The UK is a world leader in added value food and drink production and marketing. This does not mean it is immune to the threat, or opportunities, posed by sector consolidation. Since 2003 the UK food sector has seen over 150 receiverships, 200 deals and 300 businesses dissolve. Strength in size is the buzz around the industry and this looks unlikely to change. Catherine Sleep finds out more.
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Consolidation has been a feature of the food industry for well over a hundred years. As each improvement in transport and communication has gained momentum, from canals to the Internet, so the options open to the consumer have proliferated. In response, many successful suppliers have inevitably moved gradually from being highly local to being regional, then national and today increasingly international, while many more have fallen by the wayside.
Axis Management Consulting recently conducted research for management consultants Grant Thornton and private equity management company Inflexion to examine the extent of future consolidation in the UK food sector.
The consolidation process inexorably changes both the relative importance of food sectors and the internal structure of an individual food sector, as retailers and their suppliers both stimulate changes and adjust to changes in consumer habits. Two examples serve to illustrate how these factors work through to a fundamental change in the structure and consolidation level of a specific food sector:
- In the last 25 years the consumer has drifted away from red meat towards white meat for health reasons. This initially created a major growth business in the industrial scale farming of poultry, which was far better suited to supply the supermarket than traditional small farmers and abattoirs. More recently legislation, health scares and international competition have profoundly reversed the economics of this sector and we have seen not only a high level of company failures but also distress sales.
- Another underlying trend has, of course, been convenience as we move from regular family mealtimes to ‘grazing’. Consequently snacking has seemed to grow inexorably and perhaps most unusually the crisp market has seen leadership pass, in recent decades, from Smiths Crisps to Golden Wonder to Walkers. Even more unusually Walkers has even reversed the growth of own label. Yet recent concerns about child obesity have seen the market start to decline for the first time ever. How Walkers responds to this latest challenge will be fascinating to watch. But one thing is certain: for their competitors, who were often already struggling, life in a declining market has almost certainly got a lot tougher. Further consolidation seems likely.
Over the last 20 years, the UK grocery retail sector has undergone a transformation. Just four major multiples now dominate the sector, and therefore wield enormous power. To maintain and reinforce their position, they make stringent demands on their suppliers. Market forces lead them inevitably to prefer doing more business with a small band of suppliers with whom they can work most effectively in the pursuit of economies of scale and efficiency. Retailer pressures, and the way in which retailers operate, are a key force for consolidation in the food manufacturing sector.
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The Food Consolidation Report which resulted from the Axis research pinpointed 30 specific food categories to determine which are likely to see more, or indeed less, consolidation in the coming years.
The £5.9bn (US$10.4bn) unprocessed fruit and vegetable category is extremely vulnerable to consolidation, for example. Despite a string of company failures and some takeovers in recent years, the supply base in this sector remains very fragmented. Multiple retailers have continued to put pressure on suppliers both to rationalise the supply base and to improve their standards of value-adding service.
Many companies in the category are in a precarious profit position and under intense price pressure from the retailers. The report foresees a significant number of further company failures and some activity to merge small suppliers into large entities.
Salad days wilting
It is a similar story in the allied category of prepared salads. A relative newcomer to the food sector, the category has enjoyed several years of high growth but has now slowed. The supply base contains a handful of branded participants and a larger number of retailer-brand suppliers.
Like the mainstream fruit and vegetable category, this sector is far too fragmented with many small operators trying to jump on the ‘pre-prepared’ added-value bandwagon. It is inevitable that a number will not survive. Additionally, a number of takeovers seem likely over the next year or two in order to create stronger, more durable suppliers.
Sugar and sweeteners steady
Meanwhile the sugar and sweeteners category continues to show modest volume decline (albeit with some value growth) as consumers are eating less sugar, and/or turning to artificial sweeteners.
The change in the European sugar regime will reduce industry profitability in coming years and make cross-border consolidation more attractive. However, given that the UK supply base is fairly well consolidated, overall it is likely there will be little in the way of deals or company failures in the next couple of years.
Consolidation is all too often a painful business for employers and staff alike, with a trickle-down effect to customers and shareholders. Bigger is not always better, but a well-managed change of ownership can, at worst, limit the damage, and at best, prove beneficial to all parties.
