Sheep and lamb processing: assessment

4 Opportunities to grow sheep processing in Scotland

4.1 Drawing on the literature review and data analysis, but also more directly from the practitioner insights offered by industry and expert interviewees, this Chapter focuses on what can be done to increase the number of sheep processed in Scotland. This is addressed by:

• Going back to first principles to understand the economics of red meat processing. Specifically, the importance of building competitiveness through uniqueness.
• Identifying the markets to target based on market analysis plus stakeholder input.
• Sifting through the options available that could potentially be introduced or encouraged to improve the competitiveness of Scottish lamb processing and, by implication, lift the value of the sector to the Scottish economy.

4.1 Improving competitiveness

4.2 Historically, the red meat sector was horizontally structured in that producers sold animals at live markets where processors and butchers bought them largely "as seen". The animals were then sent to the local slaughterhouse for killing and processing into carcasses. The carcasses were then transferred or sold onto butchers or wholesalers for disassembly into cuts for retailing. There was little formal linkage in the four to five stages between the farm and the fork. However, butchers would generally seek out stock at the markets from farmers based on previous positive experience.

4.3 As consumers switched to buying most of their meat from supermarkets in the 1980's, or via the food service outlets like McDonalds, a new more vertically arranged model with less stages emerged in the meat sectors. In particular, slaughterhouses or abattoirs moved to buying more stock directly from producers and also processing it ultimately into the priced packs that are "shelf-ready".

4.4 This change drove massive rationalisation of the meat industry with processing concentrating to exploit size economies. Today the UK meat industry is characterised by a small number of retailers and processors, but still a large number of primary producers.

4.5 In the past 40 years the meat industry has shifted from farmers competing with processors who in turn compete with retailers, to one where retailers seek to align with a processor who in turn draws on a broad hinterland of producers to provide a distinct value chain. So, for example the M&S lamb value chain (Scotbeef) competes against the Tesco lamb value chain (Kepak). Figure 25 captures the components of such lamb chains and highlights how information flows as well as product. It also notes that most of the time (usually 4 to 12 months) between birth and slaughter is spent on-farm.

Figure 25 Illustrative value chain for lamb

4.6 Critically, value chains are driven by what the consumer values and are likely to be most successful if they target precise demands of:

a) Cost.
b) Convenience.
c) Taste.
d) Method of production (provenance).

4.7 Griffith^[42], when discussing the Australian red meat industry, stressed that there is a trade-off between value-chains that focus on being responsive to customer needs and those that focus on supplying at the lowest possible cost. He offered the following checklists as which approach best fits strategically;

a) Price sensitive consumer

i. More of them
ii. Always a market – demand uncertainty lower
iii. Minimal assurance standards
iv. Little scope for rewards for quality
v. Best strategic fit is low cost supply

b) Quality sensitive consumer

i. Fewer of them
ii. More risk – demand uncertainty higher
iii. More exact assurance standards – higher cost
iv. Greater scope for rewards for quality
v. Best strategic fit is responsive to consumer needs

4.8 Porter's work (Magretta, 2012), upon which the concept of value-chains was developed, emphasises that the long-term success of an organisation is best served by competing to be unique rather than simply "being the best" of the bunch (on cost). Porter developed the five forces framework to help visualize the competition for profits at work in an industry. Table 9 below summarises a five forces analysis of the Scottish sheep processing industry.

4.9 Based on this analysis, some Scottish sheep processors do demonstrate value-chain thinking. Essentially all three major processors have strategically chosen not to compete in the opportunistic export trade or mutton market, preferring instead to lock into more predictable value-chains with the multiple retailers. For example:

a) Scotbeef has value chains with M&S and Aldi, while sister firm Vivers has long running relationships with mid-sized retailers in France, Italy and Belgium.
b) Kepak works closely with Tesco (including organic) and Costco.
c) Woodheads is particularly interesting for it is completely integrated with its parent company Morrisons hence reducing its value chain to just two stages – retail/process and production.

4.10 However, owing to the collective strategy of the Scottish sheep industry to lock into predictability, its requirement for lambs is met by less than 50% of the potential Scottish lamb crop. That is, over half of Scottish lambs typically move through more opportunistic value-chains based in England and Wales.

4.11 Moreover, although relationships with retailers appear to be good, relationships with primary producers appear to be less so with a high degree of short-termism and a general absence of information sharing and trust.

Table 6– Five Forces Competitive Analysis for Scottish sheep industry

Bargaining power of suppliers

Negligible

• A large number of sheep farmers so effectively no one-to-one bargaining.
• Lamb sales are a major part of most sheep farmers' total income limiting their bargaining power. Plus, once lambs are finished, they go overfat quite quickly so the option of retaining stock is limited.
• Even procurement agents that supply large numbers of lambs to processors, do so on a fee basis rather than attempt to negotiate on price. Such agents extend from dealers, through mart companies to procurement co-ops that run under the Farm Stock (Scotland) Ltd umbrella.
• Nevertheless, the farmgate lamb price is set by open market forces. At times where raw supply can't match demand then processors have no power to influence price in their favour.
• Processors can have difficulties getting the specification of lambs they need (fat levels particularly important) because other processors with different customers can set the price grid more laxly.

Reducing power of suppliers

Limited need at present

• Vivers also buys from England to maintain the specification/quality of lamb they need.
• To maintain lamb availability in late season processors do have farmers they consistently work with, but it is not a formal relationship, more one of trust developed over years.
• Even a soft Brexit may reduce export demand, further undermining suppliers bargaining position.

If lamb prices fall too far owing to Brexit, the Scottish breeding flock could contract sharply. Processors may then need to collaborate more with producers especially for early and late season lambs. Processors may look to encouraging specialist lamb finishing farms to cover lamb supply in these periods. Most beef processors already operate this approach to better organise cattle procurement via a select group of finishers they can work with.

Bargaining power of buyers

Significant but constrained

• British supermarkets dominate the lamb marketing channel accounting for around half of the British lamb crop with a further third exported.
• There are few supermarkets and there is intense competition between them on price. That the supermarkets make little margin on lamb might imply that they could improve their bargaining position by threatening to reduce the shelf space allocated to lamb.
• However, shoppers expect supermarkets to stock lamb so they do. The sentiment from processors is that the supermarkets do not squeeze processors too hard on price, because they are aware of the low margins from lamb processing and the fact that there are now so few processors, meaning that switching, is more difficult.
• Supermarkets do, as standard practice, periodically tender out their lamb contracts, so a processor's demand for lambs could be adversely affected if a contract is lost.
• Morrisons is unique in that it has integrated back into processing to improve its value chain.
• Export demand only directly affects Scotbeef/Vivers and is possibly more influenced by currency changes than the strength of the buyer.
• Poor lamb pelt prices are more a consequence of low demand for wool products and tighter environmental laws in countries where pelts processed.

Reducing power of buyers

Limited scope or intent

• The relationship between processors and supermarkets is mature and reasonably stable. Further collaboration (including working closer with producer groups) to strengthen these ties, seems the most promising future development.
• In theory, developing branded lamb products would increase processor power. But the retailers brand (e.g. M&S lamb) is the only branding pursued.
• Putting more effort into developing volumes and value into the food service is an option. However, because of the carcase balance problem, meeting the supermarket demand for lamb and focusing more on beef appears Scottish processors' priority.

Threat of new entrants

Negligible

• An unattractive sector to enter because of the low economic returns from lamb processing. Apart from Vivers, the other processors are more focused on beef.
• It is difficult to foresee further major changes in Scottish lamb processing given that the recent takeover of 2 Sisters by Kepak has brought stability to the red meat processing sector.
• A bad Brexit and a sustained drop in the farmgate lamb price over the medium term would result in a large drop in the Scottish and British breeding flocks, triggering further rationalisation of the lamb processing sector across Britain.

Reducing threat of new entrants

Not an issue

Threat of substitutes

Significant from other meats

• Lamb has become the most expensive meat generally available and consumption levels have fallen to very low levels partly as a result. Purchases of lamb have become very dependent on supermarket price discounting and a favourable exchange rate.
• The generic Scotch Lamb brand is weak so often Scottish lambs are simply sold under the British lamb label.
• Beef is a less risky meat for processors to work with (better meat yield, more manufacturing options, cheaper animal cost, etc.) further reducing the processing of lamb.

Reducing threat of substitutes

Some opportunities

• Cost of lamb set by open market forces so a bad Brexit could drop procurement cost sharply (especially in the glut period), though if allowed to play out would eventually lead to lower production and some stabilisation in the price of lambs.
• There may be an opportunity to help farmers lower their cost of production through better technical performance (feeding, breeding, health management) and larger flocks (lower per unit labour, machinery and overhead usage).
• Working with producers to help add value to lamb cuts (e.g. better meat yields, provenance).
• While limited scope to develop standalone brands, there should be opportunity to help retailers develop their own label brands (e.g. Tesco, M&S).
• Better supply chain collaboration to achieve efficiencies (e.g. data sharing, volume contracts, haulage / fuel savings).

Rivalry among competitors

Significant

• Within Britain lamb processing dominated by three Irish owned processors of which only Kepak kills lambs in Scotland. Because of their size (and probable debt levels) allied to the high fixed cost structure of processing, these companies must compete hard for lambs to reduce unit costs.
• New Zealand lamb processors also offer stiff competition as effectively NZ lamb competes on an equal footing given that imports are well within the current Tariff Rate Quota.
• Scotbeef (including Vivers) is particularly vulnerable given its size and despite being debt free.

Reducing threat of rivals

Mitigation strategies evident

• Scotbeef avoids the opportunistic export market. Indeed, it mitigates the impact of New Zealand competition by actually cutting and packing NZ product to serve key customer M&S. Likewise, to service M&S' requirement for home produced lamb, it subcontracts part of the kill to an abattoir south of the border.
• Though Vivers is a significant exporter in terms of its turnover, it focuses on servicing customers with which it has established a strong reputation for delivering quality lamb.
• Woodheads is part of Morrisons so benefits from vertical integration.

4.12 A good example of putting supply chain thinking into practice in the red meat industry is provided by Silver Fern Farms. The New Zealand processor started a major seven year Primary Growth Partnership project with the New Zealand government in 2010. An overview of the Farm^IQ project that aimed to create a demand driven integrated value chain can be found in Appendix 6.

4.2 Prioritising markets

4.13 As reported in Chapter 3, sheepmeat consumption in the UK is in long-term decline, reflecting a shift in consumer preferences towards (in particular) chicken and to more processed and food service products. Within this, there are regional and demographic variations – most notably very low per capita consumption in Scotland and a growing halal market segment in the UK, EU and globally.

4.14 Internationally, overall meat demand is forecast to grow and, although a minor component of this, so too is demand for sheepmeat. Again, there are regional and demographic variations in this – most notably more rapid growth in parts of Asia, the Middle East and North Africa as both population numbers and income levels increase.

4.15 Most of the output from Scottish processors is already sold to the rest of the UK or within the EU, and given the small domestic market any significant increase in throughput will similarly have to be sold outwith Scotland.

4.16 However, different markets, even within a given country can vary in terms of consumer preferences and regulatory requirements. For example, halal consumers are not ethnically or culturally homogeneous and their preferences for particular types and qualities of meat^[43] or slaughter methods are not uniform^[44], and will change over time. Similarly, whereas fresh and frozen cuts for cooking in the home once dominated, food service consumption is now at least as important in many markets.

4.17 The global demand for halal sheepmeat is likely to continue to rise, and it's importance as a market for sheep meat continues to grow within the UK, Europe and globally. Phil Hadley of AHDB explained that "the Muslim community, both in the UK and overseas, is growing at a faster rate than the population in general, therefore the relative importance of this market is only likely to increase" adding that the Muslim population already account for approximately 20% of English sheepmeat consumption^[45]. Figure 26 shows the projected proportion of Muslims amongst European countries by 2050 – although under a no-deal Brexit more global halal markets may become increasingly attractive.

Figure 26 Muslim population projections in Europe

Source: Pew Research Centre^[46]

4.18 This raises issues around industry understanding of consumer preferences, including routine measurement of consumption patterns, but also possibly around Scottish processors' main focus on supermarkets rather than food service. Whilst it may be that food service demand is generally highly price sensitive and therefore offers lower (and possibly less stable) margins, it is where volume growth may be greatest.

4.19 Table 9 below summarises the broad market opportunities facing Scottish processors. It assumes a negotiated trade deal post Brexit that essentially retains the current trading relationship between the UK and EU. A hard (no deal) Brexit would necessarily require far more effort in developing global markets.

Table 7 Scottish sheepmeat market opportunities (assuming a soft Brexit)

Markets	Priority	Current Product type	Comment
Scotland	Low	Predominately fresh legs, chops and steaks.	Lowest per capita consumption of sheepmeat within UK and relatively small population combine to limit size of Scottish market. Public sector procurement symbolically important but trivial in volume terms. Possibly some scope to displace non-Scottish lamb in food-service sector, but (with exception of high-end niche) very price-sensitive.
Rest GB - London	Medium	Predominately fresh legs, chops and streaks.	Per capita consumption of sheepmeat is higher elsewhere in the UK, notably in London, reflecting demographic and cultural differences (including the halal market). This, combined with larger population size, explains greater reliance on UK outwith Scotland. Scottish-branded sheepmeat currently has little market penetration, implying scope for improvement.
EU - France - Belgium - Germany - Med	Medium	UK exports split approximately 66:33 between carcases and primal cuts, with Scottish exports believed to be in similar proportions.	France currently accounts for around half of all of UK sheepmeat exports, with Germany, Italy and Ireland (in that order) accounting for almost all other exports. Light lambs largely restricted to Mediterranean. Halal market underpins forecast modest overall growth in EU demand, and provides some future opportunities (subject to post-Brexit arrangements).
Non-EU - North America - N.Africa - Asia (China, India)	Low	UK exports beyond EU are currently small, but mainly comprise cuts rather than carcases.	Forecast growth in demand for sheepmeat is concentrated in northern Africa, the Middle East and Asia (demand in EU and North America is forecast to be relatively flat). Recently announced access to India and Japan are welcome, but per capita consumption is often small and prices are often much lower than in EU. Moreover, such markets are currently dominated by supplies from Australia and New Zealand[47] helped by preferential trade agreements (e.g, NZ-China FTA) and may be difficult to break-into. Three years of trying to access the Canadian market highlights the difficulties of realising gains even once market access has been granted.

4.3 Opportunities to improve competitiveness

4.3.1 Market R&D

4.20 Industry and stakeholder interviewees indicated that there is limited co-ordination between the processors and pan-industry bodies such as QMS and Scotland Food & Drink. By comparison, competitor countries, like Ireland and New Zealand, appear to put more focus and resource into co-ordinating market development. This is almost certainly driven by these countries recognising their position as being very export dependent owing to their small home markets. Co-ordination in developing export markets also appears to be greater in countries like the US and Canada (grains) and Denmark and the Netherlands (pigmeat).

4.21 The impression is that the whilst the Scottish beef industry is distinctly Scottish, and views all markets outwith Scotland as 'export' potential, no such distinction applies with the Scottish sheep industry. While this may be deemed understandable owing to the ease with which thinking switches to the British level, this lack of clarity may reduce the potential of Scotch Lamb in the important English, especially London, market.

4.22 All of the Scottish lamb processors have strong relationships with the UK supermarkets. As a result, processors will understandably be guided by the market research and development activities of these highly competitive firms who are well attuned to retail consumer needs.

4.23 However, this dependence on the supermarkets, plus the secondary status of lamb behind beef at the processors, means that there is little incentive to look at developing more niche markets in either the premium or cost-end of the food service sector. The market for public sector purchasing of lamb is so small and competition so strong from other cheaper, more versatile meats, that the big processors understandably avoid it.

4.24 The motivation by processors to look further at the potential of the halal market is also low. Kepak can satisfy this market from their plants south of the border. While Woodheads requirement for halal meat is met by another processor. Scotbeef and sister company Vivers' have sufficient halal certification for their current customer base.

4.25 While it was unfortunately not possible to speak directly with Vivers about their market R&D, the impression is that it is well honed and based on the personal touch. Vivers has been working with continental customers for decades and has developed a very successful export trade based on the strength of these relationships backed up by quality lamb (though not all sourced from Scotland). Kepak has indicated an intention to increase throughput at it recently-purchased plant at Portlethen, specifically targeting export markets (using contacts and knowledge from other parts of the wider Kepak organisation).

4.26 Given that it is the processors that have the actual product and the supply contracts, QMS cannot directly influence market development. Rather, it has to work in partnership, exploring opportunities and facilitating contact between processors and new buyers. To this end, it undertakes a range of market development activities within the UK and abroad.

4.27 For example, international trade shows to promote Scotch lamb and discussions with foreign government officials and potential buyers to identify and address regulatory requirements (e.g. certification, labelling etc.). To pool resources and seek synergies with other Scotch sectors (e.g. beef, salmon, and whisky), these activities are often conducted alongside SFD. Similarly, some activities are undertaken in association with AHDB.

4.28 In addition, QMS seeks dialogue with Scottish processors and other parts of the supply-chain through regular and ad hoc meetings to identify market opportunities. However, there appears to be little interest across most processors to significantly increase production to satisfy new markets. This appears to reflect a degree of apparent contentment (if not complacency) with the relative security and stability of current supply contracts with supermarkets (both in the UK and abroad).

4.29 There are new market opportunities in the UK and abroad (and Brexit may already necessitate their development). However, different markets can have markedly different consumer preferences and regulatory requirements, meaning that exploiting them requires considerable and sustained effort – which Scottish processors may not be able and/or willing to expend (even with support from QMS and/or Government).

4.30 For example, processors may lack the confidence and capacity (skills and time) required to gather information on export markets and to establish necessary new contacts and contracts. Moreover, they may face difficulties in accessing capital to finance investments, and/or in recruiting appropriately skilled labour to increase production. Hence there appears to be little ambition amongst Scottish processors to seek new markets to absorb any additional production.

4.31 QMS will also be influenced by processors' desire to defend and grow markets for Scotch Beef, the flagship Scottish red meat product, and by a need to develop pigmeat markets. Moreover, uncertainties around Brexit are adding to processors' inertia: until future trade arrangements are known, there is little perceived merit in trying to pursue a particular market development strategy.

4.3.2 Product development

4.32 Lamb is not as versatile as other meats, especially chicken and beef, which limits the opportunities to manufacture lamb-based products. Essentially a lamb carcase comprises; (rear) legs, loins and shoulders and the meat yield is low relative to other species.

4.33 The main product demanded is legs either for roasting whole or halved, alternatively cut into leg steaks with the lamb shank sold separately. That leaves the processor having to find outlets for the loins and shoulders. Shoulders are more easily moved as they can be manufactured into rolled shoulders or diced. The loins will then go into chops with double loin chops coming from the rear end of the loin and racks from the shoulder end. Lamb racks are popular especially with the restaurant trade. However, they are costly and time consuming to butcher and, critically, they account for only a very small part of the carcase. So, availability of racks is effectively set by the demand for legs and not vice versa.

4.34 Product development is also constrained by pricing. Lamb is expensive so whole legs, or packs of chops or leg steaks, have to meet price points acceptable to customers. Supermarket spec lambs largely fall within the 16-20kg cwe range. That means lower demand for light and heavy-weight lambs.

4.35 Butchers typically prefer a bigger carcase as they can add value through butchering into more novel, modern cuts. Unfortunately, butchers, especially in Scotland, typically sell less than two lambs per shop a week. Often, they will buy parts of a carcase from processors when the likes of legs are on promotion at supermarkets. Shoulders bought at a discount, for instance, can be butchered into profitable value-added products.

4.36 By comparison, owing to the small size of light lamb carcases, there is little scope to butcher into value-added products. Similarly, there is little demand for mutton from gimmers or older sheep.

4.37 Farmgate lamb price volatility is a further major hurdle to processors investing substantially on developing added value lamb products. Such products must be price competitive with other meats. Not only are the farmgate prices of other species lower (per kg) than lamb, the price levels are more stable through the year. Hence, processors will naturally favour adding value to meats that they can more confidently budget. Critically, for Scottish processors, the cattle price is more stable and the manufacturing options far greater than lamb.

4.38 Yet there are notable examples of value-added lamb products produced by Scottish processors. For example, Scotbeef supplies lamb for M&S with a requirement from M&S to use the whole carcase. Hence, Scotbeef developed a high value lamb shoulder "cook in the bag" meal based on the sous-vide cooking technique.

4.39 Morrisons also harvests the full lamb carcase, using intensive butchering to yield valuable cuts like neck fillets. As a consequence, Woodheads lamb buying spec is a little heavier than the other supermarkets. The processor noted that a specific problem with lamb is that consumers do not like it cold, thereby meaning lamb has no presence in the deli counter. Importantly, Woodheads Turiff plant cuts and butchers most of the lambs killed at their sister plant in Lancashire, thereby bringing jobs to north-east Scotland.

4.40 Scotbeef also gains from cutting and packing work for M&S in that it processes M&S' New Zealand lamb products. In terms of risk, and predictability, taking on such contracts makes more business sense than dealing with winter finished Scottish lambs that vary widely in quality and, often, price.

4.41 Although production is often reported in terms of number of animals or carcase weight, meat yield is actually the relevant metric. Increasing meat yield would allow processors to consistently cut and pack products that attract consumers without incurring additional costs in sorting and trimming variable carcases. While producers presenting lambs at the correct level of finish will minimise the excessive fat levels that put consumers off buying the likes of chops, using better genetics that give consistently good sized eye muscles should be an ongoing priority. Better exploitation of genetics is covered fully in section 4.3.6.

4.42 Equally, raising the demand for lamb through improved eating quality is also important. Lamb already displays some advantages over other meats in terms of consistency of eating quality, and building on its taste, succulence and tenderness may offer opportunities for offsetting its cost disadvantage. Again, more on how to improve this trait is detailed in section 4.3.6.

4.3.3 Pricing

4.43 The farmgate price of lamb is determined largely by lamb availability, which changes markedly through the year owing to the extreme seasonality of lambing. Consequently, even though the farmgate lamb price moves consistently between seasons, processors have to contend with a base product that has a seasonal range bigger than for other meats. Price volatility is at its worse in late winter/spring because of the low number of hoggs and lambs available and the timing of religious holidays (e.g., Easter) that spike demand.

4.44 Lambs are also expensive largely as a consequence of their low meat yield. Table 8 illustrates that in September 2018 per kg of lean meat a lamb was around 20% more expensive than beef last autumn, a time when the farmgate price of lamb is at its lowest and cattle generally highest. The table also shows how the extraordinary high late winter prices last year hit the economics of lamb processing.

Table 8 Comparison of relative beef and sheep (2018) costs

	Steer Sept '18	Lamb Sept '18	Lamb Apr '18
Gross value (£)	£1,583	£73	£100
Slaughter weight (kglwt)	700kg	44kg	46kg
Meat yield (%)	41%	24%	23%
Meat yield (kg)	287kg	10.6kg	10.6kg
Farmgate price of meat (p/kg)	551p	691p	943p

Own Calculations

4.45 On the other hand, processors' customers, specifically supermarkets, like to keep shelf prices stable apart from promotional periods when prices are heavily discounted. The supermarkets always run such campaigns at Christmas and Easter. Unfortunately, Easter falls in the spring, a time more suited to New Zealand than Scottish lamb production. The main supermarkets have also been competing heavily on price in recent years owing to the growing influence of the deep discounters Aldi and Lidl.

4.46 There seems little chance of supermarkets moving away from this pricing policy. Certainly, there appears little pressure from processors for a change. Processors know well in advance about promotions so can plan accordingly, which helps them achieve carcase balance. Demand amplification^[48] is no longer the problem it was 20 years ago, which is welcomed by processors.

4.47 Importantly, the supermarkets tend to fund these promotional periods themselves. Given the extremely high cost of lambs last Easter, the supermarkets would have been selling lamb at a significant loss. That means they look to regain margin when lambs are cheapest between July and December.

4.48 A further issue that would arise from lowering the retail price of lamb during the glut period is the impact it would have on demand for other meats (via cross- price elasticity). In short, such price moves would have knock on effects for other meat supply chains too, thereby creating scheduling problems.

4.49 Although Scottish processors might appear less exposed to the EU than elsewhere in Britain, they cannot escape the adverse impact of a hard Brexit. If punitive tariffs are applied, the farmgate lamb price is predicted to drop by around 40% to maintain current export levels. If the farmgate price did not fall to "clear the (export) market", extra supply would collapse the price on the GB market. Whether this will lead to the development of a parallel market with lambs destined for the home market achieving markedly better farmgate prices than lambs sent for export, is moot.

4.50 Lamb demand is sensitive to price. Only where consumers put a higher value on traits like convenience, taste or provenance does price become secondary. For this reason, Beef and Lamb New Zealand has recently rebranded New Zealand lamb under a Taste Pure Nature banner and has targeted the "conscious foodies" of California with its first major promotional campaign^[49].

4.51 Regarding the economics of pursuing superior eating quality, New Zealand processor Alliance has developed a number of branded lamb products that can extract premium returns from select market places. Particularly relevant is the Ashley brand that has been targeted at top restaurants in central London.

4.3.3 Promotion

4.52 Per capita consumption of lamb is lower in Scotland than in the rest of the UK. This reflects a long-standing domestic consumer preference for beef, with more recent trends towards lower overall meat consumption and a switch towards chicken further depressing domestic lamb consumption.

4.53 Short-term promotional campaigns, either through price reductions and/or targeted awareness raising, may have some short-term impact but sustaining higher (or even just slowing the rate of decline in) domestic per capita consumption would require permanent shifts in consumer preferences – which is hard to achieve.

4.54 Efforts to increase the penetration of lamb in, for example, school menus as a way of combatting apparent demographic consumption trends are laudable but will be mitigated by other influences on consumption. Moreover, given regulatory constraints on nutritional composition, more lamb on school menus necessarily means less of other meats.

4.55 Ultimately, even a sustained increase in domestic per capita consumption would be unlikely to provide a significant additional outlet for Scottish producers. For example, raising domestic demand by 1,000t (against 24,000t of processed output) would require about a 9% increase in per capita consumption – which will be extremely challenging to realise. This highlights the importance of, whilst not neglecting the domestic market, targeting outlets which may be more responsive and rewarding.

4.56 Individual processing companies may engage in their own promotional activities, but more generic promotional campaigns have long been used for agricultural commodities and are a feature of competitor countries such as Eire and New Zealand. Typically, Country of Origin (CoO) features are emphasized, either targeting ex-pat or historical ties to the exporting country and/or particular production attributes such as animal welfare or environmental credentials.

4.57 However, evaluations of the effectiveness of promotional campaigns indicate that demonstrable effects are often difficult to discern amongst myriad other influences on consumption (e.g. incomes, demographics), and that interactions with other markets need to be considered (e.g. substitution effects between different meats). In addition, the distribution of gains is not necessarily uniform, despite all producers being typically subject to a levy to fund the campaign (Kinnucan, 1996; Crespi, 2003; Alston et al., 2001).

4.58 Nevertheless, although not apparently reported in relation to lamb in Scotland or indeed the UK, empirical studies of generic promotion in Australia and the USA suggest that it can have a sustained impact, but also that effectiveness is highly variable and context-specific (e.g. Piggott et al., 1995 & 1996; Beverland & Lindgreen, 2002; Ghosh & Williams, 2016; Williams et al., 2018).

4.59 This highlights the need for promotional efforts to be based around a sound understanding of target markets, evolving consumption patterns and interactions with new technologies in processing, packaging and delivery rather than simply budget availability, (e.g. Baron et al., 1971; Russel et al., 2005; Pethick et al., 2011; Font-i-Furnols et al., 2011; Bernués et al., 2012; de Andrade et al., 2016). This suggests a need for further research but also dissemination of existing insights into different markets.

4.60 Comparisons across different countries of levy rates and levy body expenditure on specific activities, such as lamb promotion, are hampered by a lack of detail and definitional differences in reported figures. Nevertheless, it appears rates and expenditure are broadly similar across Great Britain. By contrast, levy rates in Eire are lower yet expenditure is higher thanks to a significant level of direct funding from central government to Bord Bia. Matching Irish promotional activities would require steeper levies and/or direct finding from the Scottish Government, neither of which will be easy to achieve without a clear strategic rationale and long-term vision for the sector.

4.3.4 Regulations

4.61 Interviewees expressed limited complaints about regulations specific to the sheep sector. Nevertheless, key concerns were:

a. the devaluing of sheep returns associated with the need to split carcases under TSE regulations;
b. the high cost of veterinary inspections and the new requirement for CCTV installation, which is a particular concern to smaller plants with lower throughputs to spread such overhead costs across; and
c. further changes to transport regulations (driver hours) due this summer, which are likely to reduce distances sheep can be hauled. This may benefit processors, but may harm farmers through lower lamb prices.

4.62 The regulation of sheep slaughter in Scotland and Britain is a particularly thorny issue. Considerable confusion and ignorance exists on all sides of the argument over slaughter by "cutting the throat". A minimum requirement of accessing Muslim markets in Britain, the EU and globally is confidence in the treatment of the animal and its meat thereafter (mixing in storage is a key concern). Critically, the animal must only be made unconscious and not killed by the stun process. Electric stunning is therefore compatible with halal, at least for some Muslim consumers (but halal is not a homogeneous nor static market).

4.63 Shatnawi and Al-Essa (2017) highlight how the New Zealand sheep industry demonstrated the compatibility of electric stunning with halal slaughter in the 1980's. Based on these Massey University trials, the New Zealand government developed a robust regulatory framework based on all sheep being halal stunned killed. Without the option of conventional bolt stunned slaughter, the chances of subsequent mixing with non-halal meat in the supply chain are effectively eliminated. So clarity and uniformity of approach means complete trust by Muslim buyers globally in the provenance of New Zealand sheepmeat.

4.64 The picture is very similar in Australia where decades of supplying sheepmeat to international halal markets gives them a very strong reputation as a source of halal products. The Australian Government and Australian Islamic Organisations work together to "enforce the best practices of production standards, which have contributed to the worldwide recognition that Australia's Halal program is amongst the most rigorously enforced Halal system in the world."^[50]

4.65 The dilemma in Scotland and Britain is that achieving the same high level of confidence in halal, requires regulating that all processors move to stunned halal slaughter. So besides banning non-stunned halal slaughter, it means also banning bolt stunned slaughtering and introduction of slaughter by throat cutting in all abattoirs including small ones. Without such uniformity, the potential mixing of halal with non-halal product undermines confidence. Euromonitor Research (2015) highlight the issue of trust as one reason many Muslim's still prefer local halal butchers: "Supermarkets lose on trust because, in many instances, they fail to clearly label halal products as such or explain the slaughter method. For example, imported New Zealand lamb from halal abattoirs sold in UK supermarkets has not been labelled as halal."

4.1 Given the small number of sheep processors in Scotland, it could be argued that Scotch Lamb could gain a competitive advantage by enforcing stunned halal in all Scottish plants. However, there are legitimate concerns that the non-Muslim population could react negatively to moving fully to halal slaughter: also for reasons of ignorance, but not the same ones^[51]. The status quo may therefore persist unless there is clear evidence that the current mix of conventional and halal stunned processors are losing out on market opportunities.

4.2 The preference of some buyers for sheepmeat coming from single-species (sheep only) plants was raised by some stakeholders. Only one of Scotland's sheep plants (Vivers) would qualify. It is difficult to envisage any other Scottish plants specialising solely in sheep for reasons explained at length earlier. That is, the known costs and risks far outweigh any potential market opportunities.

4.3 Regarding the broader regulatory framework provided by the single market, that the UK is currently still in the EU means that the Scottish sheep industry is operating largely under the same regulations as competing EU countries (Ireland, France and Spain). Even New Zealand has to comply with certain regulations to export lambs into the EU. But Brexit may mean that Scotland, as part of the UK, exits the single market and the common regulatory framework that entails.

4.4 The worse-case scenario (a "no deal" exit) is that the Scottish sheep industry effectively becomes a third-country at the end of October. That would place the Scottish sheep industry in the same trading position as New Zealand (though without the market access New Zealand enjoys through a Tariff Rate Quota [TRQ]).

4.5 Setting aside the TRQ, losing the regulatory benefits of being part of the EU single market will add costs to the Scottish sheep industry. Of course, given the likelihood of WTO tariff rates abruptly ending UK sheep exports, concerns about having the appropriate paperwork to get Scottish lamb from Dover to Calais probably becomes a non-issue.

4.6 If fully outwith the regulatory (and trade) protection afforded by being part of the EU single market, regulatory cost will become a bigger issue as the industry competes in the global marketplace. SG Heilbron Economic & Policy Consulting (2018) assessed how regulatory cost compliance affected the competitiveness of Australian beef processors against the beef processors of the USA, Brazil and Argentina. They reported that just over half of the cost advantage enjoyed by these countries over Australia came from lower costs for labour, energy and export inspections and that these were directly caused by lighter regulations or, in the case of export inspections, government covering the cost. There is, however, perhaps some comfort in that the USA, Brazil and Argentina are not sheepmeat exporters.

4.3.5 Technology and logistics

4.7 A lack of technology was not flagged-up as a specific issue by processors. Yet the need for cutting edge technology is being driven by forces beyond the control of Scottish processors. Specifically:

a. The need to boost labour productivity given the reduction in European workers following the Brexit vote.
b. The competitive advantage that new technology affords lamb processors in other countries and processors of competing meats.

4.8 Moreover, if Scottish sheep processors are to pursue export markets beyond nearby Europe, significant investment in chill technology will be needed. As McDermott et al explained in their 2008 report, controlled atmosphere packaging (Captech) greatly improved the competitiveness of New Zealand lamb in distant markets through improving both food safety and eating quality (maturation). Today, using chill technology, chilled New Zealand lamb generally has a longer shelf-life in French supermarkets than imported British lamb. The proportion of New Zealand lamb exported as chilled (compared to frozen) has grown significantly since the report was written.

4.9 The following examples provide an overview of what new technologies competitors are investing in.

a. Robotic cutters – ANZCO, a private New Zealand lamb processor, has recently replaced five-man operated bandsaws with a Scott Technology^[52] automated deboning machine that improves meat yield and shelf-life as well as labour productivity. For example, the greater accuracy of the machine means an extra 5mm of meat is added to high value French rack from the low value flap.
b. PrimeXConnect – ANZCO has also installed an on-line trading platform to provide a digital link with customers around the world. Chandler (2017) examined the potential of PrimXConnect in Australia in detail...
c. eASDs – an electronic Animal Status Declaration has just been introduced by farmer owned New Zealand processor Alliance. The technology improves supply chain efficiency by allowing farmers to book livestock in online.
d. Automated factory – 2 Sisters Scunthorpe chicken plant is one of the most advanced meat processing plants in the world thanks to robotic technology.
e. The Australian Meat Processor Corporation developed a budgeting tool to help its red meat processors assess the cost-benefit of installing new technology (SG Heilbron Economic Policy & Consulting,2014). This work was matched funded by the Australian government.

4.10 However, as evidence that innovation is occurring in Scotland, Kepak recently announced a major investment to improve processing efficiency at its sheep and cattle processing plant at Portlethen. The investment was aided with SRDP grant funding of £1.6m.

4.3.6 The right raw product (lambs)

4.11 The variability of lambs, especially out-of-season, limits the development of value-chains built on consistency through the year. This is largely a consequence of the biological constraints of the breeding ewe meaning most Scottish lambs are born in March and April. This results in the lamb value chains being more "production push" than "demand pull". Relative to other meat value-chains, the contrast is most stark with chicken which has achieved year-round consistency of the raw product.

4.12 The lamb chain is also disadvantaged by the still largely traditional relationship between most producers and processors. This is a reflection of thousands of farmers and a small number of processors (the relationship between retailers and processors appears more balanced though power rests with the former).

4.13 Moving toward a more demand-pull value chain where producers have a clearer "line of sight" with the ultimate consumer is preferable. Thanks to their pivotal position in the supply chain, Scottish processors are central to making this happen. The following opportunities – to improve the quality of lambs available to them by sending better signals to producers – all involve the active participation of processors.

4.14 The farmer sees a lamb: the consumer sees a cut of meat with, for some buyers, a method of production they like. Helping farmers produce a lamb that in turn delivers a packet of lamb meat the consumers wants, requires a pricing system that sends the right signals regarding:

• Meat yield.
• Eating quality.
• Provenance.

The EUROP grading system^[53] which all but Vivers^[54] use, only measures the first trait, and is done subjectively.

4.15 The Australians and New Zealanders have, and continue to develop, more sophisticated feedback (grading) systems operating in some of their plants. Regarding meat yield, Pearce's (2016) technical guide, written for the Australian lamb and meat supply chain, is essential reading. Most Scottish lambs will yield around 53% of the carcase weight (Clelland, pers comm). That is, if the average carcase weight of Scottish lambs was 20.3kg last year, the average lean meat yield was 10.8kg with the rest of the carcase being either fat or bone.

4.16 Perhaps more important than the overall carcase yield, is where the lean meat is in the carcase (e.g. bigger eye muscle in chops). Some New Zealand processors are understood to provide feedback to primary producers on lean tissue yields for the three main parts of the carcase: shoulders, loins and back legs. This helps farmers produce lambs from which more high value cuts can be sold.

4.17 The New Zealanders are using carcase data to calculate indexes for meat yield that can used by farmers to select rams that are positive for this trait. As shown by the dramatic increase in chicken breast yield over the past 60 years, the commercial benefits of getting the genetics right provide real competitive advantage.

4.18 However, capturing this data on the slaughter line requires sophisticated grading systems like VIAscan. No Scottish lamb processors have this technology. ABP has it in England, but the company is not using it commercially.

4.19 Instead ABP is encouraging the use of better rams through paying a premium where farmers use Easy Rams (New Zealand genetics). Previously, 2 Sisters in Wales (now Kepak) paid a small premium for where Innovis bred rams were used.

4.20 While such technology can help improve meat yield, simply pushing for a higher meat yield has trade-offs with the other traits. Eating quality and the production method can both be adversely affected by selecting for heavily muscled lambs;

a. Where meat yield percentage reaches the high 50's^[55], the lower level of intra-muscular fat (IMF) lowers eating quality.
b. Heavily muscled lambs increase lambing difficulty. Not only harming animal welfare, but also increasing labour demands at lambing time increasing the cost of production.^[56]

4.21 Bonny (2018) explains how the Meat Standards Australia (MSA) are developing a star graded system based on a combination of factors including; breed, meat yield, carcase weight and intramuscular fat to better predict eating quality. Bonny cites work by Tighe et al (2017) that finds that Australian consumers are willing to pay 1.43 and 1.90 times more for 4- and 5-star quality, relative to lamb graded 3-star.

4.22 As suggested in section 4.3.2, the New Zealanders are putting more effort into breeding lambs that score consistently highly on eating quality to win premium markets where taste drives demand. New Zealand lamb processor Alliance is building high value sheep products based on consistently high eating quality backed up with a natural production process (provenance). Te Mana lamb^[57], with its high omega fat levels, is perhaps the best-known brand. The Silere brand^[58] is also interesting as it has converted the notoriously slow growing Merino sheep into a virtue by emphasising how this results in better tasting meat. Both these brands are available in the UK.

4.23 The efforts of another New Zealand processor – Silver Fern – to develop a consumer driven value chain were mentioned earlier and detailed in Appendix 6. This processor now has a grading system in place to reward producers for delivering animals that produce meat of exceptional eating quality for which consumers will pay premium prices. Development of this system gave rise to a spinoff whole farm management information system called Farm^IQ.

4.24 SRUC is currently leading research that uses carcase measurements to breed sheep that produce lamb that can be sold for a premium. The BBSRC funded work^[59] involves the Texel breed society and processor ABP.

4.25 Exploiting the genetic potential of sheep is greatly improved if feedback from commercial animals can be linked to sire. Scotland's EID system provides a linkage platform that even the Australasians do not have (yet): it should be exploited.

4.26 Producing lambs to meet (and grow) consumer demand for M&S lamb is the headline goal of a SRDP KTIF financed project^[60].

a. The main objective is to produce meat of consistently high eating quality. The three-year trial involves Scotbeef taste testing lambs from flocks to identify management actions (covering; feeding, breeding, health and handling) that can be developed into a blueprint for use by Scottish sheep farmers and processors.
b. EID has been identified as a key enabling technology. To date, despite all lambs and sheep requiring EID tags for compliance reasons, this cost has not been turned into an advantage. This data could be used to improve day-to-day management (e.g., selection of lambs for slaughter) as well as drive long term genetic and health benefits. Scotland's traceability system – ScotEID – provides a platform for exploiting improvements in the national flock that other countries do not have.
c. The project's final objective is to look at options for better matching the supply of lamb with demand. Alternative pricing mechanisms and specialist finishing units are being explored.

4.27 This KTIF project followed on from an earlier QMS funded project^[61]. The project took a "lean thinking" approach to identify bottlenecks and inefficiencies in the supply chain which added cost and ultimately reduced margins for each link in the chain.

4.28 Two of the Scottish processors are active in supply chain initiatives. Scotbeef (as discussed in para 4.72) provides M&S lamb supply in Scotland. Woodheads (Morrisons) has also started a Next Generation Producer Group to help farmers better understand the full supply chain and what customers want.

4.3.7 Processor ownership

4.29 One option raised by the project Steering Group was that of a producer owned processor. In principle, a farmer-controlled processor has merit. However, practicalities tend to outweigh principles.

4.30 The main problem is that farmers generally attach greater value to what they get for their product (e.g. milk, lambs, and cattle) rather than the margin from processing the product. As a result, investment in processing and marketing is typically starved as the producer-controlled board overpays for stock. Attempts to be less generous on livestock procurement are often met with producers selling elsewhere even if they are owner-members. Without throughput, processing losses soon mount, compounding the problem.

4.31 Evidence for this phenomenon is offered by ANM closing the "Highland Lamb" Dornoch plant in 2010. Even countries with a greater tradition of farmer-controlled businesses are struggling to make money from red meat processing. New Zealand now has just one wholly producer-owned processor in the form of Alliance. Silver Fern Farms, the biggest processor in New Zealand, sold half of its business to Chinese company Shanghai Mailing a couple of years ago. The deal reduced debt, provided investment funding and gave the firm direct access to the important Chinese market.

4.32 Private rather than publicly owned firms dominate the red meat processing industry globally. The American firm Cargill, for instance, had a 2018 turnover of $115 billion and operates in 66 countries (poultry in the UK). The three major lamb processors in the UK are privately owned Irish firms: ABP, Dunbia and Kepak.

4.33 As noted in the Five Forces analysis, one important option used to lift competitiveness is to vertically integrate back into processing. Retailer Morrisons has done so with Woodheads. In the US, Cargill runs feedlots buying in store cattle for finishing thereby achieving a greater match of cattle availability with retail demand.

4.34 Perhaps most interesting is American supermarket CostCo's total integration of its poultry supply chain. It judges that by also running the production stage, it can gain an advantage over its competitors.