United Kingdom Food and Drink Report Q3 2011

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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BMI Industry View 7
SWOT Analysis 9
United Kingdom Food Industry SWOT 9
United Kingdom Drink Industry SWOT 10
United Kingdom Mass Grocery Retail Industry SWOT 11
Business Environment 12
BMI’s Core Global Industry Views 12
Table: BMI Food & Drink Core Views 17
Western Europe Food & Drink Risk/Reward Ratings 18
Table: Western Europe Food & Drink Risk/Reward Ratings Q3 2011 21
United Kingdom Food & Drink Business Environment Rating 22
Macroeconomic Outlook 23
Table: United Kingdom - Economic Activity 27
Industry Forecast Scenario 28
Consumer Outlook 28
Food 30
Table: UK Food Consumption Indicators – Historical Data & Forecasts 30
Canned Food/Prepared Food 30
Table: Canned Food Value/Volume Sales – Historical Data & Forecasts 31
Confectionery 31
Table: Confectionery Value/Volume Sales – Historical Data & Forecasts 32
Drink 33
Hot Drinks 33
Table: Hot Drink Value Sales – Historical Data & Forecasts 34
Soft Drinks And Bottled Water 34
Table: Soft Drink Value Sales – Historical Data & Forecasts 35
Alcoholic Drinks 36
Table: Alcoholic Drink Value/Volume Sales – Historical Data & Forecasts 37
Mass Grocery Retail 38
Table: UK Mass Grocery Retail – Value Sales By Format – Historical Data & Forecasts 39
Trade 40
Table: Food & Drink Trade Balance – Historical Data & Forecasts 40
Food 41
Key Industry Trends And Developments 41
Unilever Shares Underperform 41
Food Shares Underperform In Line With BMI’s Prediction 43
Premier Foods Sells High-Growth Quorn Unit To Appease Investors 44
Boparan Secures Northern Foods 45
Tate & Lyle Seen As Likely Takeover Candidate 47
Hovis Delisting Highlights Producer-Retailer Tensions 48
Market Overview 49
Food Sector 49
Prepared Food 49
Confectionery 50
Private Label 51
Livestock 52
Dairy 53
Seafood 53
Organic Food 53
Drink 55
Key Industry Trends And Developments 55
SNP Victory Puts Minimum Alcohol Pricing Back In Focus 55
Failings Of Leased Pub Model Pushes Punch Taverns To Split In Two 56
Diageo M&A Strategy: Remy Cointreau Not A Great Substitute For Moet 58
Minimum Pricing Legislation Will Have Limited Impact – For Now 61
SABMiller Linked With Guinness Buy, Diageo May Get Out Of Beer 62
Irish Performance Continues To Dent Britvic’s Results 63
Scotch Outperforms Spirits Sector, Expected To Be Targeted For Investment 65
UK Beer Sales Decline Will Impact Heineken And Molson Coors 66
Market Overview 67
Soft Drinks 67
Alcoholic Drinks 68
Alcohol on-Trade 69
Mass Grocery Retail 71
Key Industry Trends And Developments 71
Iceland Attractive But High Valuation Likely To Deter Big Four 71
Growth In UK Grocery Retail Drops As Consumer Confidence Plummets 72
M&S Sales Resilient On Back Of Innovative Food And International Growth 73
Ocado’s Share Price Outperforms As Firm Moves Towards Profitability 74
Asda’s Purchase Of Netto Outlets To Bring Pricing Pressure To Convenience 75
Sainsbury’s Shares Up After Takeover Speculation 76
Discount Sector No Longer Looking Poised For Market Beating Growth 78
Morrison’s Unveils New Strategy Development 79
Market Overview 80
Online Retailing 82
Table: Structure Of The UK’s Mass Grocery Retail Market By Estimated Number Of Outlets 82
Table: Structure Of The UK’s Mass Grocery Retail Market – Sales Value By Format (US$bn) 83
Table: Structure Of The UK’s Mass Grocery Retail Market – Sales Value By Format (GBPbn) 83
Table: Annual Average Sales Per Outlet By Format (US$mn) 83
Competitive Landscape 84
Consumer Shares Analysis 84
Key Players 88
Table: Key Players in the UK's Food Sector 88
Table: Key Players in the UK's Drink Sector 89
Table: Key Players in the UK's Mass Grocery Retail Sector 90
Company Profiles 92
Food 92
Associated British Foods 92
Dairy Crest Group 94
Cadbury (Kraft) 95
Premier Foods 97
Drink 101
Diageo 101
United Kingdom Food & Drink Report Q3 2011
© Business Monitor International Ltd Page 5
Mass Grocery Retail 104
Tesco 104
J Sainsbury 107
Asda 109
BMI Food & Drink Methodology 111
Table: Rewards 112
Table: Risks 113
Weighting 113
Table: Weighting 114
BMI Food & Drink Industry Glossary 115
Food & Drink 115
Mass Grocery Retail 115
BMI Food & Drink Forecasting & Sourcing 117
How We Generate Our Industry Forecasts 117
Sourcing 118
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