While the food and drink industry may not have been as badly hit by the most recent recession as other sectors, including construction, proceeding with caution has still been the modus operandi for most UK manufacturers. However, as the economy as a whole continues to experience modest growth, is now the time to take more bold decisions and remove significant expansion projects from their mothballs? Mark Reeve, Chalcroft Managing Director, looks at the growth anticipated in 2015, and how capital investment can benefit the food manufacturing industry as a whole.
Some six years on since the worst of the recession, there are many signs of optimism from economists. GDP now exceeds its pre-recession peak and there are signs that food manufacturers are beginning to look a little more positively to the future by giving consideration to capital investment – projects which until recently had been placed indefinitely on hold.
In a significant 2014 survey, Food Manufacture magazine concluded that around 62 per cent of British companies were planning more capital invesment in 2014/15 than in 2013/14, a rise of more than 10 per cent on the previous annual survey. Chalcroft’s own 2014 customer survey revealed similar findings – 72 per cent of respondents were aiming to increase capital investment in their estate in the upcoming year. This optimism is in part due to more confidence in the performance of UK food manufacturers – the same survey revealed that 72 per cent of manufacturers expected their profit margins to improve over the 2014/15 period, while some 78 per cent of respondents felt more positive about the future of their company than they did in 2013.
This growing confidence in the market was demonstrated by the Glenigan Index for February which stated that around 1,250 previously stalled projects were resurrected and brought into development during 2014, representing an increase of 13 per cent on the previous year – a significant figure considering that construction was among the hardest-hit sectors during the last recession.
These new projects include a high volume of food-related premises, with a particular focus on logistics and distribution facilities. The inaugural JLL/Glenigan Commercial Construction Index reported that the construction of distribution space in particular was at a far higher level in 2014 than 2013, with 7.1m sq ft under construction at the end of Q1 compared with only 2.1m sq ft in the same period of 2013.
This demand is expected to rise into 2015, with a 40 per cent year-on-year increase in planning approvals secured in Q4 of 2014.
In the period covered by the Index, refurbishment projects saw an increase of 8.7 per cent to a value of £10.8 billion. This increase exceeded the growth in new build schemes (4.7 per cent, £11.9 billion) which is perhaps unsurprising as refurbishment projects can be planned and completed in a much shorter time frame. However, as confidence continues to grow we expect to see the growth of new builds far outstrip that of refurbishments, with manufacturers eager to seek long-term solutions rather than short-term quick fixes.
Outside the food manufacturing and distribution sectors, steady growth is also being reported by Glenigan in related industries – retail has grown by two per cent, hotels by five per cent, and leisure is up by 10 per cent, pointing to increased consumer confidence in the economy which may well lead to additional growth for food producers.
The latest forecasts by the Construction Products Association (CPA) estimate that construction output could increase by 5.3 per cent in 2015 and 17.8 per cent in 2018 – though the CPA recognised that uncertainty around the General Election could lead to a temporary period of slower growth. Supporting these estimations of growth, the February Glenigan Construction Market Review and Forecast noted that the value of industrial projects gaining local authority approval was up by 40 per cent, indicating that recent growth – 49 per cent in the three months to January 2015 compared to the same period a year ago – is sustainable.
It’s important that food manufacturers don’t shy away from long-term decisions in the face of short-term pressures including supermarket price wars. To increase competitiveness in a crowded marketplace, efficiency is key, both in terms of production volumes and energy reduction. For some manufacturers, particularly in legacy facilities which may not have been updated in some years, capital investment is the only way forward and in some cases, a new build may be more effective in improving workflow and environmental credentials than seeking to update the existing premises and infrastructure.
Food Manufacture magazine's State of the Industry Survey 2014 revealed that 71 per cent of manufacturers rate energy efficiency as one of the top priorities for 2014/15, which is backed up by the results of Chalcroft's 2014 survey. A huge 95 per cent of respondents stated that improving the environmental management of commercial buildings plays a key role in improving both productivity and profitability, meaning that energy efficiency is high on the agenda for the vast majority of manufacturers in part due to the cost savings it can deliver.
For building and construction contractors, environmental concerns also top the agenda thanks to the government's Construction 2025 initiative. This 'action plan' aims to reduce greenhouse gases in the built environment by 50 per cent over the coming decade (compared to 1990 levels), meaning design-and-build specialists such as Chalcroft must consider energy efficiency at every stage of development. The strategy also aims to achieve a 33 per cent reduction (from 2009/10 levels) in the initial cost of construction and the whole-life cost of assets in the next ten years, making now the ideal time to invest in capital projects as construction companies seek to achieve efficiencies throughout every project.
As the economy continues to strengthen, food manufacturers are beginning to give serious consideration to expansion and modernisation projects with the ultimate aim of increasing productivity while reducing overall costs and energy consumption. The market is poised for tangible growth, but only if forward-thinking manufacturers are prepared to commit to capital investments to secure continued growth.