DRIVING FARMERS TO MARKET - Executive Summary and Recommendations of Farming Industry Marketing Strategy Report

05JanuaryBAMreportintroandexecsummary
1. Introduction

The Tenant Farmers Association (TFA) and The National Beef Association (NBA) commissioned a review of the marketplace to provide strategic direction for the farming industry.

Aims of this report

The purpose of this report is to provide a marketing strategy to help the British farming industry to become market focused. However, this must be delivered for the long-term benefit of the consumer. Therefore, the following principles were agreed as a framework:

1. The consumer should have the freedom to choose where to shop and what to buy
.

A thriving mix of food purchasing outlets (eg. local shops, farm shops, farmers markets and supermarkets) should be able to co-exist. One route should never dominate the market to the detriment of all others.
The consumer should have access to a wide variety of suppliers (smaller to larger producers) and types of food production (free range, organic to conventional).
The diversity and quality of food should be maintained and increased.

2. The consumer should be able to make informed decisions on his/her food purchases.

The consumer should be able to identify where the food has come from and who has produced it.

The consumer should be able to recognise the value of the produce they are buying in terms of health, animal welfare standards and impact on the environment.

3. Britain should become a leading nation in terms of food culture and farmed produce.

British farmers should be encouraged to add distinctiveness and additional consumer benefits to their produce.

The value of the food and farming industry should be recognised both economically and culturally.

In summary, the marketing strategy starts from the consumer down and not production up.

2. Executive Summary

Food is big business. Food production, manufacturing and retailing is the biggest industry in the world. UK consumers spent 133 billion on food and drink in 2003 (source: Mintel). Wal-Mart is the worlds largest company. Cargill is the worlds largest privately owned company. Tesco is the UKs largest retailer and is forecast to make 2.01 billion profit in 2004.

There were 303,000 farm holdings in 2003 which contributed 7.9 billion to the UK economy or 0.8% gross value added. Many farms went out of business in 2003. Over the last decade 99,000 people (or 16% of the workforce) left the farming industry (source: The DEFRA report on UK Agriculture 2003). The Government predicts that in 2005, 25% of the remaining farms in the UK will have gone out of business or merged, with a further 50,000 people forced to leave farming (source: UK Parliament). We are rapidly losing the skills to produce our own food.

According to Sir Brian Bender, Permanent Secretary at DEFRA, the Government does not have a "lower threshold of the number of dairy farmers or beef farmers" that it is prepared to see go out of business (source: Committee of Public Accounts, Oct 2004). It does not appear to know how a reduction of one sector would impact on the rest of the economy.

The farming and food sector provided a total of 3.8 million jobs in 2003, equivalent to 15% of UK employees (source: The DEFRA report on UK Agriculture 2003). A 25% reduction in farming could easily result in the loss of 500,000 jobs in food manufacturing, related industries and a drop in GDP.

The UK is falling behind our European neighbours in terms of agricultures contribution to the economy. In 2003, UK agriculture contributed 11,091 million Euros to the UK economy. French agriculture contributed 31,606 million Euros, and Italy, with the same land area and population, contributed 29,128 million Euros, three times the UK contribution (source: The DEFRA report on UK Agriculture 2003).

The UK is rapidly becoming a dependent food nation. Self-sufficiency fell to 63% in 2003 (37% of our food is imported) (source: The DEFRA report on UK Agriculture 2003). Fresh produce imported by plane only adds to the problems of climate change (ie. food aviation miles). Food importers have built huge cold storage facilities around Heathrow to receive the plane loads of chilled fresh produce brought in to serve the London market. Food importing is big UK business.

Perhaps more worrying than the decline in self-sufficiency, is the decline in the number of family run farms across the country. A large number of family farms maintain the cultural diversity of food production. They provide rural employment and the starting point for regional food differentiation. They maintain farming bio-diversity and the local food system that helps to protect the world from the rapid spread of disease. Handed down the generations, family farmers pass on valuable knowledge of animal husbandry and crop growing. This contrasts with the huge swings in food production driven by food fashion when they stem from the mass market media.

Small farms provide a good entry point for new people into the industry. Larger farms help deliver volume requirements. If DEFRA provided statistics on the number of farm businesses by their size and diversity of food production, as opposed to just volume output, we might get a better picture of the state of the industry.

A better indication of farming viability can be gained from the number of people leaving the industry, the number of farm businesses remaining for each sector, the size of each sector and market share figures for British farm produce by value and volume. If DEFRA paid more attention to these figures, people might be more concerned by the state of the industry.

The pig industry is in severe decline. The UK pig herd decreased from 7.8 to 5.0 million pigs from 1992-94 to 2003, down 35%. As the numbers decline, it makes it difficult for the processing factories to remain competitive. The dairy sector reduced from 2.7 to 2.2 million cows from 1992-4 to 2003, down 18%. Under grazing of our countryside is now a recognised environmental problem in some areas. The average herd size has also increased. The volume of liquid milk consumed in the UK has declined and the market share of British butter, yoghurt and cheese decreased. The sheep sector went down by 19% and beef cattle down by 4%. Potatoes, sugarbeet and apples have seen large reductions in the area planted. The planted area for potatoes decreased by 16%, sugarbeet by 17% and orchard fruit by 22% from 1992-94 to 2003 (source: The DEFRA report on UK Agriculture 2003). Sugarbeet is an important crop for field rotations and is being targeted by WTO talks. British Sugar and the Silver Spoon brand rely on this crop for their business.

Total public expenditure on UK agriculture was 3.1 billion in 2002/03. Direct payments for UK arable and livestock production (ie. farmer subsidies) came to 1.9 billion and were 100% funded by the EU. Market support payments in the form of intervention purchases and import/export tariffs totalled 700 million. These were paid to food processors and not farmers. Direct payments to support rural, environmental and conservation schemes were funded by the UK and came to 484.5 million. Finally, capital grants for diversification and other schemes came to 11.6 million (source: The DEFRA report on UK Agriculture 2003).

Despite the perception that all farmers live on subsidies, many sectors received no direct payments linked to production in 2004 (eg. pigs, poultry, eggs, milk, potatoes, field vegetables, salads, orchard fruit). For these products, farmers depended on farmgate prices to stay in business.

DEFRAs farm income figures are fairly meaningless. Total Income From Farming figures do not take into account the cost of running a farm business, unpaid family labour or land rent. When DEFRA publishes the annual average farm incomes, the press, MPs and public make like-for-like comparisons with their own salaries and jobs. But the figures do not highlight the investment costs, turnover or profitability of running a business. Therefore, people forget that farming is a highly skilled and specialised business, often including high personal risk and considerable investment, and that farmers are the equivalent of directors of small businesses. People will not take up farming if they cannot make a living from it.

Farm incomes were affected by subsidies in 2004 and market prices paid for farm produce (ie. farmgate prices). Subsidies (ie. direct payments for production) were paid in Euros, so the strength of the pound affected the amount that UK farmers received compared to European farmers. In 2004, retailer consolidation and the price war had a much greater impact on farmgate prices and farm incomes than the price of sterling in many sectors. Wal-Mart, the worlds largest company, entered the UK market in 1999 competing on lowest price. Tesco and the other major supermarkets responded by reducing their prices to protect their market share. The 2003/04 price war put considerable downward pressure on suppliers and farmgate prices. Retail consolidation compounded problems by reducing the number of routes to market. Since 1988, farmers have seen the farmers share of retail basket of goods drop by 13 percentage points compared to an overall increase in retail price of food. This equates to a decrease of 28% for the farmgate price paid for the goods (source: The DEFRA report on UK Agriculture 2003). This is the part of the equation that never gets talked about.

Many opinion formers have views about how farmers should run their business. But very few of them understand what is actually happening on the ground or in the marketplace as farming is a very complex industry.

Problems

The UK has no coherent food policy. The responsibility for different aspects of food policy is scattered across many government departments. We have a Minister for Health, a Minister for Education and a Minister for Transport, but no Minister for Food. Consumer concerns only reach the surface when there is sufficient public outcry (eg. GM crops) or a health scare. Consumer groups are forced to campaign loudly for changes to the way our food is produced (eg. Greenpeace invasion of Sainsburys head office to secure GM free milk) and the regulations have little impact on the multi-national players who continue to source products from across the world. New regulations in response to consumer demands are then imposed on UK farmers rather than across all food consumption. This is because DEFRA is seen as the department with responsibility for food production. Many of these issues should also be addressed by other government departments. But this rarely happens. So the burden is placed on UK farmers who suffer from government backlashes and the introduction of ridiculous regulations. Even good regulations can have a negative impact on British farmers (eg. the banning of tethers and crates in British pig farming).

The UK has the most concentrated retail market in Europe. Over 80% of food is purchased through supermarkets, with four players dominating the market; Tesco, Asda (Wal-Mart), Sainsburys and Morrisons. These four accounted for 74% of the market in 2004 (source: TNS Superpanel). The top five retailers are all wholly owned multiples and Wal-Mart successfully gained entry into the UK when it bought Asda in 1999. Retailer concentration levels increased following the 2003 mergers and acquisitions; Morrisons bought Safeways, the Co-op took over Alldays. Tesco bought the One Stop chain and Adminstore which included Cullens, Europa and Harts.

Tesco is the UKs largest supermarket and largest retailer. The grocery business grew by 8% to 21.6 billion in 2003, with food sales at 15.5 billion and online sales at over 500 million. Tesco had 28% market share and 12 million customers a week in 2004. It made 1.65 billion profits in 2003 and is forecast to make 2.01 billion profit in 2004. An incredible 1 in every 8 spent on the high street passes through its tills.

Despite this, Tesco is dwarfed by the global retailing giant Wal-Mart, nicknamed the Beast of Bentonville. Tesco changed it business strategy to compete on price, partly driven by fear of Wal-Mart. Wal-Mart is the worlds largest retailer - and the worlds largest company. Wal-Marts strengths are; colossal buying power and unrivalled systems, and the ability to bankroll loss making units for as long as required (source: Mintel).

The number of independent shops is predicted to fall from 28,220 to 24,284 over the next five years as a direct result of Tesco and Sainsburys entering the convenience (C-store) sector. The number of specialist food shops sharply declined from 1996 to 2001 by nearly 20,000 businesses (source: Mintel). The overall number of food retail outlets has fallen steadily as the large superstores have replaced small specialists. This is bad news for local producers as the number of outlets that they can sell produce through is declining.

Food prices have risen below inflation and have helped to keep UK inflation on track. Reduced consumer spending on food has released more money for consumers to spend on housing, entertainment and consumer goods. This has helped fuel the growth of the UK economy. The Government is unlikely to curb the powers of the major supermarkets such as Wal-Mart and Tesco in the short term. In the longer-term, this downward pressure on food prices is not sustainable. It will put many farmers out of business, destroys jobs and push the British food manufacturing industry overseas to countries with cheaper labour costs. A sharp rise in unemployment combined with high world oil prices could burst the housing boom bubble at a time when consumer debt is sky high. The city economists dont look at the farming industry so this has probably missed their radar screen. They will eventually notice the problem when the major food manufacturers such as Unilever and British Sugar, announce huge job losses, but by then it will be too late.

In particular, when markets trade on lowest price, it destroys businesses that deliver higher quality goods. Farmers delivering higher standards of animal welfare or environmental benefits are forced to compete with cheaper producers and either go out of business or cut costs in order to survive. When costs are cut, the environment, animal welfare, or labour wages then suffer. Food should not be treated as global commodity product. It should never be traded on lowest price if we want to protect the environment. Alternatively, all environmental or animal welfare regulations should apply to all food sold in the UK.

The Single Farm Payment came into effect on January 1^st 2005. English farmers saw an immediate 100% fall in direct payments for beef production. In 2004, at least 35% of suckler beef production was paid for by subsidy, so farmgate prices will need to increase from 1.90 to 2.70 per kilo for farmers just to survive (representing an increase of 42%). Consumers will need to choose the higher priced British beef in preference to cheaper imported beef if farmers are to maintain market share. Consumer perceptions of British beef were greatly damaged by Bovine Spongiform Encephalopathy (BSE). Since foot and mouth disease (FMD), there has been no effective marketing activity to promote the quality of British beef to the urban consumer. It is therefore not surprising that consumers are happy to buy the cheaper imported beef from South America.

The physical distance between consumers and farmers has widened. Fewer people work in agriculture today. Increasing mechanisation has led to a huge reduction in the agricultural workforce as well as the number of people employed during the summer months for harvesting and temporary farm labour. As a result, very few urban consumers have ever met a farmer, let alone spoken to one at length. Local shops, selling local products, have almost disappeared. The number of people shopping at high street butchers, greengrocers and bakers has massively declined in line with the growth of supermarket shopping. The majority of food buying is now selfservice so the modern consumer receives very little face-to-face food education from the person selling it. As more food is imported, consumers have become less aware of the seasonality of British produce. Consumers are also eating out and using pre-prepared foods more often. This has led to a knowledge gap of where the food is from and how it is produced.

Farmers need to develop marketing activity to promote quality British farm produce (ie. local, regional or speciality produce) and reconnect with the consumer. After three years and 500 million of taxpayers money to help the farming industry post foot and mouth disease (FMD), very little money has found its way to fund farmer led marketing activity to the consumer. There has been no effective marketing activity to reconnect consumers with how their food is produced or where it has come from. There has been no marketing activity to address the increasing dominance of supermarkets in the marketplace.

Responsibility for the marketing of farm produce is handled by the levy bodies. Farmers are required by law to contribute to these bodies through an annual levy.

Meat and Livestock Commission (MLC)

Home Grown Cereals Authority (HGCA)

Milk Development Council (MDC)

British Potato Council (BPC)

Communications activity for the farming industry is therefore fragmented by sector. If farmers wanted to promote strawberries to increase sales of fresh cream, this would not happen under the current structure. In addition, the overall image of farmers is never improved as no-one has overall responsibility for this task.

From a marketing perspective the levy body structure is totally flawed as it includes players from all parts of the food chain (ie. farmers, processors and retailers). Marketing cannot include all parts of the food chain. Food processors and supermarkets who import produce have no interest in marketing British produce to the consumer. Farmer owned brands are in competition with supermarket own label. Only farmers have an interest in developing farmer owned brands and promoting British produce to the consumer.

The greatest problem facing farmers is the lack of money to conduct marketing activity to the consumer. Farmers marketing budgets are handled by the levy bodies which are run by committees and blocked by State Aid rules.

Under article 28 of the EU treaty, all government funding for food marketing activity is subject to State Aid rules. State Aid rules were introduced to prevent a member state from distorting the market in favour of their own producers in their home market. Under State Aid rules, a member state (ie. Britain) is not allowed to promote its own food produce in its home market based on its country of origin. As a result, British farmers levy money goes to fund activity that actually promotes generic produce (eg. buy pork) and supports sales of imported produce (eg. Danish pork). Under State Aid rules, funding cannot be used to support individual brands or companies either.

State Aid rules apply to all marketing activity for the farming industry. They apply to government funding at the national (eg. DEFRA, DOH, DfES) and regional levels (RDAs, councils). They apply to new initiatives funded by grants such as the Rural Enterprise Scheme (RES) and Agricultural Development Scheme (ADS), the levy bodies (MLC, MDC, BPC, HGCA), and marketing activity conducted by government appointed bodies (eg. Food From Britain, The Countryside Agency and the Regional Food Groups). In other words, State Aid rules apply to all government funded marketing activity for the farming industry.

State Aid rules governed 79 million of levy body funding and over 200 million across the industry in 2003. Combined with the lack of country of origin labelling on food and own label, farmers have not been able to promote the higher quality attributes of their produce to consumers compared to cheaper imported products.

The main supermarkets spent 233 million on consumer facing communications activity in 2003. From 1999 to 2003, they spent a total of 854 million. The supermarkets and food manufacturers also used customer information to drive marketing activity. Tesco has developed the most sophisticated direct marketing activity by investing millions of pounds in its database. In 2001, Tesco bought 53% share of Dunn Humby, the data warehousing company established on the back of Clubcard. Dunn Humby also owns Crucible, a sister database to Clubcard, that looks at the rest of the UK population. Through marketing activity the supermarkets help to shape consumer food buying behaviour. They own the customer relationship. These messages are not always in the interests of farmers, but farmers rarely enter this conversation.

The majority of fresh produce is sold via supermarkets under own label. This means that farmers have no control over the messages that appear on the packaging. Own label enables the supermarket to transfer all the identity away from the producer, to themselves. The consumer is then denied practically all knowledge of where the product comes from or who has produced it, unless the farmers name appears on the packaging.

Currently it is very difficult for consumers to locate and buy British farm produce in some supermarkets as there is no clear food labelling by country of origin. In addition, food produced in another country and packaged in the UK can be labelled as British. This is not in the interest of British farmers producing better quality produce than cheap foreign imports (eg. chicken from Thailand or Brazil).

Low morale is affecting the industry. FMD disease was devastating to many farmers and led to high suicide rates. Other farmers are struggling to survive under huge financial pressures. At any stage, a farmer could lose their contract with the supermarket or processor and go out of business. A combine harvester costs around 200k to buy and 800 a day to contract in. Machinery problems or being off sick during the busy harvesting period can easily erode the years profits. Under high levels of stress, operating complex machinery and working long hours, it is not surprising that there are many accidents on farms.

The historical focus of the farming industry on volume output has led to the over reliance on economists to guide policy thinking. Economists look at the business performance, whilst marketing professionals look at the consumer. Marketing professionals take into account quantitative (ie. rational) as well as qualitative (ie. emotional) aspects of the marketplace. Marketing professionals develop brands whilst economists concentrate on improving production efficiency (ie. cutting costs). Commodities are products that are sold on price, whereas brands are sold on brand values. Brand values include emotional (eg. animal welfare) as well as rational benefits. Brands have greater value than commodities so they are invested in by their owners through marketing activity. They also add value to the overall farm business and when established can be sold. Within the marketing world, creative teams, trained in lateral thinking, bring new ideas to the marketplace. Farmers need to link up with the marketing world again.

Many farming industry players suggest that the consumer is only motivated by price. This is not correct. Price is part of every purchase decision, but it is not the only consideration. Consumers are also strongly motivated by food safety, convenience, healthy diet, animal welfare and environmental considerations. When Tesco reviewed the marketplace using 10 million Clubcard records for 18,000 grocery lines, it was found that only 16% of customers were motivated by lowest price. The majority of customers (84%) bought on a combination of price and quality (ie. food safety, environmental, animal welfare, convenience). This shows that the majority of the UK consumers do not want cheap food. They want food that offers a combination of price and quality (ie. value-for-money). Therefore, farmers need to promote the quality attributes of their produce to consumers.

The Regional Food Groups (RFGs) received around 90k each in 2002/03. This was barely enough to pay for full-time staffing let alone conduct any marketing activity to the consumer. Without sufficient core funding, RFGs spent many months applying to the RDAs to help fund projects. Many of these applications were rejected as the RDAs had no overall marketing strategy to work from. Several RDAs suggested that consumer facing marketing activity was not even part of their remit. South West Food and Drink stated that it only had a trade focus in 2003.

On very limited budgets, Somerset Food Links produced a wealth of consumer marketing materials in 2003; information posters on local food, booklets for local producers involved in direct selling, celebrating Somerset (a joint project with the County Council to promote local food to tourists), schools education, training and advice for farmers wanting to develop brands and market them (eg. Exmoor Blue). Devon Food Links, Gloucestershire Food Links, Wiltshire Food Links, Bristol Food Links, Dorset Food Links and Forth Valley Food Links groups have all developed similar activities.

Within other regions the RFGs (eg. Tastes of Anglia) also worked tirelessly to promote regional producers on limited budgets. This included running regional food events, producing food guides and leaflet activity within their region in 2003. Activity to date has failed to cut through into major urban areas (eg. London, Manchester) and all these groups were massively under funded. This shows that an overall strategy to support local producers in conducting marketing activity to the consumer is urgently needed by the Government and RDAs.

The levy bodies do not conduct any effective schools education programmes on behalf of farmers to educate children about how their food is produced. The Home Grown Cereals Authority (HGCA) barely conducts any marketing activity to the consumer, let alone any childrens education programmes. As a result, two generations of adults have grown up shopping in supermarkets with limited knowledge about how their food is produced. These adults are now running the country and influencing policy decisions. In addition, the levy bodies are run by committees and restricted by State Aid rules, so government departments may find it easier to work with supermarkets and food manufacturers to develop food education programmes rather than the levy bodies. For the last 50 years, this has led to very limited food education on seasonal fresh fruit and vegetables, how food is produced, the health benefits of eating fresh quality produce or cooking from scratch. In addition, there has been no advertising activity for fresh produce (eg. carrots, broccoli, cabbage, apples, pears).

There is now an obesity problem. Sustain is lobbying for a childrens food bill to prevent junk food manufacturers from advertising to kids. A Government health white paper was published in November to try to address the issue. Government policy has come full circle.

Solutions

The Government should deliver consumer focused food policy. As a priority, it should review State Aid rules, introduce clear country of origin labelling on food, strengthen the Supermarket Code of Practice and introduce new planning guidelines to protect routes to market for smaller producers.

Clear country of origin labelling on food is needed to enable British farmers to promote their product and ensure that the consumer who wants to buy this product can then locate it. Imported produce should never be sold under the British name, and there should be severe penalties for anyone found abusing this. Spot checks should be conducted on supermarkets and any players found abusing the system heavily fined. Results should be published.

Farmers have developed an enormous number of distinctive and appealing new brands (eg. Dorset Blue Vinny, Exmoor Blue Cheese, Quickes Traditional cheese, The Well Hung Meat Company, Oatley Wine, Bridport Gourmet Pies, Garland Hayes Farm Venison, The Black Farmer Sausages). Many of these are only fledgling brands, but some have already become quite well known and successful (eg. Denhay bacon, Tyrrells crisps, Rushall flour). Each new brand brings product innovation to the market and the opportunity for farmers to communicate their own messages to the consumer. This helps to increase consumer knowledge and choice. It also improves production standards and product quality as new brands are in competition with the existing offering. The assurance schemes developed by levy bodies can never deliver this innovation as they aim to satisfy the majority of producers and only act as a baseline for quality attributes.

The levy should be voluntary. Marketing budgets should be returned to farmers to enable them to develop their own marketing activity. The levy bodies should be overhauled and tasked with delivering farmer led marketing projects that return margins to farmers at the bottom of the supply chain.

As recognised by the Curry Commission, the Government has a responsibility to help farmers to become market focused. It should help the industry to develop consumer facing marketing activity at the national and regional level. This activity should support larger and smaller producers, cover all sectors and reach the urban areas. An annual budget of 30 million should be allocated for this task.

All marketing activity should be consumer facing (ie. not trade focused) to reconnect farmers with consumers and increase sales of quality British farm produce (ie. local, regional and speciality farm produce, seasonal fruit and vegetables).

Core government funding should be provided for the next three years as the current industry structure will not deliver what is needed quickly enough. This core government funding should cover the DEFRA, Department of Health, Department for Education and Skills, and the Department for Culture, Media and Sport responsibilities.

National marketing activity should be developed to raise consumer awareness of quality British farm produce (ie. local, regional or speciality farm produce).

A National Food and Farming Fair should be held in central London to celebrate the diversity of quality British food and promote farming to the public.

British Food Fortnight should be given core government funding for the next three years to ensure that it becomes an annual calendar event.

A high quality Food and Farming consumer magazine should be developed to build perceptions of the farming industry and increase sales of regional, local and speciality produce.

FARMA should be given core government funding to run marketing seminars, produce marketing materials and conduct market research for farmers.

A national poster campaign should be developed to rebuild perceptions of the industry and promote British farm produce to the consumer.

Food From Britain should work with the DfES, LEAF, Sustain, the Soil Association, The Countryside Agency and other farming groups to develop a comprehensive schools education programme.

An information centre should be set up to provide market reports (eg. Mintel, TGI, MMS Nielsen) and general marketing help and advice to farmers.

Local food targets should be set by government at the national and regional level to increase the diversity and quality of local food. Targets should be set by size of business and variety of product. Government funding for marketing activity should aim to help a cross section of local and regional food producers by size of business.

Core funding should be given to Food Links Groups and Regional Food Groups to conduct consumer facing marketing activity.

Marketing seminars should be given to farmers in rural areas by experienced marketing professionals to provide hands on help and advice to develop brands and communications activity.

Food From Britain should work with the RDAs and RFGs to develop a series of regional and national food awards for each sector.

Food From Britain should be responsible for co-ordinating the national and regional marketing activity. The remit of Food From Britain, primarily as an export agency, should be reviewed to ensure that it focuses is on delivering marketing projects within the UK market as well as overseas. These projects should aim to help smaller businesses (ie. farmers and farmer co-ops) and not the multi-nationals.

This will help to protect a valuable farming industry, deliver a more sustainable food marketplace and create a healthy food consumer culture.