Kraft is heading out of York, breaking Terry’s historic ties with the city. It’s not

the first company to switch production overseas and it won’t be the last. Julian Hunt and Glynn Davis report

Diageo - Will move Guinness brewing from Park Royal to its St James’ Gate Brewery in Dublin by next summer. It blames the decision on overcapacity

These are momentous times. Kraft is breaking Terry’s 200-year-old link with York and is moving production away from the UK to four different locations in other parts of Europe. Diageo is consolidating production of Guinness in Dublin, which means the end of brewing at London’s Park Royal after 68 years. Earlier this year, Gillette said it was ending a 70-year association with Isleworth, London, and shifting blade and razor manufacturing to a new facility in Poland.

Three major announcements, all made for different reasons, but each one symptomatic of the major structural change underway in grocery manufacturing as companies - and particularly the biggger multinationals - look to consolidate their production into the most cost-effective plants in Europe.

And with each announcement, more jobs are shed from the sector, expertise is lost overseas and another chunk of Britain’s manufacturing heritage disappears for ever.

So should we be worried? Well, when we asked the senior executives who are members of The Grocer’s suppliers’ reader panel for their views, it was clear many were concerned that UK plants were under pressure to perform - particularly those up against cheaper continental rivals.

Despite what the experts say, a number of those we quizzed also feared that more production would be shifting eastwards now that the EU has expanded.

One supplier, who says his business continues to invest in future product innnovations in the UK, explains: “The philosophy of everyday low price and everyday low cost is starting to have an impact. The UK manufacturing base is becoming more cost-conscious and recognises that with more countries coming into the EU, price pressure will intensify.”

He adds: “This will be compounded through major retailers resourcing products through these new EU members and passing on their lower prices to consumers in the UK. The introduction of the new EU members could have a significant impact on the grocery manufacturing base in the UK with a particular reference to own label.”

Suppliers pointed out all sorts of reasons why it would be difficult to shift output to lower-cost operations in Europe (ranging from the hassles involved in meeting local and regional tastes from overseas factories to the practical nightmares of moving production). And clearly, for many suppliers this debate is academic as they need to be in-market to supply their customers. Nevertheless, UK manufacturers do face many disadvantages, ranging from the fact the country is out on a geographical limb to the fact it is not part of the Euro zone. All of which helps explain why our panel was divided when asked whether the UK was losing out to lower cost countries in this process of consolidation.

Yet almost two-thirds of suppliers on our panel say the British grocery manufacturing base is under pressure to perform against cheaper continental rivals. They say that, in this competitive climate, suppliers must find new ways of driving cost from operations and this will mean more factories closing.

“There is an opportunity for consolidation of manufacturing facilities within the UK, within Europe and also on a global scale,” says one grocery supplier. “A business does not survive unless it strives constantly towards lowest cost to operate. Cost reduction is the only realistic avenue to improve investor returns because price increases seem unachievable.”

More worrying is that almost 90% of those we quizzed said no one was safe any more, although one who disagrees says: “It is not about being safe, it is about being low cost, efficient, competitive and pro-active.”

Richard Workman, analyst at Oriel Securities, dismisses concerns about any large scale shift of production overseas. He says: “I’m not aware of any trend to move out of the UK. Yes, there are cheaper places to manufacture but this is not the only reason to relocate. Eastern Europe has cheaper labour but there are indirect costs. You’ve got to consider the infrastructure - it might cost less to get workers on the factory floor but what about the regulatory environment, distribution and logistics? There’s no reason to see the UK as a worse country to manufacture than elsewhere.”

Mike Tipping, customer relations director at Cadbury Trebor Bassett, is another who does not believe there is any wholesale move away from the UK. “People see two things [Kraft and Diageo] and they think everybody is in the same position. At Cadbury there is no shift away from the UK. The investment here is huge.”

A similar message comes from Nestlé, whose spokeswoman says: “We are permanently adapting our production facilities to prevailing circumstances but have and will continue to invest in production within the UK.”

Tate & Lyle is also investing heavily in the UK, according to Chris Fox, its director of corporate relations. He adds: “We’ve no plans to move anything. It would be difficult for us because we have well developed plants with the workforce skills in place. Labour costs for some businesses is a key issue but for us it is the capital invested in the plant and its proximity to market that’s more important.”

Serving the domestic market is also a reason behind Unilever maintaining the production of its subsidiary Birds Eye in the UK. David Lewis, director of communications for Birds Eye Wall’s, says: “Because Unilever is a global company we operate in terms of other countries for the development of food and recipes, but the manufacture of Birds Eye foods is all done in the UK.”

There is also the issue of different food tastes. Lewis says ice cream has a more universal appeal than most foods, which is why Wall’s - in comparison to Birds Eye - is organised on a European supply chain basis within Unilever. Various ice cream brands are produced in Gloucester, Barcelona and parts of Italy and France and each country then distributed to markets throughout the EU. Unilever reagrds this pan-European structure as the most cost-efficient.

So given that some of the biggest food companies in Britain are so committed to maintaining their investment in this country, why are suppliers worried? Well, privately at least, they will talk about the fact that the highly competitive nature of the UK grocery market means they have to find new ways of becoming more efficient. And for many this means taking a hard look at their manufacturing base in the UK.

Just this week, for instance, RHM announced major changes to the production base of Manor Bakeries. Group chief executive Ian McMahon says: “The actions we are announcing are in line with our strategy of investing in key brands, introducing exciting new products and driving operational efficiency.”

The search for operational efficiency will see the company shut its 67-year-old factory in Eastleigh, Southampton, and halve capacity at its Moreton plant, while upping production at two other sites. In all, 330 jobs will be lost from the business.

It isn’t alone. While Cadbury Schweppes is clearly committed to the UK, it has been tweaking its facilities in this country as part of a global restructure announced in the wake of its acquisition of Adams in March 2003. Last October, it said factory numbers around the world would fall by 20% and the workforce by 10%. This involves 480 job losses at Cadbury Trebor Bassett in the UK over the next two years. The Hall’s factory in Manchester and a Trebor plant in Chesterfield will also shut, with some capacity switching to other facilities.

Nobody is advocating that inefficient facilities should ever be kept open. But many executives point out that once they have consolidated and streamlined operations in the UK - whether through mergers or factory closures - where do the next savings come from? And if their business is part of a multinational, recent events have shown that emotional and historical links to a particular UK facility count for nothing when hard-nosed business decisions have to be made.

Mark Baillache, partner and head of the food sector at KPMG, says the UK’s high quality of finished goods is a major factor in its favour. He explains: “A company would never relocate its production if quality or food safety was an issue, regardless of the cost savings.”

But he too believes it is inevitable the UK will come under increasing pressure as a base for production for the large global operators. He says: “The UK government has done a lot with grants and tax breaks to support manufacturers but it is still expensive here compared with other European countries. We’ll never get a wholesale exodus, but if you had to spread production from three plants into two within Europe then it would probably be the UK plant that goes - because of the costs.”
Gillette - Switching all European production of blades and razor products to a new site being built in Lodz, Poland. Production at Isleworth and its packaging operation in Hemel Hempstead will end

Kraft - Announced in April that it would end confectionery manufacturing in York by the second half of 2005 with the loss of more than 300 jobs. The closure is part of a global restructure to improve its cost structure. In all, 20 factories will close over the next three years