Poultry Plan For Scotland: Progress Report Workstream 1 – Market Opportunities

1. Poultry Plan For Scotland: Progress Report Workstream 1 – Market Opportunities Scotland Food and Drink Insights team have completed research on market demand for poultry covering the retail and food services sectors (see attached). The main conclusions and findings are listed below. • UK retail poultry market set to grow 26% from £4.6bn (2013) to £5.8bn (2018) Vs 17% for total protein market (meat, poultry, seafood). • Poultry sales increases in UK being driven by shoppers switching proteins for economic / health reasons. • 90% of chicken in UK sold through multiple retailers. • All UK multiple retailers (excl ASDA) source 100% of their fresh chicken from UK. • Average retail cost per Kg fresh chicken in March 2014 = £4.60. • Ranges from Aldi: £3.67 to Waitrose: £5.78 • Little difference in the buying habits of the Scottish poultry shopper to the rest of the UK (volume, value , number of trips etc) • However latest 12 week figures (Feb 2014) show Fresh Poultry sales in Scotland growing 3 times faster than England / Wales • UK shoppers keen on provenance / country of origin information but few actually make the effort to seek it out on-pack. • 93% of Scottish Shoppers think it is important / very important that Scottish poultry is available in Scottish multiples. 55% say they are prepared to pay a premium for Scottish produce. • Scots households cooking less from scratch and sales of meal solutions (including ready meals) increasing. • Best ethnic opportunities lie in added value halal poultry (e.g. chicken for sandwiches, rotisserie, etc) (continued)

2. Poultry Plan For Scotland: Progress Report Workstream 1 – Market Opportunities (continued) • The 5 wholesalers who agreed to interview spent between £500k and £35m p.a. on poultry • Not all questions were answered in full due to commercial sensitivities • The bigger players procure from across the globe with Thailand and Brazil the main sources outside the EU • For the bigger wholesalers the main considerations are • Price • Quality • Secure supply chain • Barriers to buying more Scottish poultry were cited as • Cost • Availability (esp of the cuts required) • Logistics (majority of customers South / SE of England) • One respondent claimed there was not enough Scottish poultry available as “too much went to retail” • Manufacturing standards and quality marks “dependent on customer demand,” BRC and Red Tractor mentioned.

3. Workstream 2 – Facilitate the Set-up of a Poultry Producers Group ‘SAOS, with SG funding, to support the development of the Association into an effective pro-active representative body for the Scottish poultry sector, and includes the development a long term business strategy’. In December 2013, SAOS helped the independent growers to form the Scottish Chicken Growers Association (SCGA) to facilitate a collaborative approach to try and safeguard production and deliver greater efficiency for 2 Sisters and their customers. The grower base Despite the challenges highlighted, the independent growers are an elite group that have invested heavily in high quality welfare systems. Amongst them they have also accumulated a high level of poultry husbandry expertise. The two factories had their own designated supply base made up from farms owned by 2 Agriculture and from 27 dedicated independent growers. The grower base which supplied 2 Sisters before the restructuring was split into four groups: • Nine independent growers growing conventional chicken, contracted to Hook 2 Sisters, supplied Letham under a two crop contract • Eleven independent growers growing conventional chicken, contracted to 2 Agriculture, supplied Coupar Angus under a twelve crop contract • Seven independent growers growing free range and/or organic birds • 2 Agriculture owned growing space (which supplied both plants) (continued)

4. Workstream 2 – Facilitate the Set-up of a Poultry Producers Group (continued) Current situation Since the announcement of the restructuring process by 2Sisters in November 2013, the growers’ situation has become clearer: Letham growers Five of the nine growers who formally supplied Letham and who were on two crop contracts are in the process of being offered new contracts to supply 2 Sisters (these growers are located closest to Letham and Coupar Angus). The four not offered contracts are based north of Aberdeen and in Dumfries and Galloway. Of these four, one has found another market for their chicken and one has decided to pursue another unrelated opportunity (using their poultry sheds). Coupar Angus growers Five of the growers who supplied Coupar Angus and who are closest to the factory have been offered new contracts. A further five (based in the north) on twelve crop contracts have had their prices reduced. A final grower who did not sign a contract has not been offered new terms and is producing his last batch of birds. If offered new terms this grower would like to remain in business. Free range growers Four free range growers are waiting to hear if they will be offered new contracts (and should do so by the middle of March 2014). Organic growers Three organic growers have been offered new contracts. This leaves three growers with a joint bird production capacity of 200,000 chickens (1.24million/annum) who maintain a strong desire to continue their poultry enterprises but who have not been offered new contracts (one of the conventional growers also has free range production capacity). The four free range growers may also have unfulfilled markets if sufficient demand is not forthcoming. SCGA activities and maintaining the grower base Since December 2013, the SCGA has been highly active with respect to demonstrating the competitiveness of the independent grower base and has represented the growers collectively with 2 Sisters and other organisations on several occasions, putting forward constructive plans and proposals. Note: It is estimated that the proportion of supplies was split approximately 75:25 between 2 Agriculture and the independent growers respectively

5. Workstream 3 – Supply Chain Links & Efficiency Poultry meat production – UK poultry production has expanded in recent years while Scottish production has declined suggesting that competitiveness of the Scottish sector is weaker. Poultry meat prices – UK prices had increased steadily and consistently over the recording period; going up from 77 pence / kilo in 2007 to 111 pence / kilo 2011. There are indications that poultry processors in Scotland are paying producers higher prices than in England but further data is required to verify the extent of this. Poultry meat consumption – poultry consumption has been stable across the UK in recent years with some shifts in demand away from cooked chicken towards fresh uncooked and frozen cuts reflecting the move by consumers to economise. Scottish poultry processing sector – although processing is dominated by one company (2 Sisters) there are a large number (10) of additional smaller processors. It would be useful to investigate the potential for these smaller operators to expand capacity and provide a more diverse market for Scottish producers. Producer margins were estimated for an average Scottish broiler producer and compared with standard costings from England. This partial analysis indicates that Scottish broiler producers face costs around 12% higher equivalent to around 20p per bird or 9p/kg liveweight produced. There are indications that Scottish broiler producers receive a higher price equivalent to an additional 10p per bird though this appears insufficient to compensate for the higher costs Higher costs result from higher feed prices and higher energy use (due to the colder climate). This analysis is based on limited information and further research is advised to provide firmer estimates. Average values must also be treated with caution as individual producers also vary widely in their costs of production. Information Gaps Markets and consumer prices - a breakdown of sales and selling prices for Scottish retailed and produced poultry. Country comparison – a more detailed analysis of the poultry meat sector in Scotland compared to Northern Ireland and the rest of the UK Producer margins - more data from broiler producers on recorded costs and sales prices for poultry meat. (continued)

6. Workstream 3 – Supply Chain Links & Efficiency (continued) POULTRY MEAT PRODUCTION 1 Unless otherwise stated data taken from: http://www.bpex.org.uk/downloads/302937/302819/Poultry%20pocketbook%202013.pdf Plant feasibility study The requirement to prepare a feasibility study for a new Poultry Processing Plant in Scotland was in response to the expectation that a large proportion of the existing growers in Scotland – particularly in the North East – would lose their contracts with 2Sisters and therefore would require an alternative processing site in Scotland to take their birds. 2 out of the 28 identified growers have been advised that their contracts with 2Sisters will not be renewed however we understand discussions with all growers in the North East are ongoing so this position may change. The feasibility study includes an outline template for a Poultry Processing Plant to be built in Scotland. The question of whether there is sufficient market demand for increased poultry processing in Scotland is being considered as part of the work being undertaken under Workstream 1 by Scotland Food & Drink. The costs for a new Poultry Plant will be influenced by several variables – a number of which are articulated within this report. These range from circa £18.5 million for the lower volume plant through to circa £29 million for the highest throughput of birds. It should be stressed that this has been a desk exercise completed by professionals experienced in both the poultry and property sectors however the estimates contained within this report would require further analysis and refinement by any potential investor in order to test them against specific locations, procurement criteria and access to finance.

7. Workstream 4 - Supply Chain Collaboration This work stream will seek to identify any features in any part of the supply chain where efficiencies could be achieved. It will require as a starting point the process mapping of the full supply chain. Develop with SCGA proposals on poultry grower costs such as using more local feed, consolidating catching teams, planning for full loads at thinning, placing numbers based on parent flock performance and last batch mortality, longer turnarounds to allow better performance levels and group purchasing of commodities. Promote in every part of the chain collaboration, best practice and innovation Part of this work has involved developing a proposal for growers based north of Aberdeen to deliver live birds for processing at no extra charge to Letham and Coupar Angus. The basis of the proposal involved allowing these growers more flexibility with respect to how they source their feed and how they catch the birds at the end of the production cycle. However the proposal was rejected by 2 Sisters who wished to retain their own feed and collection arrangements. Recent meeting with 2 Agriculture At a meeting with the SCGA on 27 February, 2 Agriculture outlined their development plans for chicken processing in Scotland. In summary, the plans involved: Supporting the development of increased volume through the One Stop Halal business at Letham Employing a Scottish Sales Director to support sales of Scottish chicken and exploit Scottish marketing opportunities Opening a new cutting plant to service the growing market for further processed chicken Selling the Hook 2 Sisters rearing and hatchery joint venture to PD Hook It was stated by 2 Agriculture that the current farm production capacity was matched to processing demand, i.e. as supplied by the independent growers who had been offered contracts and 2 Agriculture’s own internal production. (continued)

8. Workstream 4 - Supply Chain Collaboration (continued) 2 Agriculture also identified three opportunities for growth as follows: • An opportunity for free range producers (to be quantified by March/April) • In the short term, potential for an uplift in volumes if additional sales could be generated at Letham. • In the longer-term, the development of additional cutting capacity would provide the potential to work two shifts at Coupar Angus and the possibility to double the output of production at this site. In addition to the feedback provided on the development plans, there was also a constructive discussion about future collaborative opportunities between 2 Agriculture and the SCGA. A further meeting is scheduled for 31st March to explore these opportunities. SCGA activities and maintaining the grower base Since December 2013, the SCGA has been highly active with respect to demonstrating the competitiveness of the independent grower base. Following the meeting with 2 Agriculture in February 2014, members of the SCGA discussed the future strategy of the group. Although disappointing to learn of the constrained demand there was two elements to consider: • Firstly the ‘unallocated’ production capacity is relatively limited at 200,000 bird spaces • Secondly, there is the potential for growth in demand from the Letham factory and thereafter from Coupar Angus (if and when the cutting plant is opened) As a result, the basis of a proposal was developed whereby the pain of reduced production could be shared amongst the grower base on an equitable basis. This could be achieved through longer cycle times between each batch of chickens. (continued)

9. Workstream 4 - Supply Chain Collaboration (continued) The benefits of this proposed course of action were as follows: • The strategy would maintain ‘well invested’ production capacity and thus an ability to increase production if/when demand at Letham expands or when the new cutting plant became operational • The SCGA will demonstrate an ability to work collectively and collaboratively • A small increase in cycle times has the potential to improve hygiene and minimise any subsequent reduction in productivity • An opportunity to conduct a small pilot trial on local feed sourcing with minimal impact on the 2 Agriculture feed mill throughput • Similar to feed sourcing, including northern growers will provide an opportunity to conduct a pilot trial on local catching This activity would have helped to maintain the current independent grower base which is currently estimated to employ: • Twenty-five farmers and farm workers employed rearing the birds • Twelve catchers • Twenty cleaners • Thirty individuals employed at the hatchery producing chicks • Five chick (day old) delivery drivers • Ten finished bird collection and delivery drivers • Twenty-five feed delivery drivers • Forty-one farmers and farm workers producing the grain included in the 60,000 tonnes of feed consumed by the livestock However this proposal was rejected by 2 Sisters. (continued)

10. Workstream 4 - Supply Chain Collaboration (continued) Further work in supply chain efficiency will be discussed once 2 Sisters are able to confirm their chicken supply requirements. In the interim, provisional scoping work has got underway, to identify potential areas of efficiency gain and improvement for the SCGA members. Full implementation will commence once the detail of the volume requirements are made clear by 2 Sisters. Discussions continue between the SCGA and 2 Sisters with the next meeting scheduled for April or May. Support has also been provided to Barraston Poultry in helping them plan their new supply chain growth strategy for a new multiple retail customer. SCOTTISH GOVERNMENT 2014

11. UK Poultry Retail Market Opportunities Research March 2014

12. Summary How has this impacted Fresh Chicken? • UK retail poultry market set to grow 26% from £4.6bn (2013) to £5.8bn (2018) Vs 17% for total protein market (meat, poultry, seafood). • Poultry sales increases in UK being driven by shoppers switching proteins for economic / health reasons. • 90% of chicken in UK sold through multiple retailers. • All UK multiple retailers (excl ASDA) source 100% of their fresh chicken from UK. • Average retail cost per Kg fresh chicken in March 2014 = £4.60. • Ranges from Aldi: £3.67 to Waitrose: £5.78 • Little difference in the buying habits of the Scottish poultry shopper to the rest of the UK (volume, value , number of trips etc) • However latest 12 week figures (Feb 2014) show Fresh Poultry sales in Scotland growing 3 times faster than England / Wales • UK shoppers keen on provenance / country of origin information but few actually make the effort to seek it out on-pack. • 93% of Scottish Shoppers think it is important / very important that Scottish poultry is available in Scottish multiples. 55% say they are prepared to pay a premium for Scottish produce. • Scots households cooking less from scratch and sales of meal solutions (including ready meals) increasing. • Best ethnic opportunities lie in added value halal poultry (e.g. chicken for sandwiches, rotisserie, etc)

13. UK Market Projection Forecast of UK retail sales of poultry and game, by value, 2008-18 Mintel: Meat, Seafood and Poultry - UK - October 2013

14. UK Protein Switching Importance of Availability of Scottish Food and Drink: A third spend more on poultry in 2013 Source : Mintel: Meat, Seafood and Poultry - UK - October 2013

15. £11.72 Fresh Salmon Fillets Ave RSP £5.18 Fresh Pork Chops Ave RSP £10.46 Fresh Lamb Chops Ave RSP £4.97 Fresh Minced Beef Ave RSP £7.09 Fresh Turkey Breast Fillets Ave RSP £7.69 Fresh Chicken Breast Fillets Ave RSP £0.00 £2.00 £4.00 £6.00 £8.00 £10.00 £12.00 £14.00 However whilst chicken is cheapest overall… UK Protein Cuts Comparison Source: Kantar Worldpanel, 52w/e 17th February 2013

16. Grocery Market UK Volume Vs. Value

17. UK Price per Kilo by Cut Source: Kantar Worldpanel Mar 2013

18. How has this impacted Fresh Chicken? UK Sales Channels - Chicken Source: Kantar Worldpanel Feb 2013

19. Retailer Sourcing of UK Produced Poultry (excl. Ready Meals) How has this impacted Fresh Chicken? Sources: NFU February 2014, Red Tractor Nov 2013

20. Fresh Poultry Scotland Vs UK 12 week yr on yr change KWP -Take home Food & Drink - 12we 2nd February 2014

21. Provenance “How important is it to you that Scottish sourced food and drink is available in supermarkets in Scotland ?” Scotpulse Shopper Omnibus 1000 Scottish Shoppers Jan 2014

22. Provenance “How likely are you to pay more for Scottish products (assuming like-for-like quality with products from elsewhere)?” : INSIGHTS Scotpulse Shopper Omnibus Jan 2014

23. Provenance - UK Importance of Availability of Scottish Food and Drink: “While there is considerable consumer demand for detailed information on sourcing, far fewer check country of origin information than report to want origin details. The onus thus remains on the operators to effectively capitalise on their origin.” Source; Mintel: Meat, Seafood and Poultry - UK - Oct 2013

24. Ethnic Opportunities Halal opportunity UK = 3% “Muslim consumers are more wedded to using small, local, Muslim-run butcher shops for their halal purchases” Source: Eblex May 2013 Perceived gaps in Halal product offerings • Halal ready made chicken and meat sandwiches (e.g. from major retailers) • Halal versions of those products typically served in popular fast food outlets • Halal snack items and crisps • Halal ready meals e.g. shepherd’s pie • Halal rotisserie, particularly in supermarkets (roasted beef/lamb/chicken) • Halal chicken and lamb stock cubes • Halal chicken sandwich fillers