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United Kingdom Food and Drink Report Q3 2011
Business Monitor International, June 2011, Pages: 118
The United Kingdom Food and Drink Report provides industry professionals and strategists, corporate analysts, food and drink associations, government departments and regulatory bodies with independent forecasts and competitive intelligence on United Kingdom's food and drink industry.
The latest retail sales data suggests that the UK consumer sector can be expected to remain challenging during 2011, as previously predicted by BMI. This lacklustre outlook is not surprising given the UK's current fiscal policies, which are focused on cutting government spending. The UK was running a fiscal deficit going into the downturn and, due to a combination of automatic stabilisers and a government stimulus package, is currently running one of the largest deficits in Western Europe.
In response, the government has adopted one of the harshest austerity packages in the region in an effort to bring the country back into surplus by 2015 as the reality of the situation hits home consumer confidence has nosedived. This has been combined with a drop in living standards, as consumers, fearful of losing their jobs in the midst of high unemployment, accept pay cuts or increases below inflation. Taken together this means consumer spending is likely to be further squeezed and price sensitivity can be expected to dominate the food and drink landscape for at least the next 12 months.
Headline Industry Data:
- 2011 per capita food consumption = +1.6%; forecast to 2015 = +12.6%
- 2011 alcoholic drink sales = +1.7%; forecast to 2015 = +12.7%
- 2011 soft drink sales = +4% ; forecast to 2015 = +27.9%
- 2011 mass grocery retail sales = +2.4%; forecast to 2015 = +20.4%
Key Industry Trends & Developments
SNP Victory Puts Minimum Alcohol Pricing Back In Focus – A thumping victory for the Scottish National Party (SNP) in Scotland's Parliamentary elections has put the prospect of minimum pricing for alcohol firmly back on the agenda. Given the relatively small size of the Scottish market this would only have a minor impact on major multinational producers. However, this legislation could set a precedent that is later copied in other countries, particularly if it is shown to reduce harmful drinking.
Iceland Attractive Takeover Asset But High Valuation Likely To Deter Big Four – In April 2010, a director at UK retail major J. Sainsbury suggested that the firm is closely eyeing discount retailer Iceland, which is likely to soon be sold by Icelandic bank Lansbanki. Iceland occupies some prime retail space on UK high streets and a full takeover would rapidly expand Sainsbury's network of smaller outlets. We think the main sticking factor would be price – as a profitable business Iceland is worth more as a going concern than it would be if just the property were considered. This could push the valuation up to GBP2bn, and while certainly not out of the reach of any of the major UK retailers, it may make it hard for the firm's to realise a decent return on their investment. This is compounded by the fact that quite a large number of the retail units are in relatively low-income locations, which is likely to be a particular issue for Sainsbury's, given its higher-end positioning.
Key Risk to Outlook
Return to recession – With the economic recovery still very weak, the government's plans for significant fiscal retrenchment combined with weak demand in the eurozone could be sufficient to tip the UK economy back into recession. Given that fiscal stimulus has been a key factor keeping the economy afloat during the global downturn, normalising the budget now could have a more detrimental impact on growth than we currently anticipate and as such, this remains a downside risk to our consumption forecasts. Eurozone debt crisis – On the external front, the ongoing eurozone crisis poses a particular threat to investor confidence towards the UK. The risk of a major sovereign credit event on the continent would further damage confidence and put significant pressure on export demand and hence economic growth and consumption.
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