Irish Food Processing Sector1 (Paper primarily drafted by Enterprise Ireland)

The views expressed in this background paper do not purport to reflect the views of the Minister, the Department of Agriculture, Fisheries and Food or the agencies whose activities are discussed

Overview The key challenge as outlined in the ocial !artnership "#1$ review was the positioning of the %rish food and agricultural economy in a knowledge economy context& This vision also informed the thrust of the "##' (D!, which was very much focused on the )*nowledge +conomy, with an emphasis on state support and investment in -esearch and Development .-/ D0& The recent dramatic decline in the fortunes of the %rish and world economies has created a changed backdrop to an assessment of how the food industry will evolve to "#"#& %n particular, a combination of reduced public and private sector incomes and spending power, a renewed consumer1producer focus on value, price and cost plus the decline in exche2uer finances mean that current policies must be reassessed& The belief in the re2uirement to position the agri3food sector firmly in the knowledge economy has not diminished& 4n the contrary, the competitiveness challenge at primary agriculture level combined with the necessary focus on the environmental sustainability of agricultural production methods, means that a key strategy of the agri3food sector including the research community must be on the improved communication and adoption of5 best practice new technology research and advice& %reland remains a low cost producer in the +6 of primary beef and dairy products and has significant capability in the prepared consumer foods sector& 7oncerns at producer level about lower prices are suggesting that some producers are contemplating an exit from meat and dairy& 8owever, difficult as is the current situation in %reland, there is a more profound and sustained trend in reduced dairy and beef production in the 6*& This reduction in supply in our nearest market represents a significant opportunity for the %rish food and agri sector provided we get our cost base right& The food and agri3 sector remains the largest employer in the economy accounting for 1 9ob in : or ";# ### 9obs across farming manufacturing and distribution& The sustainability of these advantages over the period to "#"# will depend on a combination of5 the capability of suppliers and processors to sustain a relentless focus on costs and competitiveness issues the impact of +6 wide policy changes in the 7A! budget and the <T4 negotiations on imports into the +6 dairy and beef markets The positioning of agriculture in the sustainability agenda in terms of the 7openhagen accord later this year& %rish economy recovery policies that will need to balance the taxation of energy and carbon emissions with the competitiveness challenges facing the sector&

Cons mer demand trends The current recession has resulted in value 1price considerations moving back to the top of the consumer demand hierarchy

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This increasing demand for value is reflected in the mainstream retail pressure on food industry suppliers for sustained value promotions and in a growth in sales among the discount retailers The carbon profile of food is already an important factor in consumer choice& The meat and dairy sectors are currently vulnerable to both increased taxation and a negative consumer perception in this context& %ssues of increased nutritional value and balanced, responsible consumption of food will continue to be a feature& %ndustry must continuously improve its communication of product integrity through improved labelling and responsible consumption messages& The recession has also meant a fall in consumer demand for food out of home& This trend will continue in the short to medium term but the longer term trend towards increasing out of home consumption can be expected to resume when the recession ends&

The key trends in consumer demand to "#"# are price competitiveness and environmental sustainability coupled with longer term trends such as increased convenience and enhanced nutrition& S pply side iss es !rice volatility, as per dairy prices in "##:1=, will continue as a conse2uence of global market changes and the winding down of +6 internal market supports& %ndustry 1national measures to act as a countercyclical buffer should be examined& >iven the challenging environment for future milk price development and the need for a more competitive1sustainable energy supply for the processing sector, dairy farmers should be encouraged to invest using some of their land for the production of woodchip and other renewable energy feedstock supplies Milk 2uota abolition combined with increased market price volatility means, for the dairy supply sector, fewer and larger scale farms plus a relentless focus on costs and competitiveness& (egotiations on 7A! post "#1; and the Doha <T4 round will have ma9or implications for the supply balance for meat and dairy products in the +6 and the level of direct supports for agricultural producers into the future& -estructuring at processing level must be prioritised to deal with both competitive 1economies of scale issues and the fundamental changes in the dairy product profile that are re2uired imilarly, in the beef sector, investment in rationalisation 1restructuring coupled with the competitiveness challenge will re2uire an increased focus on managing the costs of operating in the %rish economy ,securing skilled labour at a competitive rate and managing the exposure to fluctuations in the value of ? T> against the +uro &

%ndustry must improve both their focus and capability in lean manufacture, new technology adoption innovation and sustainability& For the meat sector, new packaging1extended shelf life enhancement and tenderisation technologies must be prioritised & %n addition to the price and value factors outlined above, retail concentration and enhanced retail buying power are likely to continue to grow& 8owever, an increasing awareness that processors and suppliers cannot supply product to the retail sector below +6 economy costs has led to the +6 7ommission to announce an investigation into the introduction of fair trade measures on a pan +6 level& Focus on sustainability at producer and processor level means a focus on energy efficient and carbon reducing technologies and best practice across the spectrum in terms of animal production, processing, route to market factors and distribution capabilities ustainability challenges created by increased regulation1taxation and consumer awareness of the carbon profile of dairy and meat products must also be adapted and responded to&

!airy Processing Sector Overview The %rish dairy industry is worth approx& @;&'bn and employs A,### people directly& There are "#,### farmer suppliers milking the dairy cow herd of 1m& There are approximately "$ main dairy processors and ' of these account for :$B of all milk processed& There are three distinct product output categories5 1& Dairy 7ommodities .Culk Cutter, Culk 7heddar, kim Milk !owder, <hole Milk !owder, 7asein / 7aseinates, <hey and basic whey derivatives .lactose, demin whey etc0& This category has sales of @"&A$bn, exports of @"&;bn and employs ",D$#& "& Dairy %ngredients .8ighly fractionated milk derivatives incl milk sugars and proteins for inclusion in 8ealth foods, Dietary supplements, %nfant formula, ports nutrition / beverages, Functional foods0& This category has sales of @;##m, exports of @":#m and employs "##& ;& 7onsumer dairy .Ei2uid milk, consumer packs of dairy products including butter, yoghurt, cheese, etc0& ales of @1bn, little exports .imports of approx @A##m0 and employs 1,"##& The dairy processing sector has always been at best 9ust marginally profitable& A normal year yields approx "B margin, a good year like "##' resulted in approx AB and a bad year like "##: resulted in breakeven for the larger efficient operators and substantial losses for smaller companies& The profitability of the sector is directly related to world supply and demand for dairy products& As long as the industry focuses on the production of basic dairy commodities it will always be caught up in

the boom3bust cycle& The value added ingredient and consumer foods sectors are highly profitable& >enerally the more scientific or uni2ue the application the higher the margin can be achieved& !roducts in his category can range from 1#B margin up to A#B margin depending on uni2ueness and where it is in the product life cycle& Cranded consumer products can also achieve similar margin levels& Strengths %relands grass based dairy farming sector is the lowest cost producer of dairy products in the +6& %F7( 1FA4 figures indicate the best dairy farmers in %reland are producing milk at 1' c 1litre v "$1"D c at best in Denmark and 8olland and ;# 7ent in the 6*& 4nly (ew Fealand at 1; c has a consistently lower cost base trong export orientation& :#B of production is exported to 1"# countries across the world %reland has access, though the +6, to a +uropean dairy market that is showing stable to consistent growth and is particularly well positioned to meet an increased demand for dairy products from the 6* where production appears to be in long term decline& The dairy processing sector is heavily linked to the infant formula .%F0 industry& %reland is the biggest exporter of infant formula in +urope& This link to the %F industry and recent investments in whey and lactose manufacturing provide a strong platform for future growth& A number of strong dairy companies have expanded across +6 and 6 A giving both enhanced capability and global spread& *errygold is a recognised international brand& "ea#nesses Too many small scale processors producing non differentiated commodity dairy products& Many of the smaller processors are not selling directly to the market place & 4ver dependence on butter in the product mix at D#B of milk fat utilisation& >iven an ongoing decline in butter consumption and the dismantlement of +6 market supports for butter this presents a significant challenge Dairy farmers scale is moderate at an average herd siGe of A# cows v D$ in ( %reland 11# average in the 6* and 1'# in (ew Fealand& easonality of production while minimising costs restricts the product mix& easonality leads to poor capacity utilisation which adds to the operating costs of processors and impairs their ability to respond to market re2uirements& Distance from the +6 market and seasonality issues restricts capability in fresh dairy products which are the main growth area& Crand devolvement has been low key& There is a significant duplication in our international sales efforts with competition occurring between larger processors and the %DC& Competitiveness and the !airy Sector The Dairy 7apital %nvestment Fund in "##' allowed the industry play Hcatch3upI in terms of efficient plant and e2uipment& !rior to this investment, companies had tended $

to neglect investing in their facilities due to the large costs of upgrading facilities& %rish companies were in danger of falling down the value chain& Although the current investments will enhance efficiencies, there are other ma9or competitive issues at play in the %rish sector which also need to be addressed, particularly, the seasonality issue, where : times more milk is produced in summer than in winter& This creates a huge under3utiliGation of capital and manpower resources in the period eptember to March& Also, in comparison to other countries, %reland has too many processors operating too many plants& The evolution of the high cost %rish economy has created challenges for farmers and processors in terms of labour and other manufacturing costs& %reland has particularly high energy costs& A Forfas survey showed energy price inflation in %reland was the highest in the +6 at '#B in the period 1=== to "##D v ;$B +6 average& +nergy costs per tonne of milk powder dried in %reland v Denmark, France and (ew Fealand are set out below5 !rimary Dairy !rocessor %reland France Denmark (ew Fealand @ per *w& #&11"$ #&#$A1 #&#D;: #&#1:' @ per tonne ;=&1A 1:&:" ""&"# D&$1

This is a huge disadvantage given that :$B of our milk is dried to produce milk powders& The 7A! reforms of "##; involved a significant movement away from market management supports& <hile the impact was somewhat delayed, this was always likely to create a more volatile price pattern& The collapse of international dairy prices in "##:1= has seen the first dramatic example of exposure to volatility& This dramatic decline in prices has impacted on the sector in a number of ways3 A large proportion of farmer suppliers are getting a price below the cost of production +ven though processors are paying a historically low price they themselves are selling below cost& $ctions to address Competitiveness -estructuring 1rationalisation of processing capacity& %nvestment in new technology aimed at both reducing costs and changing the product mix to better meet global demand for whey and lactose products and functional foods +nsuring that energy policy supports employment and industrial activity and does not become a tax on 9obs and exports Dissemination of best practice on grassland management and other known cost reduction strategies at farm level& Teagasc figures show 9ust :B of dairy farmers nationally are operating detailed farm accounts& E%port & mar#et orientation The dairy industry exports @"&;bn and is the largest exporting category in the %rish economy& %t is important to maintain and grow this sector as it has a huge impact on

balance of payment issues etc& 8owever, as most of the dairy exports are commodity based, their value can fluctuate substantially from year to year& "##' was a very good year for world dairy prices whereas "##: was the worst performing year in recent memory& Approximately two thirds of %rish exports are priced at the world base commodity price level e&g& bulk butter or bulk skim milk powder& The remaining one third is value added or branded .eg *errygold0 and can command a higher premium and is price stable& A key recommendation of the !rospectus report in "##; was that this one third5two third ratio be reversed& Innovation There has traditionally been a very low level of -/D investment in this sector& The two ma9or constraints on innovation in the sector are operating costs which are draining resources that should be invested in research and developmentJ and a product mix which is heavily geared towards preserved products and butter fat at a time where there is increasing demand for innovative and fresh products& The increased consumer demand for functional foods and nutrition enhanced products is a key opportunity for the dairy sector& -ecent investments by ; large dairy processors in 7entres of +xcellence have focused some level of activity on enhancing their dairy commodity activity& !rimary -/D activity by these companies has been focused on the value added ingredients sector& Typical -/D to sales ratio for the commodities sector is #&1B 3 #&;B& The ideal industry target, which is being achieved by best in class dairy companies elsewhere is in the range #&DB 3 #&:B& %t is important that %rish companies are encouraged to move up the -/D value chain& There remains a lack of commercial focus in the university research community which must be rectified and in addition licensing and technology transfer must be given e2ual weight alongside primary research& S stainability The dairy sector is hugely challenged& According to international life cycle analysis, =# B of carbon emitted in the dairy life cycle comes from cows Dairying competitiveness is also vulnerable to carbon taxes on energy use and transport and refrigeration& Ket little research awareness at farm level 3some good work done by (F grassland based that is transferable& Main focus at producer level has been to resist the imposition of a tax& <hile this is understandable in the context of carbon leakage and competitiveness, it is not a sustainable policy in its own right& The +uropean 7ommission,s recent study on the impact of climate change has indicated that north west +urope can expect more winter rainfall .including floods0 rising sea levels, hotter and drier summers& %reland will have to manage increased wet land issues and the associated problems this will have on animal husbandry including better housing, and longer stays under shelter and perhaps lower grass yields& Infant ' tritionals (lobal Profile The %nfant Milk Formula .%MF0 market is valued at approx& 6 L1#bn& %t is the largest category of the 6 L"1bn global baby food sector accounting for close to $#B of the overall market&

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The market leader is Mead Mohnson at "#B market share, followed by (estle .1:B0, Abbott .1DB0, Danone .1"B0 and <yeth with 1#B& The market is growing 1$B on average year3on3year, however growth in Asia is significantly higher& Asia is the largest baby food market, accounting for ;=B of the market, followed by <estern +urope at "$B& Market growth in the developing world represents real opportunity for %MF companies&

Profile of the sector in Ireland) The %MF sector is strategically very important to the %rish dairy sector and to the wider economy& %t accounted for @DD'm in sales in "##: of which nearly 1##B was exported& %n excess of 1"#,### metric tonnes of %M! is produced annually utilising over 1##,### metric tonnes of %rish dairy ingredients& The key %MF producers based in %reland .>roupe Danone, <yeth and Abbott0 supply 1$B of the global re2uirements of infant formula and A#B of the +6 market re2uirements& Strengths !roven track record in high 2uality manufacture of infant nutritionals for over ;# years& 8igh 2uality supply of dairy based raw materials from indigenous suppliers& Technically advanced suppliers committed to new product development .(!D0 and 2uality e&g& involvement in Food for 8ealth %reland .F8%0, +& akaGakii collaboration between the sector and universities& The %rish supplier base is very open to partnering with the %MF sector on strategic initiatives& The expiry of milk 2uotas by "#1$, can increase the capacity of the %rish dairy sectors to milk supply to the %nfant Formula sector& As the global baby food market continues to grow, %reland will have a secure and ade2uate supply of high 2uality raw materials to facilitate increased production levels of %MF& %reland,s ability to respond to food scares1crises in a professional and credible manner e&g& C + and Food / Mouth& The %MF sector,s ability to access government departments and high level personnel on important issues with relative ease is of ma9or importance to the sector& 8igh level food research capability and facilities i&e& Moorepark, MTE, 677 supported by >overnment& %reland,s low corporation tax of 1"&$B and enhanced -/D tax credit& Attractive financial grant support packages are available towards -/D, 8uman -esource Development .8-D0 .incl& Eean1Cest !ractice0& "ea#nesses Eow level of %rish industry based -/D activity& kills gap in the areas of engineering, technical and dairy processing& cientists with managerial skills are in short supply&

There are currently low levels of collaboration between the third level sector1institutions and the infant formula sector in strategic -/D& Eimitations in relation to capital grant support to support expansions as outside of the CM< and outh +ast regions, no capital grants are available& +xceptionally high manufacturing cost base v,s other locations resulting in a loss of competitiveness& Available data, from a leading %MF producer, indicates that %reland is ADB more expensive that the lowest cost producer in the group and "1B more expensive than the average cost& Asia represents the fastest growing market place of %MF and this is where real opportunity exists for %MF companies and suppliers& The %MF sector is aggressively expanding its operations in the Far +ast& This may have implications for the viability of %rish plants in the longer term& Cilateral Trade Agreements among Asian countries makes local supply into this region more attractive and hence places %MF plants outside of the region at a disadvantage&

*ps#illing 7ompetitiveness issues re2uire that the %MF sector adopts best practice and lean manufacturing to drive efficiencies& Training and support in lean manufacturing is a key re2uirement& The sector has difficulty in recruiting appropriate graduates with the necessary scientific and technical skills& +xperienced personnel with the necessary balance of technical and managerial skills are also difficult to recruit& Innovation&+echnology +ransfer %n order to support the development of the sector, in3company and collaborative -/D programmes should be encouraged and supported by >overnment& %ndustry led partnerships such as Food for 8ealth %reland .F8%0 which is a uni2ue partnership between four of %reland,s ma9or dairy processing companies and four public research organisations are a valuable / efficient means of exploiting research for commercial benefit& The %rish based %MF sector is a potential recipient of the outputs of F8%& ,ision for -.-. %reland will be regarded as a centre of excellence in the production and development of a wide range of nutritional products N ranging from specialised infant nutritionals .e&g& hypoallergenic / elemental formulas0, growing up milks .a high growth market0 / sports / medical nutritional products etc& %ncreased production levels of %MF which will be facilitated by the increased availability of milk post "#1$& trong -/D functions based in %reland with global responsibility e&g& >lobal Technology 7entres& trong supplier1%MF partnerships in place that focus on collaborative -/D and value added supply arrangements& 8ighly efficient %MF sector which has adopted best in class practices and are recognised by their parent companies as strategic centres of excellence&

%rish based and non %rish based %MF companies engaging with %rish companies and third level sector1research institutions in strategic collaborative programmes& This may deliver added value research partnerships, supply arrangements and inward investment& uccessful commercialisation of functional ingredients arising from Food for 8ealth %reland .F8%0 by the %rish Dairy industry partners and the %MF sector& Follow on and additional industry led partnerships will be in place delivering value adding opportunities& F nctional Ingredients/ Foods and 0everages

(lobal Profile HFunctionalI is commonly recognised as any ingredient, food or beverage that contains specific physiologically active components that provide health and wellbeing benefits beyond basic nutritional functions& <hile Functional foods are continuing to grow in popularity around the world, there is currently no universal definition of the category& A lack of legislation means that there are several different definitions of HfunctionalI and this lack of consistency explains why market valuations on the siGe of the market can vary considerably between sources& The current worldwide functional foods market is worth approx& 6 L:#bn with an estimated annual growth rate of :B& The sector is pro9ected to grow to between L=$bn and L1=$bn depending on market research source and definition used& %ndustry drivers include convenience, increased concern for health and wellbeing, ageing populations, scientific1technological advances .e&g& nutrigenomics0, desire for personaliGed food and beverage solutions and the need to add value to commodity products& This has opened up a potentially significant market for investment and the %rish food industry is now being presented with a real opportunity to develop new products, new markets and new businesses that focus on food and its health3enhancing role in modern lifestyle& +he Irish f nctional Food sector The functional food sector in %reland is estimated to be worth in excess of @1##m& %t is comprised of imported functional products as well as products produced by indigenous food companies& The siGe of the market can vary depending on definition used& 4ne large %rish industry player values the market at @A#m 3 @$#m which is based on food and beverages which display a health claim& <hile there is no hard data on the value of the %rish produced functional food and ingredients sector, it is evident that the functional sector offers lucrative opportunities to the indigenous food industry& 7urrently %rish manufacturing capability is largely confined to a small number of large dairy companies and M+,s in the ingredient and beverage sectors& !roducts such as fortified milk drinks, probiotic yoghurts, cholesterol lowering spreads, energy drinks, functional waters have been successfully launched by these companies& %n addition, the %rish dairy sector is now a key supplier of

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specialised functional ingredients to the global infant, adult and sports nutritional sectors and on a local basis has very close supply base relationships with three of the <orld,s largest %nfant Milk Formula producers .<yeth, Abbott and Danone0 who have manufacturing facilities in %reland& %rish companies are well positioned to make its mark in this sector& An existing strong food and pharma industries base, good availability of 2uality raw materials, state of the art food and drink research centres, world class third level facilities all combine to make the environment right& Functional foods have been designated as a priority sector by +% and the >overnment who have recommended that potential opportunities in this sector are exploited&

Strengths trong market growth N -esearch from market analyst 8ealthFocus has revealed %rish consumers show a great openness towards fortified foods as compared to countries in +urope and the 6 .Man "##:0& Ageing populations turning to functional foods to facilitate Hhealthy agingI& 7onsumer health concerns N Hprevention over cureI is being adopted by health conscious consumers& Advances in nutritionals science e&g& nutrigenomics, metabolomics will drive a more concerted focus on functional product development 8igh level food research capability in the third level sector and across the research institutes e&g& Teagasc Moorepark, Ashtown Food -esearch 7entre, Marine Functional Foods -esearch %nitiative& Technically advanced companies capable of developing and producing functional ingredients& The %rish dairy sector is strongly positioned to exploit opportunities in the dairy based functional foods and ingredients sector& ignificant government commitment and investment towards in3company, collaborative / publicly funded food research e&g& funding of company - / D 7entres, @"#m >overnment investment in Food for 8ealth %reland .F8%0 and F%-M& "ea#nesses5 %n recessionary times, demand for Functional foods may ease as consumer buying behavior changes& +6 -egulatory hurdles .a0 (ew +uropean 8ealth 7laims Directive which came into force re2uires substantiation of any claims and hence makes it more difficult now to introduce new claims& %nnovation in +urope may become more expensive and possibly stifled as a result& .b0 (ovel Foods regulation N this regulation is a significant stumbling block for food1ingredient manufacturers& (ew functional ingredients are more likely to be drawn from existing foods than from newly discovered ones& 8igh (!D and marketing costs may not attract entrants into this sector&

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<eak %nternational consumer brand recognition e&g& %rish brands do not have a global presence such as Danone HActimelI or (estle,s brand range& %ncreased power of retailers 3 margin differential between standard food products versus functional foods in the retail sector is reducing& Eack of consumer understanding and mistrust of health claims associated with healthy foods and beverages& Eimited focus on the commercialiGation of research / technology by %rish research1academic communities compared to other countries e&g& Finland, weden & 8owever, more emphasis is now being placed on exploiting potential commercialiGation opportunities& %ndustry would tend to view publicly funded research programmes such as F%-M as offering limited commercialiGation opportunities for the %rish food sector& kills gap in industry in relation to areas such as engineering, food technology and dairy processing& The sector is experiencing difficulties in recruiting suitable candidates&

*ps#illing +nhancement of commercialiGation / %! skills to help maximiGe the commercial opportunities in the functional foods sector& The sector is experiencing difficulty in recruiting science1technology and engineering graduates with the appropriate skills that industry re2uire& The third level sector and industry should engage with each other to address this skills gap& Innovation&+echnology +ransfer %n order to support the development of the sector, in3company and collaborative - / D programmes should be encouraged and supported by >overnment& %ndustry led partnerships such as Food for 8ealth %reland .F8%0 which is a uni2ue partnership between four of %reland,s ma9or dairy processing companies and four public research organisations are a valuable / efficient means of exploiting research for commercial benefit& ,ision for -.-. Development of %reland as an internationally recogniGed centre of functional research and development& %reland will have become a world3wide expert in the field of Hmilk miningI healthy ingredients from milk and will be a supplier of choice of specialiGed nutritional ingredients to the %nfant Milk Formula, sports and clinical nutritional sector& The sector will be characteriGed by strategic 9oint ventures and partnerships, licensing, technology transfer agreements between large and small, indigenous and international food and pharma1bio3technology companies& These interactions will harness potential synergies and will contribute towards the development of an innovative / profitable functional sector& %reland to be recogniGed as a leading location for clinical trials&

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trong focus in terms of exploiting commercialiGation and %! opportunities by the research institutes / third level sector resulting in start3up company,s, licensing deals, technology transfer agreements etc& %ncreased levels of - / D collaboration between the food sector and the research community with a strong focus on industry led partnerships& Development of a cohesive, long term national sector strategy along with continued >overnment support and funding towards the development of the sector&
Prepared Consumer Foods (PCF)

+nterprise %reland,s portfolio of client companies in the !7F "sector currently amounts to ":A companies that exported some @"&D: billion of product in "##:, primarily to the 6*& The bulk of these exports came from four companies& Strengths) %reland,s !7F sector en9oys a number of strengths including5 A ready supply of high 2uality raw materials& A national reputation for a safe, clean environment& A national reputation for high 2uality food products& 7onvenient access to the 6* market& "ea#nesses) The sector currently faces a number of challenges, including5 >lobal competition in both domestic and export markets& A relatively high %rish cost base& Many plants operating at less than optimal capacity or efficiency& A highly concentrated domestic retail market where the top ; retailers en9oy a combined '#B share& 7ost conscious consumers seeking lower priced products An industry structure that is comprised mainly of small businesses& A high dependence on the 6* market& terling depreciation& +6 constraints on +% assistance& -estricted bank credit facilities -elatively low profit margins resulting in a lack of internally generated funds for investment& ,ision -.-. Future vision for the !7F sector is that of a competitive manufacturing sector, that is internationally recognised as a producer of safe, premium 2uality, high added value, innovative food products for world markets& <ith exports of @$ billion, the sector comprises of a number of large scale producers of branded products as well as number of smaller companies focussed on specialised

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This +% classification of the !7F sector is not comparable to the product categories used by the 7 4&

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foods such as functional foods, genuine organic products, ethnic foods and traditional %rish fare& %n between there is a cadre of extremely efficient medium siGed companies producing private label products for the retail multiples or the ma9or multinationals& %t is envisaged that a number of client companies will be focussed on developing and licensing proprietary process or product technologies, enhancing %reland,s reputation as a )hot bed ) of food innovation& The successful !7F sector will also have resulted in a number of spin off or service sub sectors such as cuisine centres of excellence or training colleges, food tourism, cafes etc& C rrent Enterprise Ireland Strategy) +%,s current general strategy for the !7F sector has three components5 ustain the current base of companies and help create cost effective operating platforms for the future through the application of lean manufacturing, funding through the +nterprise tabilisation Fund etc& Develop the necessary scale through encouraging and assisting industry consolidation by amalgamations, 9oint ventures etc& Cuild on the achieved competitive platforms to assist the necessary strategic investments to facilitate future growth etc& +% also focuses on product and process innovation and management development programmes, to ensure the sector is driven by a cadre of managers with the necessary management and leadership skills, as well as undertaking the necessary operational cost reduction and efficiency enhancement pro9ects with the ob9ective of increasing competitiveness& 7urrent initiatives and pro9ects include5 Assisting company amalgamations to help build scale etc& %mproving operating efficiencies and reducing costs through lean manufacturing& Assisting companies to focus on niche markets& Assisting companies with new product and process development& 8elping build competitive advantage through recognised brands& Focusing on the health and well being agenda 8elping develop proprietary competence and technology& Developing managerial expertise& Assist in accessing and exploiting proprietary technology& Cuilding processor1 retailer relationships& 8elping develop clusters of companies to build scale and competence& F t re Challenges for Food Sector
In addition to dealing with current issues, it is anticipated that Irish companies will face the challenges and opportunities posed by macro issues such as:

Food safety and security in a world facing increased water, food and energy scarcity because of an ever increasing population etc& <T4 changes 3 increased competition from developing countries&

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>enetically Modified 4rganism .>M40 issues (ew technologies such as nanotechnology applied to food products& (ew processing technologies such as high pressure processing that will impact on food production& More stringent food safety and labelling regulations& The blurring of the boundaries between the food and pharmaceutical sectors through functional foods etc& (ew strains of food related bacteria emerging or further food scares in addition to those experienced previously N )Mad 7ow Disease, etc& Further global consolidation of the retail multiples N e&g& <al Mart is now the world,s largest company&

*ps#illing for the Food and !rin#s Sector There are D main areas that need to be addressed in order to improve and upgrade skills in the food / beverage sector5 Leadership ignificant gaps from a succession perspective for 7+4 and MD, further gap at Tier two senior and middle management, functional management development vital to generate future sector leaders A culture of leadership and empowerment skills within companies is vital for <orld 7lass Manufacturing .<7M0 sites going forward& %nnovative process, production skills combined with behavioural competencies are also essential& Lean Operations %ntegration of Eean, six igma and *aisen toolbox practices into Food and Ceverage manufacturing to generate world class manufacturing sites %nnovate process diagnostics, with highly skilled, super skilled deployable with replicable, specialist and generic skills %ntegration at ;rd level as specialism 7ost control and best practice oriented upskilling at all levels across the organisation& Supply Chain Management %ntegration of designated resources to manage this function 6pskilling from a green and black belt perspective with both financial and performance management %ncrease focus on upply 7hain Management at ;rd level& Innovation (ecessary skills for the commercial analysis of all stages of product production to identify areas for improved product development& +mbed and focus on (!D at ;rd level more successfully and upskill technical resources on the relevance of consumer and market insights& %ncreased focus on innovation as a means of finding new ways to deliver value to customers& Internationalisation 7ommercial sales and negotiation skills, 7ultural differences from an international trade perspective, 1$

 6nderstand the foreign buyer, his motivations and practices 7ompliance and legal frameworks in different 9urisdictions& Financial & Commercial Acumen trategic cost analysis skills, around (!D and production %ntegration of better measurement of all functions 7ross functional commercial understanding of business viability uites of HTskillsI to be integrated into all third level courses in the Food 3Agri and Manufacturing field kills in entrepreneurship should be incorporated into food science courses, encouraging students to see starting a new business as a viable option& S mmary There are significant steps underway and in development addressing the skills gaps from a strategic perspective with the Food and beverage sector& 4ne notable statistic is that $DB of all employees, with the Food and Ceverage ector have leaving certificate education& 7urrently with the move toward <orld 7lass Manufacturing and best practice sites there is a shift in the skills base of these employees who are highly motivated by the opportunity to contribute the business and relevant idea generation through empowerment& Cy "#"# the agri food sector will have significant investment in best practice manufacturing sites, further up skilling in niche craft artisan businesses and more cost effective organisations throughout with the overall ob9ective being to sustain employment and generate a population of a HsuperI skilled, more employable and flexible workforce& 0eef Processing Sector The %rish beef processing sector comprises ;# +6 licensed slaughtering facilities which handle a combined throughput of approximately 1&Dm cattle p&a& %n addition there are a small number of standalone .no slaughtering0 beef boning and beef added value processing businesses& <ith the exception of three dedicated plants, the national sheep1lamb throughput is handled in facilities which process both species i&e& beef and lamb& %n overall terms, ex factory output in "##: was @;&#bn of which @"&#bn was exported& The processing sector employs approximately 1#,### people& <hile annual throughput is 1&Dm cattle implying a weekly average of ;1,###, in actual fact there is some seasonality influence in livestock production which means that weekly cattle availability to factories can be as low as "$,### with a weekly high of ;:,###& A ma9or influencing factor on the supply lines to the processing sector is the live trade& This features in two ways& Firstly finished animals which are exported live mainly to (&% and processed in that territory and secondly the live sale of young calves and weanlings to the 7ontinent& This latter category comprises animals which

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are within 1$11: months of finishing, are farmed to maturity on the continent and sold to the domestic processing industry& Strengths >ood penetration of 6* and +6 retail markets& This is particularly important since the 7A! reforms dramatically reduced market supports& !enetration of retail markets has changed the sector,s profile from a froGen beef exporter to third countries to a fresh food supplier in +6 markets& The penetration of retail markets has facilitated a more even supply pattern The primary producer is relatively low3cost grass based producer The suckler cow herd of over 1m& animals is a significant national resource %ncreasing emphasis on better welfare and environmentally sustainable extensive production methods at farm level "ea#nesses uccessive reports and comprehensive beef sectoral analysis has identified that structural weaknesses exist in the primary processing segment of the industry& %t is estimated that the national capacity utilisation is about D#B and drops to below $#B during periods of short supply& The estimated cost of this lack of competitiveness is @A#m pa& The most serious characteristic is that virtually no factory in %reland operates a full $3day week, with most operating between ; and A days for every week of the year& >iven that the collective view is that beef livestock numbers available for processing in %reland will remain at best, at current levels for the next number of years, the number of slaughtering facilities should be reduced with each operating on a full $ day week& This will generate sufficient profits to fund new initiatives for shareholders and providing improved margins to stimulate and reward livestock producers to sustain and grow their cattle enterprises& 8igh labour and energy costs are also damaging the competitiveness of the sector& These costs are as much a $#B lower in the 6* 3the principal export market& The small scale of farmers, particularly in the suckler herd with an average herd siGe of 1# cows and lack of focus on farm productivity are also competitiveness issues& Figures from Teagasc + profit monitor published in Muly #= show no improvement in live weight production per hectare since "##; coupled with a =B increase in feed over the same period& E%port Foc s Ceef exports account for =#B of production so the sector is highly exposed to global trade developments& The evolution and shape of the Doha <T4 global trade round and in particular the proposals to increase imports of lower cost beef into the +6 will have a ma9or bearing on the future of the sector
Competitiveness responses

%ndividual businesses have been actively pursuing reductions in labour and other business costs and in lobbying with the other food industry companies for an improved energy pricing system&

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The beef1sheepmeat sector is committed to investing @1'$ million .with tate assistance of @'#million0 on improved productivity and technology& -etail buying power has a specific impact on the meat sector as these products are regularly used as a loss leader by supermarkets to increase footfall and attracting consumers with the margins being recovered on other goods&

S stainability Iss es As is the case with the dairy sector =#B of the carbon1methane produced in the beef life cycle is produced on farms& At processing level the industry is a significant user of carbon based fuels for sterilisation, water treatment, energy source, transport and refrigeration& This makes the sector vulnerable to potential carbon taxation of fossil fuel The 6* retail sector is hugely engaged by the carbon profile of the meat sector and processors will need to respond to retailer demand for Hsustainability measuresI in addition to regulatory or taxation issues& A number of companies have invested in tallow burning boilers to both reduce their energy costs and their carbon profile& The meat sector is heavily dependent on the rendering sector for efficient handling of by products& -estrictions on by product end uses are currently imposing a cost on the industry& -endering output is being exported to >ermany and %taly at a cost of @D# to @:# 1tonne for use in energy generation& A national waste to energy policy which allows meat and bone meal and other by products to be used as a carbon offsetting fuel supply could greatly improve both the cost structure of the sector by reducing energy costs and the carbon profile of the sector where by products as bio3fuels would significantly reduce fossil fuel usage

Innovation Focus on tenderisation1beef aging techni2ues and on processing technology %nformation capture through improved software development There has been some work done on meat functionality but it is not as developed as in the dairy sector as beef is not as flexible& 0everages Sector Sector Profile (o& 7ompanies5 ales @m5 +xports5 +mployment5 +otal "1 @",$=1m @1,D$$m ",=##

1ey +rends in Sector "orldwide Beer market is low growth i&e& up "&"B since 1=='& o 7hina has replaced 6 as the largest market& o Oery concentrated top 1# have $"B of global market& 1:

o Flavoured alcoholic beverages are growing e&g& Alco !ops& Spirits market is very diverse in product range from country to country& o <hisky is becoming the dominant product as brand, fashion and 2uality become increasingly important facets of consumer choice& o The largest single market is the 6 .@;Abn0 with Asia3!acific -egion showing the strongest growth .;&DB0& Soft drinks, the 6 is the largest market with Asia, +urope and the Middle +ast being the fastest growing& o 7arbonates dominate the market .A$B0 with bottled water being the highest growth sector&

Strengths&"ea#nesses of 0everage Companies in Ireland 0eer 5 there are two ma9or players who between them control roughly =#B of the market and employ over 1,$## people& There are some craft brewers and imports of beer but they represent a very small share of the market& Spirits2 Two main players and both have an -/D presence in %reland& The other spirits manufacturers are M+s, primarily manufacturers of cream li2ueurs with some variant product offerings, for example wine based as opposed to whiskey based cream li2ueurs Soft drin#s 5 the market comprises mineral water and carbonated soft drinks as well as fruit 9uices and cordials& %n contrast to the beer and spirits sectors there are little exports of soft drinks and minimal -/D& S3Es 5 have a low capability in terms of technical and innovative skills, have poor linkages to the third level sector and, in general, have a short term view of -/D&

Competitiveness&Cost Oirtually all of the companies in the beverage sector have reduced their costs through a combination of redundancies, wage cuts1shorter working time, and renegotiation of prices from suppliers& The 6&*& is a key market for the beverage sector and in order to compensate for the drop in the value of sterling some beverage companies have been switching from %rish to terling suppliers to offset their potential losses& S stainability&Climate Change A number of the larger firms have an extensive sustainability policy in operation and they generate as much energy as possible from renewable1recycled resources& +nergy efficiency is particularly germane from both a cost and sustainability viewpoint and is becoming an issue with the multiples& Innovation&+echnology +ransfer The larger beverage companies engage in -/D in some form and get strong encouragement and financial support from +nterprise %reland& There has been limited success in relation to technology transfer& 0a#ery 4 !eserts Sector There are key differences in the nature of the bakery sector in %reland as compared to other sectors in the food industry& Firstly, it is a traditional industry that over the 1=

decades has experienced significant rationalisation with a large number of closures and the disappearance of the small local bakery network& At the same time the industry has fragmented into a number of different business types each with very different cultures, ob9ectives and development challenges& %t is not an export focused sector and does not lend itself easily to exports due to the nature and value of the products produced& There are approximately ;## bakery enterprises in %reland, of which ":# can be classified as craft bakeries, and "# as plant bakeries& %n addition there are a further $# in3store bakeries and an estimated 1$## in3store retail bake3off outlets& The sector is experiencing consistent growth which is expected to continue& The total bakery goods market in %reland is estimated to be worth 9ust over @#&$bn at the retail level annually, of which A1B is imported& The domestic market has shown growth rates of "3;B, driven by the rising popularity of specialist breads and an increasing focus on health and well being& The trend for "##$ to "##' was for an increasing level of imports .@"$:m in "##D0 rising by approximately 1#B per annum& The exports from the sector were rising by 'B per annum .@"1;m in "##D0& This is an important sector in economic terms being strategically located throughout %reland and is also important in terms of direct and indirect employment& %n direct employment alone the sector ranks third behind the Dairy and Meat sectors with D,"##& The Irish bread market has seen steady growth in the period "##"3"##:, with estimated sales reaching ?1#;m in (% and @;$#m in -4% in "##:& !ro9ections for "#1" are ?11:m and @A1Dm respectively& The Irish cake market has shown consistent growth also over the period with chilled and individually wrapped cakes driving growth& +stimated sales for "##: are ?;Dm in (% and @:Dm in -4%, pro9ected to rise to ?A$m and @1#"m respectively by "#1"& The biscuit market is valued at ?1"Dm in (% and @"':m in -4% with sales having recovered from a slump in the period "##$3"##D& >rowth has been achieved through innovation, new recipes and siGe reformulation and sales are forecast to reach ?1ADm in (% and @;1=m in -4% by "#1"& Strengths 7onsolidation of !lant bakeries A number of M+ bakers have o 7ore product specialisation o Oolume production *nowledge of competitors products Differentiate by product not price The M+ bakery sector represents the greatest potential for growth and within this sector there are approximately "# businesses which are capable of growth given the correct strategies and support mechanisms& Challenges %ncrease in the power of the retail buyers N purchasing policies are acting as significant drivers of change and are exposing certain weaknesses in the bakery dessert sector

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%ncrease in the cost of raw materials, energy and ingredients helf life of most products is short >reater intensity of competition %ncreased imports More consolidation across the sector 8igher levels of food legislation and customer compliance re2uirements Typical issues affecting the industry include over3capacity, low margins, low levels of exports, a lack of (!D Family3owned, bakery background rather than business& Competitiveness&cost 8igh volume production& Automation 1lean manufacturing 7ore product specialisation& ourcing lowest cost raw material where possible E%port& 3ar#et orientation +xport market focus will remain in the (&%& and 6* market with more interest in +uroGone markets as a conse2uence of sterling& longer shelf life products and freeGable products markets would include 6 A and candinavia Target supply to niche distributors in the market !remium products to selected markets at a competitive price S stainability !redominantly driven by the retailer !ackaging usage attempt to reduce Attempt to reduce energy consumption Innovation&+echnology transfer Further involvement with third level institutes and Teagasc in Ashtown& %nteraction with initiatives1programmes .heat recovery, lower salt etc0

!ecember -..5

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