Producers are facing unprecedented pressure in the face of rising costs and supermarket demands, according to the latest survey from business consultancy Grant Thornton.
Turmoil in global food markets has created huge consolidation pressure in the UK food production industry that will create a spike in mergers and acquisitions over the coming two years, according to the report from Grant Thornton and Barclays Commercial Bank.
The research found raw material cost increases, retailer pressures, tighter availability of finance, cross border acquisitions and major portfolio adjustments were the key factors creating this pressure.
In the Grant Thornton-Barclays Commercial Bank 2008 Food Consolidation Index, the entire UK food and drink production sector is assessed on the many factors that influence mergers, acquisitions and failures, with various sub-sectors given a ranking from one to four based on the consolidation pressures they are facing. Those rated with a one - including fresh produce - face the greatest pressure.
The sector was found to be high in company failures - generating just 14 per cent of all food sales, it accounted for 23 per cent of business failures and 11 per cent of mergers in the two years to April 2008.
Grant Thornton and Barclays Commercial found fresh produce is an area in which retailers have a large number of suppliers, and consolidation of their business with a smaller number is an obvious way of resisting the inflationary pressures which are having such a significant impact on all raw materials. “Indeed, we understand Tesco has already begun to look at this option, and almost certainly other retailers will have had similar thoughts,” the report states. “The one area where consolidation may be less marked is in prepared vegetables. With the acquisition of Hitchin Foods and Exotic Farm Produce, Bakkavor extended its domination of this sub-sector, and the interesting question is whether any other consolidator can emerge to tackle its domination.” The report also suggests that volume is likely to continue to grow due to the positive health perceptions associated with fresh produce.
Phil Jackson, pictured, head of food mergers and acquisitions at Grant Thornton, said: “Standing still is not an option. Producers must focus on new product development, as innovation and growth are two features that customers and potential acquirers are attracted to.
“Strive to maintain and improve gross margins by passing on price increases where possible, sourcing raw materials/commodities efficiently, creating manufacturing efficiencies (including labour costs) and currency hedging effectively. If you want to be acquired - get noticed. Publicity in the media or entering awards are good methods of getting onto a buyer’s radar.”
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