Link, share, join, listen ...
Link, share, join, listen ...
It seems that there is a lot of love to share at the moment, with Trade buyers and Private Equity alike looking to court businesses and build market share.
This is with a back drop of an extremely tough couple of years in Mergers & Acquisitions. According to the recent OC&C merger market analysis on UK Food & Drink Manufacturers’ M&A activity, 2010 almost flatlined with only four deals valued over £20m!
The good news is that Food & Drink companies big and small are turning to M&A to boost top line growth and gain market share and use as leverage with retailers – this is set to continue in 2012.
2011 started to mark a change with a number of transactions – such as Boparan 2Sisters and Northern Foods, Brookes Avana, Hain Celestial and Daniels, First Milk Group and Kingdom, Princes and Premier Canning, Baxter’s and Frey Bentos, Young’s Seafood and Cumbrian Seafood. Which leads me to a number of questions:
What impact do you think consolidation will have for Food & Drink Manufacturing in the UK?
Match-making?
Looking at recent transactions and future deals there appears to be two main courting tactics:
Love at first sight – targeting the obvious match with businesses operating in the same vertical category such as sandwiches to build category depth.
Opposites attract – targeting businesses that in isolation are not an obvious match but partnered with have the potential to become category powerhouses by building breadth (soups, salads, sandwiches, fruit pots) in a core category such as Food to Go.
What other acquisition strategies do you think make sense in this market?
Why marry now?
As food & drink manufacturers fight for survival (against a wave of commodity cost increases from the supply side and retailers squeezing margin from the customer side), it has never been tougher for manufacturers to hold onto margin and remain profitable. Growth needs to be realised at speed and this means buying out the competition or being bought out – consolidation in market means power in size, market share, shelf space and lobbying power. If anything is going to make the retailers nervous it will be consolidation, as fewer suppliers means weaker negotiating position. So if done properly the benefits are immense!
Love match?
Post-acquisition benefits include economies of scale and supply chain efficiencies – offering an immediate benefit against rising commodity costs. Eliminating the competition and gaining market share can also result in dominant shelf space and a position of strength with retailers – how will they respond as the supply market shrinks?
Heart break?
Many post-acquisition businesses soon find the honeymoon period is over! Certain love-blind facts hidden during the courting process become irritating habits to overcome, or even deep personality flaws that could wreck the long term future of the relationship. What resources will businesses need for a successful integration?
Match made?
As with any relationship there is a distinct phase when good due diligence can be unravelled if the integration is not planned out and delivered in good time. All too often the most important element when planning the integration is overlooked: culture. As two cultures collide the unforeseen obstacles can seem insurmountable, using inexperienced or culturally bias internal resource to implement change.
Interim Programme leads can work best in this environment as they offer independence, neutrality and most importantly experience to cut through the cultural, process and system differences. Used to over-arch the process from pre-acquisition (i.e. operational due diligence) to post-acquisition integration and leadership, Interims can provide that helicopter view and clear pathway for the integration.
They are experienced in managing people from different cultures, managing businesses through change successfully, providing Counsel and ear-marking potential pitfalls/opportunities – an invaluable resource through a period of adjustment.
The Food & Drink market is picking up on the value of Interim Managers, with the thinking moving from a useful tool for gap cover to using Interims as agents for change – i.e. Project/Programme leads, Turnaround Directors and International Development specialists. As they start to reap the real value that Interim Managers can add to a business going through change, do you think 2012 will be the year for the career interim in Food & Drink?
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I’m sitting here on the train at 6.00am trying to warm up by writing my blog. Why? Well it’s certainly not a New Year’s resolution that I’m going to be far more efficient with my time. I have to put it down to the fact that the start to the year has been a little bit frenetic.
Just before Christmas I was reading articles from a series of economists who were trying induce an Ebenezer Scrooge-style festive period with their talk of “double dip” and Armageddon. But since then I’ve been buoyed by the fact that my meetings are about deals that are back on the table and more interestingly, commercial growth strategy! I was also lucky enough to have a piece published in the FT last week that has received some interesting feedback regarding the involvement of the lender community in appointing senior level interims. All in all I believe we have an interesting year ahead!!
Maybe we’re trying to talk ourselves out of the issues that surround us or possibly we’re trying get our business done for the year nice and early so we have the summer free to enjoy the splendour of the greatest show on earth coming to London in July. I have noticed a spring in the step of a number of the clients that I’m meeting right now and long may the positive attitude continue. I’d be interested to hear your thoughts and dare I say predictions are for the year. Do you get out of the blocks quickly if you’re running a marathon?
Simon Gough is Director of Private Equity & Advisory at Interim Partners.
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I was thinking recently of an Institute For Turnaround (IFT) lecture I attended in the summer of 2008 where Sir Stuart Rose was inducted as an Honorary Member and made to ‘sing for his supper’. On reflection I wonder if Sir Stuart is in possession of a crystal ball as he made what have turned out to be some frighteningly accurate predictions on the retail sector and economy as a whole. I won’t go into the negatives because you’ll be more than familiar with the bad news in retail in recent times but if his predictions continue to be accurate then I’m going to share some good news with you……….he talked about four years of pain before things got better and by my calculations that makes it this summer – hooray!
On the subject of predictions, I recently presented my business plan to our team at Interim Partners and BrightPool and highlighted the areas I think will be most prevalent for interim managers operating in retail this year. On the proactive side I see roles for interim managers who can look at opportunities for retailers to diversify and create more reason for consumers to spend. Sir Stuart summed it up nicely by saying M&S was continually trying to ‘persuade you to part with every pound that we can’. There is also the continued growth of on-line retailing. I spoke with a major parcel delivery business who have more than doubled the amount of parcels delivered in December over the last three years. Retailers will continue to invest in on-line and need operational support to make sure the growth can be supported by their supply chain. On the reactive side there is going to be continued work around Finance (cash management) and HR (business re-organisations).
I’m interested to hear your predictions for the sector in 2012. Are the good times going to return to UK retailing in time for the Olympics?
Jonathan Flynn is Head of Retail at Interim Partners.
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The new year began precariously for UK Food & Drink manufacturing; as with the global economy many companies are teetering between signs of recovery and omens of collapse!
Being so risk adverse can create paralysis, but others are maintaining or even increasing profit through consolidation and cost management. This sheds light on a market that surely does not represent true sustainable growth. Now more than ever is the time for fresh ideas, invention and innovation - we must tackle austerity with audacious ideas that represent real business opportunities and tackle fundamental problems in the market!
Tesco alluded to this with the announcement on Friday that festive cheer ran out, with results taking a tumble following their lacklustre review of Christmas trade. Chief Executive Philip Clarke admitted Tesco was “disappointed” with its domestic performance over the seasonal period:
“There is much more we can do to further improve our shopping trip for customers and we are determined to move faster.”
For most people the new year is a time for reflection, prediction and action and the same is true of major multiples such as Tesco. The recession has had an impact on UK consumers’ shopping budget which – now seriously pinched – has become more discerning. Traditionally the retailer response has been to pass on the pain and squeeze manufacturers’ margins.
However, is Phillip Clarke’s statement a nod to change in 2012? Will manufacturers this year have a chance to change the balance of power?
If so, how ?
In the last few year retailers – by squeezing margins – have forced manufacturers to focus on good cost management and supply chain efficiencies to recover bottom line margin. Market consolidation was another approach – buying up market share and creating stronger leverage with retailers.
However, does this represent true market growth in the same way as organic growth or innovation or new product launches? Perhaps the retailers’ continuous downward pressure has sent manufacturers into a New Product Development black hole or has it had the opposite effect?
I believe the winners of 2012 will be those businesses that can invent, innovate and launch effectively. As we can see with Philip Clarke’s statement retailers want to embrace change and improve the shopper trip experience, so not only is it about new product – the focus will also be on innovative in-store activation!
The key trends of 2011 will continue in 2012, with three areas of business activity in Food & Drink:
1. Consolidation will continue as businesses build market share and power to battle the retailers on price and distribution.
2. Cost Management – on-going review of cost and efficiencies to recover margin erosion. Looking at the total value chain as a response to increasing raw material costs and decreasing margins with the retailers. Businesses will also be looking at how they can re-engineer processes/product to innovate in the market, so a combination of cost management and NPD will support a more strategic approach and joint planning with the retailer.
3. Innovation – my call to action for 2012. We must have fresh ideas, new ways of working and new products if, as a market, we are going to truly grow.
So how as an industry can we bend the boundaries, change the way we work and launch new and exciting products, gain power back from the retailers and connect with the consumers????
Manufacturers need to be more daring and as they say; ‘out of adversity comes opportunity’ !!
Jo Sands is Head of Food & Drink at Interim Partners
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There has been lots of talk this month about the perilous state of the economy and its outlook for next year, a similar tale really from the rest of this year. I was interested by the comments of a couple of businessmen for differing reasons this last week. Firstly from a leading retailer who said that flat is the new growth and holding position over the next couple of years will compare to the high growth model of old that had the investment community buzzing. Then from one of the best known PE house owners who comments on the need for the industry to look for “long-termism” for future investments, and that the existing model is just no longer viable.
These are just opinions of course, but if they both hold true then how are investments going to be valued going forward, will there be an even greater stagnation in the deal market as perceived values from either side of the fence differ drastically as we all dispute what the bottom of the market really looks like.
I’m personally seeing quite an interesting marketplace at the moment where my clients are looking for long term operational sense in some of their portfolio businesses and short term cash grabs in others. We can help in both cases as well as assisting in their more traditional needs of executive gap management.
My question for today relates to the current position of the market that needs a good kick start. Are perceived investment valuations changing extensively at the moment due to economic forecasts (flat being the new growth) and as a result what activity will we see in the non distressed marketplace? Sadly I think I know the answer but would be really interested to hear your thoughts.
Simon Gough is a Director and Head of Private Equity.
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Almost every interim manager or client I meet these days is talking about the ‘customer experience’ and often when discussing who is getting it right, one name always comes up…….Apple. Interesting then to see that Morrisons have just appointed an ex Apple Director to lead its online food launch as it takes its next steps into etailing. Simon Thompson who has joined this week was Worldwide Strategy and Customer Experience Director for Apple and prior to this he worked for lastminute.com. Earlier this year Morrisons bought a 10% stake in US grocery etailer FreshDirect and since then a team from Morrisons has been embedded in the US business to learn how to etail and build the business for the UK market. Recent figures show the UK online grocery sector is worth £4.8bn and is expected to double by 2015.
Morrisons is also close to launching its non-food internet offer with Scott Weavers-Wright (founder of the acquired Kiddicare) at the helm. With these two appointments Morrisons is taking a serious but considered step into etailing, and with Dalton Philips seemingly not putting a foot wrong since taking over at Morrisons it will be exciting times ahead for the business.
With the other big grocery multiples already established in online retailing, have Morrisons left it too late to make a major impact in the sector or with the expected growth are there going to be even more reasons to shop at Morrisons?
Jonathan Flynn is Head of Retail at Interim Partners
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The year so far has provided some interesting debates on varying markets within Interim Partners, the market is changing, the landscape is shifting, surely this is a good thing for the interim marketplace. The Pharmaceutical market is no different, in fact I’d say that in its own real terms it’s a position of accelerated chaos. Through all of my meetings this year I’m not witnessing companies talking about business as usual, I’m hearing the talk is about change management, outsourcing, procurement initiatives, downsizing, consolidation through acquisition and regionalisation with a smattering of six sigma and a thirst for quality thrown into the mix.
So what does this all mean for us? Well change is good, it’s what we’ve built our business around. The question is around what’s the best approach to make sure the Interim marketplace aligns itself to the large amounts of change in this vast industry. I’ve just read this morning in the IMA Q1 IPSOS MORI poll that Pharmaceutical and Life Sciences makes up just 3% of the professional interim marketplace. The consulting businesses are stocking their shelves and strengthening their benches in their approach to Pharmaceuticals and we are looking to do the same, this percentage has to increase.
I’d be really interested to hear your thoughts on where you think the market will be in Pharma over the coming year and perhaps more importantly where clients will engage directly with the interim community and not engage a consulting business to outsource their problems to. Your comments are greatly appreciated and help us form a wider view.
Simon Gough is Director of Consumer and leads the Pharmaceutical practice.
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Despite the recent collapse of Focus DIY, the rescue of All Saints and the on-going fight for survival at HMV I’m still optimistic about the opportunities in the retail sector for interim managers this year. I spoke in an earlier blog about the opportunities for interims coming from Private Equity investment, turnaround specialists and the middle-ground retailers who haven’t yet changed their focus (no play on words intended).
Despite a slow start to the year and a slow-down over the Easter / Royal Wedding period, it’s been a good start for the retail interim manager and the signs are looking better for the back half of the year. A number of private equity businesses I have met with have funds burning holes in their pockets and are eager to spend and I’ve made placements across a number of disciplines in retailers who are performing well and are hungry for growth and investment. The focus has changed from ‘09/10 where interims were predominantly used for cash management or business reorganisation projects. I’ve met with a number of businesses this year and while all will say it’s challenging out there, those are still ‘battening down the hatches’ seem to be missing a trick.
These retailers are either in denial or have a head-in-the-sand approach. Having a ‘me too’ offering and hoping that a business is going to trade its way out of trouble just isn’t enough in the current climate. You might be able to get away with it when times are good and consumers have more money. Unfortunately for businesses in this predicament I see less innovation and more procrastination. Businesses claim that it’s costly to reinvent or reinvest, but surely they can’t not afford to do so? Whilst interim management can be an expensive resource, I work closely with senior level industry specialists who are committed to delivering a return on investment from day one. This surely is a better option than throwing money at consultancies to try and fix the problem when the horse has already bolted.
There will be a number of second tier operators looking at Focus and wondering if they might be next. Wouldn’t they be better looking at the retail success stories and trying in some capacity to emulate their success? This change will require experienced, sector specific knowledge and fast……..but what will it take for the penny to drop and for these retailers to do something now rather than reflecting on it when it is too late?
Jonathan Flynn is Head of Retail at Interim Partners.
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Most of us will have taken pleasure and delight in consuming about as much chocolate as one grown individual could muster over this gloriously sunny Easter holiday, but how much is chocolate worth to you? What are you willing to pay for this pleasure and for some daily necessity?
I don’t know what you found, but my clutch of Easter Eggs cost exactly the same at the check out as they did last year. Surprising I thought as I happily handed over the cash, as the news has been full of chocolate or more precisely its derivative cocoa.
Cocoa crops have been hit by bad weather, beetles and increasing world consumption over the last few years and this year, serious political unrest in the Ivory Coast and a ban of cocoa export resulted in a further cocoa price hike. Cocoa producing regions plus other raw commodity generating areas are often in socio and politically unstable areas and this year problems in Africa and the Middle East acts as siren that raw material prices are exceptionally vulnerable long term.
Expensive cocoa eats into manufacturers margins as does commodity increases in sugar, milk, nuts, packaging and oil all common ingredients in our every day delight, so a natural conclusion would be that we the consumer will foot the bill.
In this climate though retailers are generally pushing price increases back so you find some manufacturers are changing how they use cocoa in recipes using less cocoa butter and more cocoa compound as it is cheaper, some will absorb the price into the supply chain, but how long can this be sustainable before the product is no longer recognisable or the manufacturer collapses?
What else can we do to offset the climate of commodity increases? What core skill sets can the Interim community offer our manufacturers to: hedge price fluctuations, preserve margin or gain price increases with retailers.
Is now the time to draw a line in the sand with the retailers and secure price increases that are a fair reflection of what is now the true cost of producing our beloved chocolate?
Let me know your thoughts.
Jo Sands Head of Food & Drink, Interim Partners
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It’s disappointing to hear that HMV, an iconic retail brand has decided to close 60 stores following poor Christmas trading. I would have thought that being the only music and entertainment retailer on the high street would be a saving grace for the business but the competition from on-line retailers and supermarkets combined with the increase of digital downloads and music streaming is proving too much. Despite diversifying into live music venues, ticketing, cinemas and widening the product proposition, the future looks tough having just appointed KPMG’s debt advisory team.
Ordnance Survey have recently compared 27 million retail addresses between now and October 2008 when the financial crisis began. It found that banks, recruitment agencies, estate agents and pubs were increasingly leaving the high street while the prevalence of betting shops and hairdressers grew. The data showed there were 280 more betting shops on the high street compared to before the recession, representing a 5% rise. The change represents a consumer shift to the internet for shopping, and services including job searches and travel bookings. However services that cannot be accessed online have seen their presence grow on the high street with a 3% rise in hairdressers and a massive 28% increase in the number of car washes.
Demand for pound shops, pawnbrokers and bakers are also in evidence from the figures, “demonstrating the increasing social stratification of the high street as wealthier shoppers drive to out-of-town retail parks and malls”. Known as the “doughnut effect” in the US, where shoppers migrate from the centre of town to the periphery, Britain’s high street is fast becoming boarded up with the national high street vacancy rate soon to exceed 15%.
I’m hopeful that HMV doesn’t ultimately go the same way as Woolworths. The Chief Executive of the British Property Federation commented that “there is no point harking back to the old high streets we claimed to love. We need to be more creative in looking for new roles and uses for these empty shops”. I’d be interested to hear your views on what the high street is going to look like in the future, surely we’ve reached saturation point with mobile phone and coffee shops and with the big chains finding they can cover the county with 50 stores and a decent website what is going to fill the increasing number of vacant buildings, after all aren’t we supposed to be a nation of shopkeepers?
Jonathan Flynn is Head of Retail at Interim Partners.
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