The Irish Food Processing Industry.

University Degree Business and Administrative studies

Wu Qian 28 Oct,2003

The Irish Food Processing Industry

Competitiveness of the prepared consumer foods sector

The competitive performance of the prepared consumer foods sector has already been outlined. A Porter analysis was also carried out to analyze the factors leading to the emergence and growth of the sector over the past decade. A survey of firms in the sector was carried out in order to assess company strategies, company performance and factors that facilitated and inhibited growth. The impact of future policy and industry changes on competitiveness was also evaluated and the needs of the sector identified.

Factor conditions

Raw materials: Ireland has a reasonable endowment of high-quality, indigenous raw materials (such as dairy ingredients, meat, poultry and fish) which forms the basis for the prepared consumer food sector. The processed meat sector has benefited from Ireland's traditional strength in meat production, along with historically high per capita consumption of meat products in the home market.
Peripherality: Ireland is at a disadvantage with regard to its peripheral location and low population density. Higher energy, natural gas and transport costs in relation to the UK are a source of competitive disadvantage (Forfás, 1998). Higher costs have traditionally been offset by favourable exchange rates vis-a-vis the UK. However, with entry into EMU and the absence of currency de-valuation as a policy instrument, control of costs is even more critical.
Labour costs: In terms of labour productivity, Irish rates have been among the highest in Europe (Forfás, 1998). Irish labour costs have been among the lowest in Europe in relation to the processed foods area (Commission of the EU, 1997). However, the survey revealed that lack of human resources was an important factor inhibiting new product development. Companies require highly skilled, experienced and trained people at all levels of the business. Small firms are often disadvantaged in their ability to acquire and retain staff. Furthermore, the success of the Irish economy has made employment in the food sector less attractive than other sectors.
Capital: The availability and cost of capital are critical components of competitiveness. The survey identified lack of capital as an impediment to the development of the prepared consumer food sector. For instance, 57% of the sample cited lack of finance as an important barrier to new product development and 63% cited it as an important barrier to export-growth.
Profitability: Clarke (1997) found that most sectors of the Irish food industry have a poor record in terms of profitability. Forfás (1998) revealed that, in 1996, the profitability of indigenous companies in the food, drink and tobacco industry was 3.6% of sales compared with 7.5% for general manufacturing industry. Profitability has a direct impact on the amount of funds retained for investment, be that in upgrading capacity, investing in technology or new product development. A survey by the Commission of the European Communities (1997) of firms in the "other processed foods" sector showed that Ireland re-invested a very small proportion of its output value in comparison with other EU member states.

Although many firms in the food sector compete on non-price rather than price factors, cost is still a critical component of competitiveness. If company margins are to be preserved in a more competitive environment, then improving cost efficiencies and securing access to capital are of major importance.

Demand conditions

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Demand conditions

On the demand side, there has been a significant shift towards convenience foods throughout the EU. The Irish consumer has become more "Europeanised" due to converging lifestyles and economic conditions. The population bulge in the 18-45 year old age group, the rise in female participation rates in the labour force, the rise in dual-income families, and growth in disposable incomes are all factors that have resulted in a "cash-rich, time-poor" consumer and contributed to the rise of the prepared consumer food sector in Ireland . In particular, increased numbers of younger consumers with higher disposable income has brought about a change in Irish food consumption patterns.

The retail sector is highly concentrated in Ireland and retailers wield massive buying power. Over the past decade, Irish-owned retailers, notably SuperQuinn, have supported small, niche companies by giving shelf space to new products that were aimed at a narrow demographic or lifestyle segment (Collins, 1997). In Ireland, retailers are beginning to challenge the catering sector for the consumer's expenditure on prepared foods and are expanding their range of fresh, chilled and hot-delicatessen products. Retail buyers are increasingly dictating terms on food standards, quality control, supply chain management and prices.

Population changes and a dynamic retail sector in the home market have therefore contributed to the growth of the prepared consumer foods industry.

Firm strategy, structure and rivalry

Scale: A particular feature of the European food industry (including Ireland's prepared consumer food sector) is the existence of a dual market structure. The sector is characterised by a small number of large firms which operate over a wide range of product sectors and geographical markets, and a large number of SMEs (small and medium sized enterprises) which tend to focus on niche products or regional and local markets. An estimated 92.4% of all firms in the EU food, drink and tobacco industry have less than 20 employees (Eurostat, 1997).

Our survey revealed that most of the turnover, output and employment was accounted for by a small number of firms. Sixteen per cent of the sample had sales of over £20m, 11% employed 200 plus employees, and 17% produced over 20,000 tonnes of product per annum. An estimated 40% of the sample employed less than 10 employees. In view of the structure of the European food industry, Irish firms are not uniquely disadvantaged in terms of company size.

Innovation : Innovation, in terms of product development, is often cited as the most important source of competitiveness in the food industry, given the proliferation of new products, short product life cycles and the changing tastes of consumers (Traill and Grunert, 1997). In our survey, we asked managers to rank the factors that facilitated new product development (Table 3).

Table 3: Factors that facilitated new product development; results of a survey of firms in Irish prepared consumer foods sector.

The survey showed that the incentive to innovate depends to a large extent on the existence of strong demand for the product. Ninety one per cent of the sample cited that new product development was customer-driven and 63% indicated that it was retailer-driven. The survey also shows that the capacity to innovate depends to a large extent on the availability of R&D staff. Table 4 shows the factors that were perceived by respondents to inhibit new product development.

Table 4: Factors that inhibited new product development; results of a survey of firms in Irish prepared consumer foods sector.

The three major inhibiting factors were lack of people skills, time constraints and finance. As new product development is a critical determinant of competitiveness in the prepared consumer food sector these barriers need to be addressed.

Marketing capabilities; Competitiveness also rests on superior marketing capability. Branding is a widely used strategy in the food industry which requires substantial economies of scale (Forbairt, 1995). However there are alternatives to the high-cost, mass-produced, branded product strategy. Niches are opening up in areas such as health foods, regional specialities, supply of chilled foods and delicatessen products for the retail trade, and supply of fully or partially prepared products for the catering trade. Branding may be a less important component of the marketing strategy in these niches.

Small firms often gain competitive advantage by competing on non-price factors such as customer service and superior quality, rather than on price. The survey showed that firms in the sector generally adopted a strategy of differentiation. Ninety four per cent of the sample adopted a high quality product strategy. Regarding pricing strategy, 60% of the sample described the price of their product as "medium", 36% described it as "high" and only 4% described price as "low".

Table 5 summarises the impact of the four main Porter factors on the competitiveness of the prepared consumer food sector.

Table 5: Sources of competitiveness in the Irish prepared consumer foods sector.

Regarding outside influences on the diamond, the level of state support available to companies seems to be as good as that available in other European countries and could be seen as a factor that has a mildly positive impact on competitiveness within the prepared consumer food sector.

Conclusions: The RCA statistics demonstrate that Ireland has a comparative advantage in several prepared consumer food products. It is reasonable to conclude that Ireland is competitive in the prepared consumer food sector.

Ireland has a reasonable endowment of factor conditions. Companies benefit from a well-educated labour force, a supply of high quality indigenous raw materials, a low interest rate environment, well developed sources of capital along with a strong state sector.

The quality and low cost of human resources have positively influenced the country's competitiveness in prepared consumer foods (However skill shortages are emerging and survey respondents cited lack of human resources as an important impediment to both new product and export market development).

Domestic demand conditions have been important for several prepared consumer food products. Ireland's unique demographic profile - the young, educated workforce which has the disposable income to spend on new food products - has brought about a change in food consumption patterns. The retail sector is highly concentrated in Ireland and retail chains could be considered among the world's most sophisticated and most demanding buyers. They are responsible for supporting new food companies and forcing an increase in product quality, service and delivery standards.

With regard to firm strategy, structure and rivalry, the sector is distinguished by its strong customer focus and the degree of importance given to new product development. A number of firms have been successful at building brands and expanding internationally. Irish firms are not particularly disadvantaged in this regard since the structure of the European industry is geared towards small firms. Small firms have worked to overcome scale limitations and have had some modest success in own-label and niche marketing areas.

Related industries do not seem to make a significant contribution towards the competitive advantage of the prepared consumer food sector. Food ingredients have the potential of developing into a strong related industry to the prepared consumer food sector.

The prepared consumer food sector in Ireland is not extensively clustered and is not very R&D or knowledge-intensive.

Conclusions

Ireland had a strong competitive position vis-à-vis our EU partners in the large sub-sectors of the food industry in 1994. Our strategic position was somewhat weaker when account was taken of our level of growth in the high growth food sub-sectors.
In the prepared consumer foods sub-sector, Ireland had a relatively strong competitive position among EU members in 1996.
The competitiveness of the shellfish sector was predominantly based on the quality of the raw material.
The dairy industry's competitiveness was positively affected by factor conditions in the Irish market, the operations of multinational companies, the strategic behaviour of Irish dairy companies and the Common Agricultural Policy.
Major factors which contributed to the competitiveness of the prepared consumer foods sector were high quality raw materials, population changes and a dynamic retail sector in Ireland.

Reference:

http://www.teagasc.ie/research/reports/foodprocessing/4984/eopr-4984.htm