The Scottish Government

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Executive Summary

• DTZ was commissioned by the Scottish Executive's Rural and Environment Research and Analysis Directorate ( RERAD) to conduct research into the levels of processing of primary produce in Scotland.
• The study was commissioned in November 2006 and completed in July 2007.
• The aims of the research were threefold:
  • To understand the opportunities to add value to food and drink processing in Scotland
  • To understand purchasing strategies of processors
  • To provide an evidence base to inform future policy
• Throughout this study the term "primary sector" includes the agriculture, fishing and fish farming sectors, with "primary produce" being the outputs from these sectors.
• The study methodology had three main components:
  • Input-Output analysis and modelling
  • Stakeholder consultation involving industry bodies, and large companies.
  • A survey of 250 companies in the food and drink processing sector.

The study considered who are the buyers of Scottish Primary Produce.

• Around 94% of sales of primary produce are accounted for by four purchasing groups: Scottish food processing companies (26%); Scottish households (24%) ¹; the Scottish primary produce sector (18%); and non-Scottish purchasers (26%) including the rest of the UK and overseas.
• Figure 1 below shows purchases of primary produce by these four groups from all origins.
• The area outside the circle is non-Scottish purchases. This will include purchases of produce not available from Scotland ².
• For Scottish purchasers, around a third of the primary produce they purchase is from non-Scottish sources.

Figure 1 - Purchases of primary produce by main Scottish purchasing groups

Source: Scottish Input-Output Tables, 2003.

The study considered the destinations of Scottish-processed food and drink

• Scottish food and drink processors sell 21% of their output within Scotland, 42% to the rest of the UK, and 37% outside the UK.
• Sales within Scotland are highest in the dairy sector (59%), followed by soft drinks (55%) and beer brewing (44%).
• Foreign exports (non- UK) are highest in the spirits and wines sub-sector (89%) and lowest in the soft drinks sector (2%).
• The bulk of outputs of the Scottish food and drink processing sector are sold to consumers via retailers, highlighting the fact that there is little further processing of this material.
• The value of sales to other processors is generally small with the obvious exceptions of products which are ingredients including oils and fats, and processed grains e.g. flour.

The findings on sales of primary produce were benchmarked against other EU countries selected as follows:

• • UK - an important benchmark for Scotland.
  • Italy - a Mediterranean country with a strong, traditional, food heritage and international reputation for quality produce
  • Austria - a mid-European country with strong connections to Germany similar to Scottish connections to the UK
  • Denmark - a north-European, intensive, food producing country with an export focus and international reputation
  • Poland - a developing country in agricultural terms with scope to significantly raise productivity and exports
  • Wales - part of the UK and shares a border with England. It is also a similar size in terms of population and has a similar economic structure to Scotland.
• A summary of the analysis is presented below which highlights the key differences between countries and Scotland's interdependence with the rest of the UK:

Table 1 - Destinations of primary produce for benchmark countries

Sources: Scottish Input-Output Tables, 2003; UK Input-Output Tables, 2000; Eurostat Input-Output Tables for Italy, 2000; Eurostat Input-Output Tables for Austria, 2000; Eurostat Input-Output Tables for Denmark, 2000; Eurostat Input-Output Tables for Poland, 2000; WERU Input-Output Tables for Wales, 2000.

We combined our analysis above with findings from stakeholder consultations to provide an overview of the level of Scottish primary produce processed in Scotland by sub-sector.

• The findings are presented in Table 2 showing that most sub-sectors are considered to have high levels of processing of primary produce.
• In only two cases is processing considered to be low overall - that of oilseed rape and blackcurrants. There is no oilseed rape crushing plant in Scotland and blackcurrants are sent to England to be processed into fruit drink.
• In the case of added value potato products, lamb and fish processing, the level processed is considered to be medium. There are good reasons for the level of processing not being high in these sub-sectors - largely due to economies of scale that cannot be gained in Scotland. In other words, the current situation is an efficient market response to the economics of food processing.

Table 2 - Summary of Scottish processing sub-sectors and their sourcing of Scottish primary produce.

The final stage of the research was a survey of 250 food and drink processors.

• Of the companies surveyed 55% were small; 27% medium; and 18% large.
• Survey results were weighted by company size to reflect the Scottish situation overall. Only weighted results are reported in the Executive Summary, while both weighted and unweighted results are shown in the main report.
• Almost three quarters (72%) of respondents are producing for the mass market rather than niche markets.
• More than half (58%) said that none of their products receive any further processing, with a further 28% saying only some of their products are not final outputs.
• The meat and fish processing sub-sectors are more likely to have some of their output used as an input to further processing (62% and 51% respectively, compared to 41% for the survey as a whole).
• Drinks companies are less likely to sell any of their outputs for further processing - 79% said none of their outputs are processed further compared to 58% overall.
• Just over a quarter (27%) said that they source all of their inputs from Scotland, with a further 32% saying that they source more than half of their inputs from Scotland. Very few (just 7%) said they do not source anything from within Scotland.
• The dairy and meat sectors are more likely to source their inputs from Scotland, in fact, all of the companies surveyed in these sectors said they source at least some of their inputs from within Scotland.
• Activity in the drinks sector is more likely to rely on non-Scottish inputs, 15% using no Scottish inputs at all, twice that of the sample overall (7%). Around two thirds of company activity (64%) relies mostly on unprocessed inputs.
• Around a third (32%) of companies said the majority of their sales are within Scotland, just over half (52%) said the majority of sales are to the rest of the UK, and 16% said their main market is outside the UK.
• The number of companies who sell mainly overseas is much higher in drinks and in fish-processing sectors. None of the companies in the meat processing sector or the dairy sector had the majority of their sales overseas, with much larger UK markets than the sample overall.
• More than half of respondents (54%) said that demand for quality was the main issue driving their market, followed by price (26%). Only 8% said that it is mainly branding that drives their market.
• For nearly one in ten (9%) companies product origin is not a consideration, but for almost two thirds (64%) origin is the main consideration, most often because of rules on sourcing and branding ( e.g. Protected Geographical Indication).
• Product origin is the main consideration at 93% in the fish processing sector and 85% in the meat processing sector.
• Origin is of increasing importance amongst almost all of the survey respondents (96%). 71% said it was because customers want to buy Scottish products.
• Competition is much more of an issue for food and drink processors than for businesses generally. Lack of raw materials, too, is an important challenge for the food and drink processing sector (about 15% said that this was a challenge), whilst it is rarely an issue for businesses generally.
• Respondents felt that the main way to increase availability of Scottish produce was to increase demand (both in the processing sector and from end consumers).

Conclusions

• The key aim of this report was to gain an improved, evidence based understanding of the levels of processing of primary produce in Scotland and to understand why the situation is as it is.
• The broad picture is of total primary produce sales of £3billion, of which 26% are sold to the Scottish processing sector, 24% sold directly to Scottish households and 18% to other primary producers. A further 26% go to non-domestic purchasers, reflecting the fact that Scotland is an integral part of the UK economy.
• When we put these figures into context with a range of benchmark countries, it is clear that Scotland has a lower proportion of total domestic sales than any of the benchmark countries except Wales. This low level of domestic sales is due to its small population and dependence on the UK economy.
• Scottish primary producers' sales to Scottish households are similar to the UK, but higher than other benchmark countries except Poland. This figure includes sales through retailers and highlights that much Scottish primary produce requires little in the way of processing. This may, in part, be due to differences in culture and tradition between Scotland (and the UK) and the benchmark countries and does not necessarily imply differences between the strengths of primary producers.
• The figures highlight that the notion that very high levels of Scottish product are being processed outside Scotland, robbing Scotland of the opportunity to add value, is in general wrong. Rather, high levels of Scottish primary product are being exported out of Scotland in processed form to be sold to the final consumer. This is confirmed by the results of the survey of food and drink processors - 70% of respondents state that none of their output is processed further.
• Consultation indicates that the level of processing is generally high. Sub-sectors such as red meat have made real progress in adding value to output with considerable investment taking place in adding value to cheaper cuts. Leakage of unprocessed material in this case seems to be a function of company structure where some processing plants are located in England (see Appendix C for detailed discussion of the meat processing sector).
• In only two cases is processing considered to be low overall, that of oilseed rape and blackcurrants. There is no oilseed rape crushing plant in Scotland and blackcurrants are sent to England to be processed into Ribena.
• In the case of added value potato products, fish processing and lamb processing, the level processed is considered to be medium. There are good reasons for the level of processing not being high in these sectors. It is largely due to economies of scale that cannot be gained in Scotland. In other words, the current situation is an efficient market response to the economics of food processing (see Table 4.1. for more on this as well as Appendix C for detailed information).
• The way to improve value added in many of these sectors will be to focus on low volume, premium products to niche markets. These products are most likely to be sold in England or export markets. In general, the Scottish population is not the target market for these types of product.
• The consultations and flow charts in Section 4 show the concentration of the processing sector into a small number of large firms. The survey results highlight that the focus of large players tends to be on volume products, while small players focus on premium products (see Figure 5.2).
• Almost two thirds of Scottish processors surveyed stated that at least half of the raw materials they buy are sourced from Scotland and more than half said that they buy food that is mostly unprocessed. The question is whether processors could be encouraged to buy more Scottish product?
• Businesses identify a range of different challenges that they face in the marketplace with competition being the most cited. Competition is likely to get more severe as international trade barriers continue to be rolled back and the EU accession countries come on stream with a raft of good quality primary produce.
• Whilst many companies across all sectors say that they would purchase more Scottish produce if demand was higher (see Figure 5.13), many also say that they cannot source enough Scottish produce, especially in the fish processing sector (see p.55) This reinforces the fact that there are significant differences between sub-sectors in the availability of produce and that increasing production may be appropriate.
• The policy emphasis of the past 10-15 years has been on diversification, environmental protection, and environmental enhancement. Some of this focus has been at the expense of production, albeit subsidy driven production does not always produce the right quality of products. As the industry adjusts to subsidy free production (or at least a less rigid subsidy framework) there will be opportunities to target investment on encouraging efficient production of products that are in demand.
• Within this context, the role of protection will be important. The UK has been slow to take up PGI and PDO designations in comparison to other EU countries. Red meat is the most advanced in this regard. Scotland should be able to further exploit the schemes to add value to its produce.

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