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by Rebecca McQuillan
03 March 2023
After surviving the pandemic, the food and drink sector faces mounting costs and regulation

After surviving the pandemic, the food and drink sector faces mounting costs and regulation

If you took all the Scotch pies Bells Food Group produces in one year and piled them up into a tottering tower one pie at a time, it would apparently reach 52 times the height of Mount Everest, or to somewhere near the middle of the thermosphere close to where the International Space Station orbits. That’s quite a few pies in the sky. 

Bells’ longstanding managing director Ronnie Miles uses this image of a titanic Scotch pie obelisk to illustrate the huge volume of Bells’ pie trade in Scotland, and how therefore even small changes to the pie recipe – called “reformulation” – can have a dramatic effect. 
One such recent change involved reducing the level of salt in the pastry while retaining the flavour, supported by a grant from the Scottish Government.

 “With a very smallish change,” explains Miles, “we managed to take out approximately eight tonnes of salt a year.”

Bells has done some work on reducing fat in its pastry and is looking at salt in the pie fillings too. “If we can reduce salt, if we can reduce fat, great,” says Miles. “In Scotland, we have a very strong palate for salt and spice and stuff, more than in England. If we were to reduce salt levels by 75 per cent overnight, trust me, they wouldn’t taste as good. But if you can slowly but surely lower salt, people’s palates do adapt.” 

Reformulation is an example of how Scottish food businesses are responding to changing demands over issues like public health and climate change. 

Bells has two bakeries in Shotts, Lanarkshire, a turnover of around £26m a year, and employs 220 people. It produces over 25 million shell pies a year, that’s 80 per cent of all shell pies sold in Scotland, including chicken curry, macaroni cheese, steak and gravy, and vegan varieties. They are sold in shops nationwide, along with Bells’ pastries and cakes. 

Miles is fully supportive of creating healthier recipes but is worried about mooted moves to ban the advertising and promotion of certain foods while firms are still struggling with inflation, rising wage costs and labour shortages. He’s also worried about the timing of the deposit return scheme, though Bells won’t be directly affected by it.

A board member of Scottish Bakers, he says: “Companies are fighting for their lives just now.
“I’ve been decades in this company; I have never seen anything like the last year and a half. Bakers are a resilient bunch, we’ve had tough times in the past, but it’s just been an avalanche over the last 18 months.”

Bells has seen beef costs rise by 40 per cent, and utility costs sky-rocket. The company’s gas bill for the month of September was equivalent to that for the previous 12 months put together and the electricity bill is “hundreds of thousands of pounds a month – it’s mindblowing”. The company is still managing to invest and has won new contracts recently which will add £5m-£6m to annual turnover, but has turned down extra cake business because the cost of switching on the ovens for that particular cake was unaffordable.

But the business is resilient and its famous pies are a reminder of how important food is to Scotland’s identity. 

“Pies are not sexy,” says Miles, reflecting on the contrast with “hand-diving langoustines off the Isle of Mull”.

“Each to their own,” he says, “but we’re producing 600,000 pies a week, at good value, at a time when people need to be very cost-conscious. We can provide a good quality nutritious meal for not a lot of money.”

Food businesses support a lot of jobs. Scotland’s largest manufacturing sector, it employs nearly 50,000 people. The industry has an annual turnover of £10.4bn. 

Around 95 per cent of Scotland’s 1,200 food and drink businesses are small and medium-sized enterprises (SMEs) but there are also a few major global brands. 

They range in size from those turning over less than £1m a year, such as Edinburgh-based sweet treat-maker Madamoiselle Macaron, through firms worth £5m-£6m such as Macsweens haggis and black pudding maker, up to larger businesses like Nairns, which turns over £40m and produces around 70 per cent of the UK’s oatcakes. Next comes the likes of Graham’s dairies (turnover £127m) and Baxters’ UK arm. Then at the top in the ‘megasphere’ come the large whisky companies. Scotch whisky exports in 2022 were worth £6.2bn. 

The strength of the food and drink sector is underlined by its exports: Scottish food and drink accounts for around 30 per cent of overall UK food and drink exports. 
Premium products are an important element of that. 

Scottish whisky, salmon, seafood, beef and lamb, help define Scottish produce internationally. Scotch beef and lamb have long been known for their EU protected geographical indication status showing that they meet strict quality and welfare standards. 

At the same time, many other companies like Bells are producing food for dinner tables and lunch boxes primarily across Scotland and the UK. 

Ronnie Miles at the World Championship Scotch Pie Awards in 2019 | Credit: Alamy

So the sector is diverse and vibrant. Yet a Food and Drink Federation Scotland (FDFS) survey shows that business confidence is at its lowest since the survey began in 2018 as a result of stiff economic headwinds, the most immediate problem being those high costs. 

They continue to spiral upwards, which has led many businesses to cut capital investment. Energy costs had reached 22 per cent of operating costs in the third quarter of 2022, up 12 per cent on a year earlier. 

FDFS director David Thomson calls the cost rises “brutal”. Companies coming to the end of fixed-rate gas contracts are seeing their energy bills increase by five times, even taking into account government support.

Thomson explains: “Food price inflation is currently at 16.9 per cent – that’s January’s figure. That’s the highest since September 1977 that we’re aware of, and it’s not done yet.” 

That has put pressure on household budgets, but the costs food businesses are seeing behind the scenes are even higher, he adds, with commodity prices like butter up between 30 and 50 per cent. “Those companies are having to swallow a lot of this.”

Confidence to invest has inevitably taken a hit. “It might be investment in new machinery or trying to expand; investment in new products or services. Companies are having to tighten their belts; some have had to cut down their ranges and concentrate on their core.”

You can see all this clearly among farmers. 

Agricultural inflation is sitting at about 30 per cent, with fertiliser costs having doubled or even tripled. All this, added to rising labour costs (and labour shortages), means that some farmers are having to consider how much food they can afford to produce in the coming year. 
Martin Kennedy, president of NFU Scotland, warns: “If we don’t get this right, there will be an impact on food security and we need to address that. 

“Farmer numbers have dropped and overall production has started to drop, especially in the livestock sector and particularly beef.”

The average beef herd has reduced four per cent in Scotland, year on year. 

A survey by NFU Scotland in January found that farmers and crofters identify growing uncertainty over future agricultural policy post-Brexit as the greatest threat to their business.

They are calling on the Scottish Government to bring forward the detail of what support they will get from 2026 and what policy measures will be required of them in return.

“The Scottish Government recognises that high-quality food production is important,” says Kennedy, “but it’s getting them to make the right decisions.”

In the food industry generally, Brexit continues to cause problems. Labour shortages are worsening (vacancy rates stood at 9.1 per cent in the third quarter of last year, compared to 6.3 per cent in the second) and there are barriers to trade with Europe. 

Some barriers have proved fatal to some export relationships, particularly for smaller companies that have to put their consignment of goods for export in the same lorries as other people’s.

“The risk of doing that is so high that many companies don’t want to do it and the logistics companies who provide the lorries, don’t want to do it either,” says Thomson.

“If your consignment is okay, but the other person’s consignment on that truck is not okay, then everything gets delayed, and potentially destroyed, so nobody does it. 

“There are some household-name companies in Scotland that don’t do it any more. 
“So smaller businesses have given up on Europe as an export market.”

In addition, Scottish seed potato exports to the EU, worth tens of millions, are now banned due to post-Brexit sanitary and phytosanitary rules.

They are a casualty of the unspoken trade war, says Thomson, adding that there will be no enhancements to the UK-EU trading relationship until the impasse over the Northern Ireland protocol is resolved.

And labour shortages are an ongoing headache. “We lost free movement and the reality is we’re still suffering from that,” says Kennedy. Soft fruit growers are one badly impacted sector, but the food industry more widely is affected with a lack of machine operators, drivers, engineers and scientists, among others.

There are the policy impacts to consider too. Last year, the Scottish Government consulted on restricting the promotion of food and drink high in fat, sugar and salt, as part of a sustained effort to reduce obesity levels and poor diet, which are associated with illnesses like cardiovascular disease, diabetes and cancer. 

Thomson believes that the most important thing the industry can do to support public health is to reformulate recipes. Over the last three and a half years, with Scottish Government support, he says recipes have been reformulated to remove hundreds of millions of calories from manufactured foods, and add in more dietary fibre.

He is “quite concerned” about the impact any new restrictions could have on certain manufacturers, adding: “If you’re a biscuit manufacturer, you make biscuits, you’re not suddenly going to pivot to vegetable cassoulet.”

Food businesses are also facing sustained pressure from both government and customers to reduce climate emissions associated with food production and protect biodiversity. On this, Thomson believes the Scottish food industry could become a global exemplar, having made great progress already. 

He says: “There is a strong commitment from across the food and drink industry in Scotland to make net zero happen and we want to be in a place where people point to Scotland and say ‘they’ve made great strides’.” 

On balance, Thomson is optimistic about the future, but would like to feel more confident that the Scottish Government understood how so may changes all at once are affecting firms.

“We have strong and vibrant food businesses that have weathered a hell of a lot over the last five years,” he says. “Things are really difficult just now but you can see they will start to recede and the industry that comes out of that will be stronger and fitter as a result. 

“What we’d like to see and what the national strategy on economic growth promised, is a more holistic approach to the industry.”

Pointing to the “multiple” changes from government that will raise industry costs, he says: “There’s no real sense that anyone is looking at the cumulative impact on businesses – and in particular on food and drink businesses – of all these things, which amount to an unprecedented level of regulation targeting the industry for the next few years.”

Miles echoes that view. He says: “I just think the government need to listen to industry.  
“Some of the decisions recently you just think, give us a break.”  

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