On the edge

THEOC&CFOOD&DRINK1502018 Ontheedge FoodanddrinkproducersfeeltheimpactofuncertaintyastheBrexitcliffedgeapproaches uncommonsense UKfoodanddrinkproducershavegrownattheirfastestrateinnineyearsbutaswehurtletowardsBrexit,thesalesperformancehidesmoreworryingtrendsbelowthesurface U AlecMattinson Kfoodanddrinkproducerscan’tcatchabreak.Nosoonerhastheindustry’sgrowthenginefinallysplutteredintolife,thansuppliersfindthemselveshur-tlingtowardsapotentialno-dealBrexit. Andwhilethepossibilityofbackstopdeals,transi-tionarrangements,no-dealcliffedgesandevenasec-ondreferendumhoveintoview,theimplicationsforUKfoodanddrinkarebecomingincreasinglystark.Theyincludeproducerottingduetoborderdelays,costlytariffs,andlabourshortages. Industryconfidenceinatransitionagreementtomit-igatedisruptioninspring2019isevaporating,believesOC&CheadofconsumergoodsWillHayllar.“Thepos-sibilityofshort-termdisruptionnotmanymonthsawayisbecomingsharperinpeople’sminds.Theyarestart-ingtothinkmoreaboutsupplychaincontingencies.”Whatmakestheseconcernsallthemoreworryingisthattheindustryisheadingintoapotentiallychaotic periodfromapositionofhistoricweakness. Onthepositiveside,theOC&C/GrocerTop150showsadramaticturnaroundintop-linegrowthfortheUK’sbiggestfoodandnon-alcoholicdrinksuppli-ers.AggregaterevenuesacrosstheTop150jumped7.5%in2017,thehighestgrowthsince2009,andamarkedreboundfromthe0.8%fallin2016.Inall,112oftheTop150grewsales,with49indouble-digitgrowth.Thismarksthefirsttimeinfouryearsthatgrowthhasbeenabovethelong-termindustryaverageof4.9%asthepricewaranddiscountergrowthhasdrivenwide-spreadindustrydeflation. However,it’samixedblessing.Thereportsuggests thevastmajorityofgrowthhasbeendrivenbyinfla-tion,saysJefferiesanalystMartinDeboo.“Itisnotanindicationofhigherstructuralgrowth.” Inputinflationisalmost£1.6bn,inevitablyhittingbottomlines.Suppliermarginsfellbackfrom6.7%to6.2%lastyear–belowtheirlong-termaverageof6.4%.True,60companiesexpandedoperatingmargins,but88sawprofitsfall,suggestingproducershavepassedonameasureofinputinflationtoretailersandconsum-ers,buthadtoabsorbachunkthemselves. Passingoninflation OC&Canalysissuggestsaround£645mofthe£1.6bnhasbeenabsorbed–passingonabout£1bntoretail-ers,whointurnpassedon£1.7bntoconsumersastheygrewgrossmargins,evenasinflationbit. Hayllardescribessuppliersuccessinpassingoninputinflationas“middling”.“Theydidn’tgetcaughtout,astheydidinthepreviousinflationspikeof2012,butequallytheyhaven’thadthefreereintheydidinthemid-2000stopassitallon,”hesays. Producerswithlowmarginandlowaddedvaluebusinesses,suchasagriculturalsuppliers,willusuallyhavereasonablytransparentprocessestopushthroughpriceincreases,basedoncommoditypricefluctua-tions.Forotherplayers,hikingpricesinahighlyprice-consciousgroceryretailenvironmenthasrequiredmorecreativethinking. “Gettinglike-for-likepriceincreasesthroughisincrediblydifficult,”saysRothschild’sglobalheadofconsumerAkeelSachak.“Generallyyouwillneedtoinnovatetosecureapriceincrease.” EDGE ONTHE THETOP150 RANK&YEARCHANGE COMPANYNAME&OWNERSHIP ANNUALISEDTURNOVER(£M) OPERATINGPROFIT(£M) OPERATINGMARGIN(%) ROCE(%) YEAREND ACTIVITY Current Previous y-o-y(%) Current Previous y-o-y(%) Current Previous Delta Current Previous 1 ▶– AssociatedBritishFoods Sub 3,393 3,224 5.3 310 301 3.2 9.1 9.3 –0.2 11.3 11.3 09/17 B 2 ▶– BoparanHoldings Family 3,298 3,139 5.1 68 91 –24.7 2.1 2.9 –0.8 12.3 16.7 07/17 O/L 3 ▶– ArlaFoods Sub 2,536 2,340 8.4 33 50 –33.7 1.3 2.1 –0.8 3.7 7.9 12/17 O/L 4 *7 GreencoreConvenienceFoods Listed 2,326 1,458 59.5 93 84 10.0 4.0 5.8 –1.8 22.7 25.2 09/17 O/L 5 *8 MüllerUK&Ireland Sub 1,979 1,337 48.0 42 75 –43.7 2.1 5.6 –3.5 10.9 20.7 12/16 B 6 ▼2 UnileverUK Sub 1,858 1,829 1.6 85 70 22.4 4.6 3.8 0.8 9.5 8.3 12/17 B 7 ▼2 Coca-ColaEnterprises Sub 1,831 1,748 4.8 298 266 12.0 16.3 15.2 1.0 35.4 37.3 12/17 B 8 ▼2 Bakkavor Listed 1,820 1,735 4.9 113 108 4.6 6.2 6.2 –0.0 66.4 75.3 12/17 O/L 9 ▼2 MondelezUK Sub 1,643 1,733 –5.2 33 58 –43.6 2.0 3.3 –1.3 1.2 N/A 12/16 B 10 ▼2 NestléUK Sub 1,525 1,579 –3.4 368 244 50.8 24.1 15.4 8.7 14.3 8.2 12/16 B 11 ▼1 Britvic Listed 1,516 1,417 7.0 180 193 –7.2 11.8 13.7 –1.8 26.5 30.7 10/17 B 12 ▼3 Princes Sub 1,507 1,481 1.7 12 58 –79.5 0.8 3.9 –3.1 1.7 8.2 03/17 B 13 *2 Cranswick Listed 1,465 1,264 15.9 91 80 12.6 6.2 6.4 –0.2 28.7 27.2 03/18 O/L 14 ▼2 MoyPark Sub 1,397 1,407 –0.7 66 51 29.5 4.7 3.6 1.1 19.6 19.2 12/16 O/L 15 *1 HiltonFoodGroup Listed 1,363 1,238 10.1 38 37 1.9 2.8 3.0 –0.2 28.2 23.3 12/17 O/L 16 ▼2 WmMorrisonProduce Sub 1,311 1,294 1.4 71 92 –22.8 5.4 7.1 –1.7 28.3 55.2 01/17 O/L 17 ▶– MarsUK Sub 1,199 1,154 3.9 223 207 7.8 18.6 17.9 0.7 19.2 17.7 12/16 B 18 ▶– Tulip Sub 1,065 1,050 1.4 (34) (17) N/A –3.2 –1.6 –1.6 –8.8 –4.4 09/17 O/L 19 *1 SamworthBrothers Family 955 887 7.6 49 47 4.2 5.1 5.3 –0.2 14.6 15.8 12/16 O/L 20 ▼1 UnitedBiscuits Sub 871 906 –3.9 105 128 –18.3 12.0 14.1 –2.1 6.3 8.0 12/16 B 21 *1 PremierFoods Listed 821 793 3.6 108 102 5.5 13.1 12.9 0.2 83.6 75.8 03/18 B 22 ▼1 Kellogg’s Sub 775 797 –2.7 19 15 26.7 2.5 1.9 0.6 9.9 8.6 12/16 B 23