A slow recovery for the grocery industry
A new year has dawned and after enduring four very tough years, there are hopes that the economy is finally seeing some green shoots, albeit small ones. Shane Dempsey, head of consumer foods at Food and Drink Industry Ireland (FDII) gives his thoughts on the Irish food industry and what he believes will be the major issues to focus on in 2014
22 January 2014
As we begin 2014, the long-awaited recovery has arrived. Unfortunately, it’s unevenly distributed across geographic, demographic and economic sectors. For example, Ibec has predicted growth of 2.8% in 2014 with 2% employment growth to match 2.5% in 2013. Unfortunately for those dependent on the domestic grocery sector, it’s likely that spending and employment growth will be somewhat behind the curve until late 2014.
Taxation must be reduced
Ibec research shows that more consumer spending is going into services, such as the hospitality sector, rather than retail. In addition, the negative effect of the property tax shows that any additional taxes in 2014, such as the imminent water charges, will depress consumer spending and sentiment. The problem for the grocery sector will continue to be that people without money can’t spend and that people with money are saving. FDII believes that the government must reduce personal taxation levels to stimulate the domestic economy as the marginal and average rates of tax militate against consumer spending.
Consumers to remain conservative
Even if the recovery continues throughout 2014, it’s likely that the shopping habits of the consumer will remain conservative and value-driven for some time to come. Those who do decide to spend will more likely splash out on larger consumer goods or services rather than on the weekly shop. In other words, families with 2014 cars will continue to do three shops a week across retailers and discounters for value promotions.
All this points towards a relatively tough year for domestically focused consumer foods companies. On the other hand, those companies with an export focus will experience growth barring some external shock. Consumer foods companies continue to diversify markets whilst continuing to target the UK; their key market. As there is a shop, farm and food company in every community, the domestic grocery sector represents a delivery mechanism for spreading stimulus and job growth across Ireland. The government must adopt effective policies that bolster the domestic grocery sector.
Will 2014 be the year of the elusive code?
The food industry has asked successive governments since 2006 to introduce fair trade regulation in the Irish grocery sector. In early 2014, we expect the government to publish legislation to introduce a statutory code of practice. Many believe we would have a stronger consumer foods sector if the code had been introduced in 2006.
The immediate introduction and effective enforcement of the code will be critical if it is to have any effect on fair trading practices in the sector – no more time can be wasted. Unfortunately, it appears that the government has decided not to appoint a standalone grocery sector adjudicator as in the UK. As the new regulatory framework is introduced in the coming months, industry will continue to work with the Department of Enterprise to ensure that the code is effectively enforced.
Regardless, two trends in the sector driven by the recession are likely to continue for the foreseeable future: increases in market share for discounters and in private-label penetration.
Another good year for the discounters
The discounters’ increase in market share will plateau some time, but not in 2014, even if the economy recovers strongly. This will increase pressure on other retailers, who will have to decide whether to continue to try to compete on the basis of price or some enhanced shopping experience.
Recessionary habits have opened the door for private-label which will continue to modify its offering and increase penetration.
Another facet of the consumer’s life will shape the environment for consumer foods companies in 2014: health. Governments are struggling to reduce obesity rates and will face related healthcare costs for decades. Retailers will begin to receive the same sort of negative media comment that food companies have attracted in the past on this issue in 2014. FDII members are making a significant contribution to reducing obesity in Ireland through reformulation, the promotion of workplace wellbeing and other cross industry initiatives. So far, the Irish government has sensibly resisted the introduction of unproven policies, such as discriminatory food taxation, that might further depress consumer spending with no health benefits.
In 2014, all consumer foods companies will have to adapt their labels to meet the requirements of the EU’s Food Information to Consumers Regulation – the most fundamental change in food labelling in 30 years. This regulation will set out mandatory requirements and will see the replacement of the ubiquitous GDA label with Reference Intake labelling. FDII will be working with companies to facilitate them in this transition period. From a consumer perspective, the appearance on grocery shelves of the UK’s hybrid traffic light labelling on some private-label and branded products may add to the confusion.
Expect growth in exports
On a positive note, consumer foods exports are likely to continue to grow. FDII has encouraged the Department of Agriculture to develop a sector strategy for the prepared consumer foods sector. This is an essential step in ensuring the diverse sector has a co-ordinated policy roadmap to help achieve its Food Harvest 2020 targets. FDII’s Consumer Foods Council believes that the sector can achieve a 40% increase in output by 2020 and support up to 10,000 jobs directly and indirectly by this time. The removal of quotas in 2015 is an obvious and huge opportunity for the dairy sector. However, to ensure we translate the anticipated dairy and beef output increases into increased value added products, we need a strong cadre of consumer foods companies ready to add value, innovate and ultimately employ people across the country.
The central part of this strategy must be to connect good companies to viable sources of finance. Like all other sectors of the economy, credit is tight. FDII has long called on the government to establish a sector specific fund involving relevant state agencies, international fund managers with food company experience and senior industry players. However, other sources of finance, such as venture capital do not view food companies favourably because, whilst they provide good return on investment, they do so over a longer period of time. Unfortunately for food companies, state sponsored funds are not geared towards this sort of investment and food companies are chronically underrepresented.
If the government can adopt these measures throughout 2014, they will spread and sustain economic recovery and jobs growth by supporting Ireland’s most important economic asset: its indigenous food sector.