Market challenge

When consumers start tightening their belts, the repercussions are felt right the way through the supply chain. And nowhere is this more apparent than in the pork industry, which seems to have faced more than its fair share of challenges in the last few years. Consolidation and contraction appear to have featured highly of late, as cost pressures hit the whole pork supply chain.

Last month, Dutch processor Vion announced that it had signed an agreement to buy Grampian, one of the UK’s largest food companies. Reaction to the deal from the British pig industry has been positive. In the short term, it will make little difference to the UK sector but, over time, the deal will have an effect says Chris Lamb, BPEX consumer marketing manager. “They will introduce cost savings to make the deal worthwhile. But it will be interesting to see what they do, as they are not a new player in the UK, and they know and understand the pig meat market in the Netherlands and other parts of Europe.”

He is quite hopeful that the contraction in the supply side of the industry, with BPEX estimating a 10% decline in slaughtering year-on-year in June, will be good news for producers. “I believe the new Vion UK company will require producers to supply the quality and quantity to meet the needs of consumers. “It would be unwise for it to talk about massive changes, because what is being said across the industry at the moment is that serious thought needs to be given to medium- and long-term contracts between producers, processors and retailers, particularly with the contraction in supply. If people want to ensure they are going to get product for which there is demand, they need to get contracts sewn up and that’s not just with the big pig producers, but also with the smaller ones.”

Access to retailers

Simon Brookes, BPEX business sector manager, believes what Vion bought, when it signed a deal to acquire, were the retailer relationships the UK food group had. Over the medium-term, he expects that Vion will get more profitability. “That won’t just come simply from squeezing suppliers; it will come from getting increased prices from retailers,” he says.

Rob Smith, marketing director of Vion’s UK operations, concurs that the acquisition of Grampian will benefit his firm’s position in the UK market, as Grampian was strong on pork in the retail sector, while Vion tended to supply processors with pigmeat for the foodservice industry over retail. “We will not suddenly change the Vion side of business to retail. The pigmeat market is an international one, at the end of the day, and there is a finite supply of product, so it is not a case of turning on the tap.”

But consolidation is not confined to processors. The same appears to be true of the retail sector, as, a few months ago, The Co-operative finally announced it was making a bid for the Somerfield chain. The deal, which appears imminent, could be good news for British producers, as it is widely acknowledged that the pro-British sourcing retailer could keep 700-800 stores and sell 200-300 stores to Waitrose, another greater supporter of British agriculture. “We could see 5-6% of the market switching from imported product to British, so that will be quite interesting in terms of pushing up farmgate prices,” says Brookes. The good news is that pigmeat DAPP prices seem to be going up a couple of pence every week. As MTJ went to press, it was around 131p. “It is fair to say we are beginning to see light at the end of the tunnel,” says Brookes. “It was very grim three to four months ago.”

He believes that, now, it will not take that long for the DAPP to reach 140p. “The spot market is already at 142p. And if you look at the European price for pigs produced to a UK equivalent standard, that price is already over 140p. The DAPP will reach that in the next month or so, which will help persuade UK pig producers to stop pulling the plug on their businesses and hold their nerve, as they are by no means out of woods just yet.”

While retail prices of pork, just like all other meats and products, have risen over the past year, and consumers could be lulled into believing pig farmers’ concerns about production costs are easing, the fact is that not much of the increase is feeding through to producers. BPEX has tracked the movement of the DAPP and constructed a basket of retail products that includes a combination of fresh pork, ham and sausages across the major retailers. Says Lamb: “Simplistically, over that period, we found that while the price of the average retail basket had shot up by 109p/kg DAPP has just gone up by 17p, so there is a big difference.”

He adds that the retailer has a percentage margin and, therefore, as prices go up, that margin will go up. The poor old pig farmer is squeezed at one end by costs such as feed, that can be as much as 50% of his production costs, and, at the other end, by the low price he receives for his product. “There was movement in the retail prices back in September, but it was February before it began to be fed through to pig farmers, because of foot-and-mouth disease (FMD), which meant that pork could not be exported nor moved. So right through that period, they were sitting through serious losses.”

However, Lamb is keen to impress that retail is now increasing, with a consistent amount going through to farmers. “But they are still well below the cost of production. Pig farmers need 140p to break even. We have to keep up the pressure, so that the DAPP keeps on rising and producers can carry on in business, because you have already a reduction taking place in the pig herd.”

Heeding the Call

Consumers, it seems, have taken heed of the Save the British Pig Farmer campaign, and BPEX’s research shows that 92% of them agree that imported meat should be produced to the same high-welfare standards as the UK. “That gives us great confidence and indicates that consumers do recognise they are getting a higher-welfare product in the UK and are prepared to pay more for it,” acknowledges Lamb.

It must be equally reassuring for the pig industry to find that demand for pork products remains strong, although prices have been rising. Lamb attributes this to BPEX’s communication with consumers about the role of pork, ham and sausages, which he believes are all seen as value-for-money products. “Beef and lamb have always been seen as the more expensive meats, while poultry is seen as a cheap product,” says Lamb. “Pork sits in the beautiful position in the middle, with a wonderful value-for-money proposition, to which consumers ascribe.”

Although the big supermarkets are portrayed as the “baddies” exploiting the poor farmers in the national media, this does not appear to be necessarily the case. Each of the retailers is doing its own thing. Tesco has received the most widespread criticism, but it should also be recognised that it has often been the leader in putting up prices, which is critical. As Lamb says, “If retail prices don’t go up, there is no head room for money to be pushed down the chain to pig farmers.”

Asda’s chief executive Andy Bond has made very strong statements about the chain’s commitment to do everything it can to ensure that money flows down to pig farmers. Morrisons also pledged to go 100% on fresh British pork last year. The problem, Lamb says, is that “While they are making noises, we would like to see some of the money going right the way down the chain back to the poor old pig farmer, who is incurring so much extra cost. He has no alternative but to feed his pigs, and how is he going to do that when it is costing more every time he speaks to his feed supplier.”

Brookes’ stance is bit more positive than that of Lamb: “I have to hold up my hat to the retailers. They have done a pretty good job. Only a fortnight ago, Tesco increased its pork price for the third time.”

Like Lamb, he believes Tesco is leading the market, because size dictates pace. Brookes also recognises there is lot of pressure on the retailer to grab the headlines by going cheap on product lines, which is why there are quite a lot of them on promotion. Asked what he thinks will happen to pricing on pork over the coming months, his measured reply is: “The lines priced in the middle will be squeezed. The standard offer is going to come under increasing price pressure and there is going to be a big growth in value offering, where imported meat has a role to play.”

More importantly, Brookes believes that the premium sector is set to grow.

“With consumers feeling the pinch, they might say. ‘We will eat out once a fortnight or once a month.’ But at the same time, they will treat themselves by trading-up when they do a shop, as a treat. TNS Worldpanel is picking up this trend. The marketing term for it is polarisation,” he says.

Nor is the so-called credit crunch seeing any switch to imports. “There are no statistics to support that,” Brookes says, citing a Porkwatch survey that is carried by BPEX every eight weeks, where over 350 people, including some farmers and professional panellists, go and audit what they see in the fixtures.

“We are doing well in every pigmeat category. The numbers come at around 75% for British pork and 55% for sausages.”

Retailer Performance

In terms of retailer share of the pork market, Tesco and Asda are doing well, with 14% and 17% year-on year growth respectively, according to TNS Worldpanel. Sainsbury’s has put in a robust performance, with a year-on-year share growth of 6.3%, after seeing a temporary decline in its market share of fresh pork sales following its over-promotion of pork a year ago.

Waitrose has also pulled in a sterling performance, with a fresh pork year-on-year sales growth of 14.3%. This, Brookes says, can be attributed to the chain’s success in communicating its happy pig proposition, offering near to free-range as possible to its consumers, who tend to be more interested in British agriculture. “The big challenge is get the one of the big four to emulate this. Morrisons is taking steps in this direction, because it has opened its own meat plant in Spalding, Lincolnshire, so it has the vertical integration, which Waitrose has. It is taking a long-term view, putting its money where its mouth is and investing in the UK.”

When it comes to pork cuts, belly, with sales up 12.5% year-on-year, appears to be going from strength to strength, which Brookes believes is due to the work BPEX has done in the foodservice sector. People try belly in restaurants, like it and then look for the same product in retail. Roasting joints have also seen strong growth this year, with a market share of 24.1%, up 14.2% year-on-year. “We were worried about it last year, because it was in decline, but the work we did with [BPEX NPD specialist] Keith Fisher on alternative roasting propositions on the forequarter and shoulder has borne fruit, with lots of processors putting them in the market and promoting them heavily,” Brookes says.

However his one concern is the decline in popularity of the humble pork chop, which saw sales rise by just 4.1% year-on-year. “We have to make it relevant to pork consumers, so it does not disappear.”

To ensure pork maintains its sales momentum, BPEX has signed up four-celebrity chefs – Aldo Zilli, Phil Vickery, Antony Worrall Thompson and Lesley Walters of Ready Steady Cook fame – to endorse recipe leaflets that will be available in-store in autumn.

As to what the future holds for the pork industry, it will undoubtedly continue to face new challenges. “I cannot remember an easy year. There are always different challenges,” says Rob Smith. Many will concur. Cereal prices have rocketed in the past year and now it appears that fuel prices are creating new pressures. At the same time, whether contraction in the pig herd will mean better prices for all remains to be seen.

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