Dark clouds are hovering over the Scottish food and drink industry at the moment. Last week it was confirmed that Scotland would be the first part of the UK to introduce minimum pricing on alcohol - and at 50p rather than the 40p planned elsewhere, affecting a quarter of all alcohol sold north of the border. The news came on top of a less-than-stellar performance from the domestic grocery market, with sales growth lagging behind that of both England and Wales [Kantar Worldpanel].

But every cloud, as they say - and as far as silver linings go, they don’t get much shinier than the country’s phenomenally successful export market. The country has always been strong as an exporter of whisky but over recent years has really strengthened its food exports, to the extent that overall exports have shot up 38% over the past four years [Scotland Food & Drink] and the industry has already smashed its 2017 target of growing exports to £5.1bn, with sales of £5.4bn in 2011.

And changes are afoot that could similarly transform the fortunes of the domestic grocery market - provided obstacles such as the controversial ‘Tesco tax’ can be overcome.

Whisky is the life of Scotland

In the export market, whisky remains not just Scotland’s but the UK’s great success story, accounting for almost four-fifths of all UK food and drink exports.

Exports of Scotch whisky continued to grow last year, hitting a record £4.2bn in shipment value, up 23% on the year before.

Perhaps more impressively, rising demand in both emerging and more mature markets has resulted in export values increasing by an average of 10% a year over the last five years. It now contributes £134 per second to the UK balance of trade.

“Scotch whisky is a trailblazer for the UK food and drink sector,” says Scotch Whisky Association communications manager Rosemary Gallagher. “It made up 78% of total Scottish food and drink exports last year. It accounts for a quarter of UK food and drink exports, is sold in almost 200 markets worldwide and contributes almost £3bn annually to the Scottish economy.”

It also provides a valuable ballast against swings in the economy. Because 95% of whisky is exported, the industry has largely been resilient to the economic downturn in the domestic market.

Of course, Scotland exports more than whisky. Since 2007, its food exports alone have grown 62% to £1.16bn today. Price inflation and currencies have played their parts, but this growth is noteworthy by any standard.

James Withers, chief executive of Scotland Food & Drink, believes the opportunities for food exports are bigger still.

“At the moment 80% of all our exports go to just 10 countries,” he says. “When you compare Scotland to similar countries like New Zealand and Denmark, we’re not there yet. Our total food export market is over £1bn and this year Ireland will export more than €2bn in dairy alone.”

The last few years have already seen unprecedented levels of investment by the retail multiples in Scottish food & drink, giving suppliers a bigger platform from which to grow sales and secure listings in Scotland and beyond.

“By achieving listings in supermarkets, local Scottish suppliers not only gain much better access to the Scottish market, they can also gain UK-wide listings,” says Ian Shearer, director of the Scottish Retail Consortium. The multiples have a vital role to play in ensuring the success of Scottish products. And Scottish products are also vital to the performance of the retailers.

Tesco - the largest of the mults in Scotland, with 185 stores - says value sales across its 1,500 Scottish lines have grown at “well over 10%” in the past three years and last year hit £2.1bn.

“There’s a feeling that this is just the starting point for Scotland,” says James Withers, chief executive of Scotland Food & Drink. “We’ll be looking back at this period as a sea change for the industry.”

Government initiatives such as the ‘Tesco tax’ are causing some to speculate about how long the mults’ focus on Scottish products will last - but as yet interest shows no sign of waning. Withers recently brokered a meeting between the Scottish government and the major supermarkets to discuss how to fuel future growth.

Dairy and booze: The best of Scotland’s drinks NPD

a2 milk
Launching
: Autumn 2012
Manufacturer: Robert Wiseman Dairies

Robert Wiseman Dairies’ biggest launch this year, a2 is a form of pure dairy milk that is easier to digest than most. It is designed to “bring people back to dairy” - particularly those who usually struggle to stomach milky products. All cows produce milk containing either A1 or A2 beta-casein proteins, and Wiseman has used a simple, non-invasive DNA test to select cows that produce milk rich in the latter, more stomach-friendly, variety. Its a2 milk will launch in the major multiples this autumn.

 

Original Export
Launched
: May 2012
Manufacturer: Tennent’s

Scotland’s leading lager producer has launched a premium export lager for the domestic market. Tennent’s Original Export is brewed in Glasgow and taps into demand for local provenance - it is made with 100% Scottish barley. The beer is sold in multipacks in about 2,000 outlets, and comes in two formats: 300ml bottles and 440ml cans.

 

Bonnie Shots
Launched
: April 2012
Manufacturer: Rowan Glen

Galloway-based Rowan Glen makes dairy products using only milk from neighbouring farms. The latest additions to its range are Bonnie Shots, two probiotic yoghurt drinks in strawberry and raspberry & blackberry flavours made using Scottish fruit. According to the company, they are the only Scottish probiotic yoghurt drinks on the market.

 

Johnnie Walker Gold and Platinum
Launched
: May 2012
Manufacturer: Diageo

Diageo Reserve Brands has added two lines to its core Johnnie Walker range. Gold Label Reserve (rsp: £39.99) has been created from whiskies selected by master blender Jim Beveridge, while even-more-premium Platinum (rsp: £69.99) is described as “a sophisticated blend of malt and grain whiskies matured for a minimum of 18 years”.

“It’s interesting to watch retailers clamour to position themselves as the leading supporters of local suppliers,” he says. “Five years ago you just couldn’t have imagined that.”

All the major multiples have been investing heavily in building their relationships with Scottish suppliers. Asda, for instance, completed its first supplier development programme to help build long-term trading relationships last June. Over its six-month duration, the initiative led to a combined £3m sales increase for the participating suppliers through Asda stores.

The programme, which involved a series of workshops on developing products, gaining listings and maximising sales, was organised by Scotland Food & Drink with funding from the Food Processing and Marketing Grant scheme. It also received financial contributions from the 10 companies participating, which included salmon supplier Shetland Products, family butcher Simon Howie, Border Biscuits and Porelli, a family-owned ice cream business.

“Their knowledge of Asda has grown massively, as has their confidence when interacting with the buying team,” says Withers. “I am pleased to report we are currently working on a further programme.”

Fanning the olympic flame north of the border

The Olympic Games are, of course, big news for suppliers and retailers in the South East - but how marked will their impact be on Scottish grocery?

The industry is expecting to benefit from increased tourist trade as consumers attending the Games extend their UK visits to holiday in Scotland.

Online travel store Expedia reports a significant increase in searches for Scotland - and bookings for Glasgow and Edinburgh are up 30% year-on-year, says Andy Washington, Expedia MD, UK & Ireland.

Visit Scotland, meanwhile, is targeting those looking to get away from the bustle of the capital during the Games.

All of this is likely to have a positive impact on grocery retail sales - starting from as early as next week.

On 8 June, the Olympic torch arrives in Scotland and its route passes within metres of many supermarkets and c-stores, bringing with it the opportunity to promote community events - and drive sales.

As in the rest of the UK, official Olympics sponsors such as Coca-Cola are already getting heavily involved with PoS advertising.

Isla Craig, who manages the Crianlarich Store in Perthshire, expects the shop to do brisk trade as the torch passes, despite being located a couple of hundred metres from the route.

“There will be a lot of people in the village that day, I’m sure,” she says. “It might not pass through our end of the village, but Crianlarich is definitely getting involved. We’re expecting a lot of visitors as we’re one of only two areas near here on the route. There’s certainly a buzz and I am expecting a sales uplift.”

With 54 stores in Scotland, Asda’s estate is currently smaller than Sainsbury’s (63) and Morrisons’ (59), as well as Tesco’s. Waitrose has the smallest estate, with just four stores north of the border - in Glasgow’s West End and Newton Mearns suburb, as well as Edinburgh’s Comely Bank and Morningside.

Unsurprisingly, it sees huge potential for growth. Indeed, in January 2011, it unveiled plans to open 16 stores in Scotland by 2015 - and it has just gained planning permission for stores in Stirling and Helensburgh, which are likely to begin trading in 2013.

“Next year will mark another significant year in helping us achieve our aspirations in Scotland when we open our first stores outside Glasgow and Edinburgh,” says Martin Gorman, Waitrose development manager for Scotland.

The company is also set to open a new distribution centre in Leyland in Lancashire that will support its growth in Scotland as well as in the north of England - and expansion will not stop there, Gorman adds, with community consultations under way about plans for a new branch in Milngavie, Glasgow.

Tesco, meanwhile, has opened 15 stores in the past year alone, of which 12 were its Express convenience format. “In the last year we created 800 jobs in Scotland, opening new stores in Glasgow Parkhead, Airdrie and Inverness,” says a spokesman. “This year we are building a new store in Aberdeen and continuing with substantial developments in Dunfermline town centre and Linwood, Renfrewshire - the latter being our biggest and most complex build in Scotland for many years.”

Ambitious target for Scottish food
Scotland Food & Drink - organiser of the 2012 Scotland Food & Drink Excellence Awards - has an ambitious target to meet. It aims to grow the value of Scotland’s food and drink sector to £12bn by 2017.

It’s made a good start - since 2008, the industry has boosted annual sales by 8% to total £9bn last year - but there’s still some way to go. That’s why events like the Awards, held in Dunblane on 24 May 2012, are so important.

Scotland has a natural larder to rival any country’s, but to secure growth the industry needs to build on its reputation for quality with impressive food and drink innovation - such as that celebrated through the Awards.

The Product of the Year award went to Katy Rodger’s Knockraich Farm for its probiotic yoghurts, produced using milk from the farm’s British Friesian herd and available in natural, raspberry and rhubarb variants.

CCS Estates’ Cullisse label came top in the soups, preserves and accompaniments category for its mixed pepper & spice marinade and Highland rapeseed oil, while the bakery & cereal-based product category was won by Lazy Day Foods for its gluten-free Indulgent Chocolate Slice range.

Award-winning NPD wasn’t restricted to up-and-coming suppliers, however. Scottish stalwart Macsween of Edinburgh came out top in the meat category in recognition of its new microwaveable haggis and black pudding range.

Lanarkshire-based Border Biscuits, meanwhile, picked up two prizes. It bagged the Profiting Through Skills Development award in recognition of its commitment to developing its employees, and also earned the coveted Business of the Year prize.

“The Awards provide an inspiring snapshot of everything great about Scottish food and drink,” says James Withers, chief executive of Scotland Food & Drink. “The breadth of entries showcases just how varied the sector is.”

The retailer attributes the strong sales of Scottish products through its stores to its growing use of local suppliers. “We are continuing to see growth in sales of our Scottish produce,” says a spokesman. “Our investment in building our network of Scottish suppliers is delivering year-on-year growth. A particular strength is that our Scottish team allows us to offer technical support based in Scotland to Scottish suppliers.”

Tesco’s Scottish sourcing office works with more than 150 Scottish suppliers, many of whom deal with growers, farmers, creameries and distilleries across the country. Together, they supply the stores with over 1,500 products - 80 of which launched in the past year.

Tesco is keen to shout about its success with Scottish products. On 15 March, a new livery for 14 Tesco lorries was unveiled at the Scottish parliament by Richard Lochhead, cabinet secretary for rural affairs and the environment. The livery design highlights the range of locally sourced food and drink available through Tesco, with the caption: ‘At Tesco we’re proud to work with over 150 Scottish producers.’

The multiples’ emphasis on Scottish sourcing taps into and propagates the broader recession-driven trend for local food and drink, but there is a caveat. “More often than not consumers will choose a pack highlighting provenance over one that doesn’t, but only if the price is the same,” notes Sandie Wilkie, sales and marketing director at Robert Wiseman, citing research carried out on behalf of the dairy.

From biscuits to booze: Scotland’s rising stars

Simon Howie Foods
Family butcher Simon Howie’s recent growth - the company boosted its turnover last year by £1.5m to a total of £10.5m - was rewarded when its eponymous chairman bagged the prestigious Glenfiddich Spirit of Scotland Business Award 2011 in recognition of his outstanding business achievements. The company, which Howie started in 1986 aged 19, launched a range of meat products including its Farmhouse Kitchen meals into Tesco, Sainsbury’s and Morrisons in November 2011. Simon Howie Foods is part of the Simon Howie Group, which has an annual turnover of over £40m.

Graham’s The Family Dairy
Founded by the current chairman’s father in 1939, Graham’s has gone from producing 400 pints of milk a day for delivery by horse and cart to become the UK’s seventh-largest bulk liquid milk producer, with daily production in excess of 360,000 litres. The family business boasts an award-winning range of milks, creams, butters and ice creams, and last year Graham’s launched Scottish Spreadable Butter - the only such product on the market.

Border Biscuits
Border Biscuits raked in a turnover of £9.3m last year. Its most popular biscuits, dark chocolate gingers, have recorded particularly strong sales growth, increasing value sales by 70% in the first four months of 2012. Louise Creevy, Border Biscuits national account manager, attributes this to new listings in 180 Asda stores - and expects the new-look packs rolled out across the range in May 2012 to help keep sales buoyant in coming months.

BrewDog
This Fraserburgh Brewery has rapidly made a name for itself - as much for its marketing antics as for its beers. The company recently hosted an agm for new ‘fanvestors’ brought in through its Equity for Punks scheme, which raised £2.2m. The event combined the usual business reports with craft beer tastings, rock bands and gourmet burgers. BrewDog may be unconventional - but it now employs 85 staff and has an annual turnover of £10m.

This change in behaviour is making things more challenging for producers - as is the greater scrutiny they are being placed under by increasingly savvy consumers on the provenance front. “Five years ago, all you had to do was put a saltire on pack and you could charge a premium,” says Withers. “Now you can’t just call something Scottish. Consumers are asking what ‘local’ really means.”

It’s a challenge Scottish companies are rising to, however - and the growing influence of the mults means many small producers are reaping enormous rewards.

Caithness Biscuits - based in Thurso, the most northerly town on the Scottish mainland - is a husband-and-wife business producing shortcakes, biscuits and oatcakes. It started supplying two local Tesco stores three years ago, and a year ago this paid off with a new contract. The company now supplies two lines to 60 stores across Scotland, allowing it to move to new premises and grow from two members of staff to five.

“Achieving an expansion of this size was really daunting for us, but we’re all geared up and ready thanks to the support from the Tesco local sourcing team who have given us technical advice and support,” says Caithness Biscuits owner Stuart McConnach. “It’s incredibly helpful to a small business like ours. We often have customers asking where they can get our biscuits and now, thanks to our wider listing with Tesco, our name and presence is more widely available.”

Chorus of outrage at minimum pricing plan
The decision last month to set Scotland’s minimum unit price for alcohol at 50p, not the 45p initially mooted, was greeted with consternation, if not incredulity, by the industry.

And hopes of a last-minute reprieve were dashed last week when the Scottish government backed the measure by 86 votes to one, which will make Scotland the first part of the UK to implement it - as early as next April.

While Scottish health secretary Nicola Sturgeon insists the move will reduce deaths, hospital admissions and crime, opponents argue that it is a wholly political gesture that will punish the majority of responsible consumers with higher prices, hit the poorest hardest and do nothing to tackle the root causes of alcohol misuse.

“The announcement that the price is to be set at 50p does nothing to change our mind about the impact of this regressive and disproportionate measure, which will punish low income and moderate drinkers,” says Scottish Grocers’ Federation chief executive John Drummond. “Minimum pricing will drive up illicit, cross-border and internet sales to the detriment of indigenous Scottish retailers, while any profit from increased prices would be more than offset by falling sales.”

Gavin Partington, interim chief executive at the wine and Spirit Trade Association, agrees that the measure will do nothing to tackle the root causes of alcohol misuse. “The government’s own report shows that 73% of alcohol prices in the off-trade would rise overnight,” he says. “Rather than penalising the responsible majority, we believe alcohol policy should be targeted at problem drinkers.”

Maximum impact: 29.2% of Scottish beer and cider retails at less than the threshold of 50p per unit - by retailer, that’s 35% of Asda’s beer and cider, 29% of Tesco’s and 23% of Sainsbury’s

Further north, fish supplier Shetland Products began supplying Tesco’s Shetland branch in 2009. Within a year, the company was supplying stores across Scotland - and in the past year alone it has recorded a 124% increase in sales of its WildWaters smoked salmon range in Tesco, as well as securing a new listing for a fourth salmon SKU in Asda stores after participating in the retailer’s supplier development programme.

One category posting particularly impressive growth is speciality beer. Having slowly gained momentum over the last few years, 2012 may be the year that craft beer makes its off-trade breakthrough (see The Grocer’s forthcoming Focus On Craft Beer, 30 June 2012). Nielsen Scantrack figures show that beer sales in the UK off-trade grew by just 1.9% during 2011, to £333m, while ‘speciality’ beers, which include craft brews, grew by a far healthier 10% to make up a tenth of total beer sales.

There are now over 60 independent breweries in Scotland and with distribution increasing in supermarkets and limited ranges beginning to appear in convenience, hopes are high for the sector.

“The growing trend to ‘buy local’ has given us a solid platform on home turf, particularly in the specialist independents where the range is very much driven by locality and knowledge of local producers,” says Crawford Sinclair, UK director of sales at Edinburgh-based brewer Innis & Gunn. “The multiples have also reacted by changing their sourcing policies - you’ll see clusters of stores now that stock product from local producers, which wouldn’t have happened even a year ago.”

Kantar data

Scotland is a unique trading environment - shoppers spend £29 more per head on food and drink than the rest of the UK every year, as well as £119 more on branded products.

Brands account for 47.9% of food and drink spend north of the border, compared with 44.3% in England and Wales.

Packaged grocery makes up a greater proportion of Scottish shoppers’ spend. soft drinks, preserves, biscuits and chilled convenience foods all have a higher share of spend.

The overall Scottish grocery market for food and drink is growing behind the rest of the UK, but there are certain categories that go against this rule. Alcohol spend, for instance, is up 9% in Scotland as a result of its ban on multibuy deals and multipack discounts.

Scottish shoppers are increasingly looking to consume food for health reasons, whereas health has become less of a priority in the UK overall.

Arguably the most high-profile of the craft brewers is BrewDog, the Fraserburgh-based company that has become notorious for its unconventional marketing. James Watt and Martin Dickie, who started the company in 2007, saw profits shoot up 92% last year to £425,000 on turnover up 77% to £5.92m. BrewDog now has 85 staff and plans to open a £7m facility in July that will allow it to increase capacity 10-fold. The company is hoping its growing number of BrewDog bars, located in cities across the UK, will boost awareness - and also help accelerate off-trade sales.

Alloa-based Williams Bros has adopted a similar tactic. Eighty per cent of the beer produced by the company is packaged in bottles, says sales and marketing director Richard McClelland, giving it leverage to grow in both the on-trade and the off-trade. “The craft beer movement is only going one way,” he maintains. Given that Williams Bros already has permanent listings in the big four, and convenience listings are on the increase, his optimism looks to be well-founded.

Big companies, too, are capitalising on consumer demand for provenance. Following a sustained period of product development and acquisition, one of Scotland’s best-performing brands, Highland Spring, has been so successful at exploiting its Scottish heritage that it has overtaken UK and imported competitors for the first time, on the back of year-on-year value growth of 10.8% [Zenith International 12 m/e December 2011].

Ever alert to opportunities to showcase its Scottish credentials, the company was quick last year to cash in on growing demand for flavoured waters by offering a Scottish alternative. “We saw a big opportunity in the wholesale channel because retailers were buying imported flavoured waters, and we wanted to give them an offering with more provenance,” says Paul Condron, head of brand marketing.

The company’s Hydr8 brand, launched in February 2011, has already established itself as the UK’s 11th-biggest bottled water. The launch has been Highland Spring’s only foray into flavoured water - though Condron doesn’t rule out further launches - and demonstrates Scottish producers’ readiness to exploit the local sourcing opportunity. Indeed, Condron explicitly pinpoints provenance as the major driver behind the company’s success.

Irn-Bru wows its fans on YouTube

Irn-Bru rarely launches new campaigns, but when it does, they tend to create a stir. The new ‘Irn-Bru Gets You Through’ push is big news north of the border, and its three irreverent ads have garnered hundreds of thousands of hits on YouTube. “One of the ads has been so popular we’ve decided to release it as a TV ad,” says Jonathan Kemp, commercial director at owner AG Barr. The Grocer can also exclusively reveal that Irn-Bru will update 2011’s Bru-Jet promotion with a Bru-Island version in autumn 2012, giving away a trip to the remote Cape Verde Islands.

“Provenance is huge and foreign water brands have perhaps suffered as a result of that,” he says, adding that he believes the importance of provenance is magnified in his native Scotland. “The multiples tend to have a regional focus on ranging so there are more Scottish brands in Scottish stores. The taste profile of a Scottish consumer is different - and flavoured water performs better here than elsewhere.”

Some major brands certainly perform better in their Scottish homeland than anywhere else. Irn-Bru is a prime example - it has “a strong presence thanks to its heritage in Scotland”, says Kantar Worldpanel business unit director Mark Thomson. Penetration among Scottish shoppers is higher for Irn-Bru (at 48%) than it is for soft drink giant Pepsi (39%) and Coca-Cola (36%), according to Kantar Worldpanel.

Other home-grown brands with exceptional popularity include Bells Meat Pies, purchased by 45% of Scottish shoppers, and Baxters, the 142-year-old Scottish manufacturer of soups, preserves and condiments, bought by 47% of shoppers.

A growing number of Scottish food and drink brands are also gaining traction in the rest of the UK and abroad - with demand coming from unlikely sources in some cases. The Scottish shellfish Marketing Group (SSMG), a co-operative representing 37 member farms, recently won its first export order from the Middle East. The order from Dubai-based food distribution specialist JustFood International was for half a tonne of premium cooked mussels, and the company hopes it will pave the way for further business expansion into the Middle East.

SSMG’s range, which includes mussels in garlic butter, in Thai sauce and with Mediterranean sauce, uses only rope-grown mussels cultivated by member farms on the west coast of Scotland and Shetland. “The mussels will be marketed at hotels, restaurants and catering companies at first, with the intention to move into retail at a later stage,” says Robert Mitchell, JustFood International managing partner. “We believe the Scottish branding and provenance of these mussels will offer important marketing advantages, with the product appealing to customers because of good food cost controls, zero waste, guaranteed availability and high quality.”

A Kingdom seized and reinvigorated

When Kingdom Bakers collapsed in late January 2012, St Andrews seized the opportunity. The company bought Kingdom’s property and some of its equipment under a private equity-funded deal in February, hired many of Kingdom’s staff, and began baking artisanal Scottish products. The business has projected sales of about £10m in 2012 - a bold aim, but an achievable one, given that it has already picked up over 70% of Kingdom Bakers’ customer base and is providing both branded and own-label products to Morrisons, M&S, Sainsbury’s, Tesco and Aldi.

Growing interest in Scottish food and drink from outside the UK can only be good news for local food and drink suppliers. And they might soon need all the good news they can get. Although the mults are lining up to back local products, many in the industry are worried that the controversial ‘supermarket levy’ - nicknamed the ‘Tesco tax’, although it affects all the multiples - will force the supermarkets to rethink their sourcing priorities in Scotland.

The measure, introduced in April, was announced by Scottish finance secretary John Swinney in September 2011 and takes the form of increased business rates levied against large retailers selling alcohol and tobacco. The Scottish government has touted it as a health measure, but to Shearer, it is simply “a raid on the profitability of businesses”.

And a big raid at that. Although no formal impact assessment was carried out before the introduction of the levy, the move is expected to raise around £95m for government coffers, and Asda estimates it could reduce its store profitability in Scotland by as much as 8%. Commercial property consultancy Ryden’s analysis suggests it will cost Sainsbury’s £12.8m, Morrisons £19.7m, Asda £27m, and Tesco a total £36m. A late concession by the Scottish government has specified the duration of the levy, which was previously undefined - it is now set to last for three years. But that’s very little comfort to those hit by the increased rates.

“For the 240 or so stores affected there’s effectively a 20% increase in rates,” says Shearer. “Who’s to say the finance secretary won’t extend or broaden it? It sends out a terrible message to the sector and it makes Scotland a less competitive place to do business. It’s at odds with everything the government here is trying to achieve.”

On the plus side, the Scottish government continues to invest in Scottish food, if not in the mults. On 13 May 2012, the Scottish Food & Drink Federation announced its programme to boost school pupils’ awareness of careers in the food industry, ‘A Future in Food’, had secured funding from the government of £270,000 over three years. Based on estimates by the Scottish government that the sector will need 12,000 new entrants in the next 10 years, it’s a critical initiative.

Willingness from government and industry stakeholders to invest in development means, in the long term, the prospects look good. But in the short term, growth for both suppliers and retailers depends on the mults continuing to drive the locally sourced message home - in the case of Tesco’s liveried lorries, literally.