The study by the Confederation of the Food and Drink Industries of the European Union (CIAA) is part of the association's research into the general decline in innovation and competitiveness affecting the sector, a situation besetting both the big and the small. However small and medium sized enterprises (SMEs) are more at risk of losing ground in the global competition stakes due to their comparative lack of funds and resources to conduct research and development.
The report underlines previous calls by the CIAA for a greater share of public research and development money, less burdensome regulations and community programmes to reduce raw material prices. Despite boosting exports last year, the EU's food and drink sector share of the global market continues to shrink in the face of overseas competition. Most innovation indicators of the food and drink sector are below the EU's manufacturing industry average, the CIAA has found in a previous study.
As the largest manufacturing sector in Europe, the food and drink industry is characterised by high fragmentation of its structure. Further, it is exposed to pressure from the increasingly concentrated and globally active retail sector. SMEs make up 99 per cent of the total food and drink production companies operating in the EU. They produce 90 per cent of the EU's food and drink products, according to the CIAA..
SMEs are lagging behind in both the innovation challenge and investment in research and development, the new CIAA report found. The association says to remain competitive the industry needs more skilled workers, a greater emphasis on R&D, a pooling of innovation resources between companies and improved incentives.
The survey focused on the needs, expectations and evaluations of the various sectors operating under the umbrella of the food and drink industry across 11 EU countries. About 1,300 SMEs took part in the survey.
The 1,286 firms in the survey collectively had a turnover of €90bn, 744,000 employees, and spent €892m on R&D.
Innovation in the food sector requires a number of input factors, mainly skilled people and very often, financial allowances to carry out minimum levels of R&D, the survey found.
"The most important factor, from the point of view of the company, is the availability of a skilled workforce," the CIAA stated. "Companies with this advantage are ultimately better off in the market."
The most important core areas for product innovation in the food industry include advances incorporated directly into the quality and appearance of the end product, process manufacturing and packaging.
Companies are strongly in favour of the CIAA's research priorities relating to quality and manufacturing, food safety, and consumer concerns, according to the survey's results.
Technology transfer is a major worry for companies. As for the sources of innovation, food companies in Europe derive much of their information from non-academic sources, the survey found. Information generated by frequent exchanges with suppliers, clients and equipment providers are very important in channeling the innovation. Technology transfer initiatives usually follow suit.
However, broadly speaking a majority of firms rely heavily on their own internal R&D activities, the survey found.
"Food companies want to have credible partners for developing their own innovations," the CIAA stated. "They want to see continuous European support. In general big firms prefer fiscal incentives while SMEs are more sensitive to direct support."
Company preferences for active innovation policies reflect a bend towards a mix of actions. This means that companies look for actions that are in line with their genuine needs, the CIAA concluded.
The SME report comes on the heels of a more general study by the CIAA into competitiveness in the EU' food and drink sector.
The appeal is consistent with a CIAA report last year that low spending on developing new products and processing techniques coupled with sluggish export growth, has made the industry vulnerable to increased global competition.
Even though the amount spent on R&D in the EU rose by 20 per cent between 1997 and 2001, it accounted only for 0.24 per cent of output in 2001, far beyond the average of 0.35 per cent of its main competitors, the CIAA stated in a separate report this year.
Even large EU-based companies spend per employee 45 per cent of what non-EU food and drink companies invest in R&D, according to figures provided in the CIAA's benchmarking report on competitiveness.
Food companies in Australia, Japan, Norway and the US all spend relatively more on R&D than the EU. Japan sits on top of the pile with an R&D intensity reaching almost 0.8 per cent.
Within the EU R&D spending diverges from country to country. The Netherlands and Finland achieve an R&D intensity in the food and drink sector of about 0.50 per cent while new member states are characterised by very low levels. Food and drink companies from large member states, such as Italy, remain below average.
About 77 per cent of food products launched in 2004 were innovative in formulation and only 1.5 per cent of them were innovative in technology, the CIAA noted. Innovation on formulation increased to 77 per cent in 2004, from 66 per cent in 1999 while innovation on both packaging and positioning decreased.
The association has previously noted that the bloc's global share of the export market had been falling for the past 10 years, while countries such as Australia, New Zealand, China and Brazil had boosted theirs.
Meanwhile exports of EU food and drink products rose in 2004 and continued to grow in the first nine months of 2005, following a slight drop in 2003.
In the first nine months of 2005, exports grew by 4.8 per cent, while imports grew by 3.2 per cent. The trade surplus, which decreased substantially in 2003 and 2004, registered a 23 per cent increase in 2005.
"Despite this and growing global competition, most food and drink sectors' growth and production value measures remained positive and stable, underlining the resilience and competitive potential of our industry which topped the European manufacturing league again last year," the association's president, Jean Martin, stated in his introduction.
The CIAA has created a programme, called 'Food for Life', to focus the its members efforts on promoting the industry's image and efforts in relation to reducing obesity.
The EU food and drink industry is the largest manufacturing sector in Europe, with an annual production valued at €815 billion. The sector employs four million workers.
Membership of CIAA is made up of 24 national federations, including two observers. There are 32 EU sector associations, 21 major food and drink companies grouped together in a Liaison Committee.