OC&C and The Grocer reveal revenue for UK’s Top 150 food and drink producers in decline for first time in 15 years

September 23, 2016 | NEWS

Revenue growth for the top 150 food and drink producers in the UK slowed significantly in 2015, hindered by deflation and investor uncertainty

  • Severe deflation caused revenue for the UK’s top 150 food and drink producers to decline (by 0.1%) for the first time in 15 years, representing a slowdown of 3% versus growth in the previous year.
  • A significant slow down in M&A activity has also had a large impact on sector growth, with deal totals dropping by £3billion in 2016 (year to date) compared to levels reached last year.
  • Within the top 150, small branded producers and large own label producers grew by 1.2% and 0.4% respectively - the only groups to report growth in the sector.

Revenue growth for the top 150 food and drink producers in the UK slowed significantly in 2015, hindered by deflation and investor uncertainty, and turned negative for the first time since 2004, posting a historic 0.1% decline.

This is according to OC&C Strategy Consultant’s 28th annual Food and Drink 150 report, produced in collaboration with The Grocer. It is the only sector-wide analysis of the financial statements of the top food and soft drink firms in the UK, and ranks companies by revenue.

Profit margins for the Top 150 also stagnated at 5.3% in 2015, sitting far below their 20 year average levels of 6.4%. As a result, return on capital employed has been pushed to 12.4%, its lowest level in 30 years.

The damaging impact of deflation has been compounded by a distinct slowdown in merger and acquisition activity in a typically deal-rich industry. M&A totals reached £3.9billion in 2015 but investor confidence dropped significantly in light of Brexit uncertainty, and big businesses in the UK failed to make a compelling case for industry consolidation. As a result, it has chalked up a paltry £0.8billion across just five deals in 2016 (year to date) – less than a quarter of levels seen in the previous year.

While big producers struggle to grapple with the changing face of the industry, small brands and large own-label producers are the only groups to post continued revenue growth in 2015, reporting 1.2% and 0.4% revenue growth year on year respectively. The growth of small brands is possible because of the unique environment created in the UK for enterprises to flourish. London is a well-known incubator for start-ups, and British consumers are particularly receptive to exciting and engaging new brands, which marries well with the disruptive, digital tactics they are employing. This, along with sterling’s Brexit-driven devaluation, makes them even more attractive to foreign investors.

Will Hayllar, Partner at OC&C Strategy Consultants and author of the report, said: “For years, the top 150 food and grocery companies in the UK have enjoyed revenue growth that has far out-paced overall grocery spending, driven by M&A activity and a focus on leading brands. That has now been turned on its head, and we’re facing the dawn of a new era for the industry. Small branded businesses are coming to the fore, boosted by the appetite for niche food and drink brands in the UK, and presenting the biggest source of revenue growth for the sector. A devalued currency makes these small and innovative new businesses an attractive prospect for overseas investors, whilst big producers must redouble their efforts to restore growth or acquire it.”

While it certainly presents new challenges, Brexit could have the potential to be the saving grace for big producers. The currency devaluation of sterling alone is likely to have a significant impact on the current landscape by reversing deflation, which has been a major feature of the food industry for years. OC&C has identified four key implications of this for UK suppliers. First, they will need to rapidly change from having deflationary conversations with retailers to talking seriously about cost pass-through, particularly as inflation is now expected across the sector. Second, exporters must recognise they will be at an increased advantage and move swiftly to capitalise on this, particularly in places where UK-origin brand values are strong. Third, across the board, reduced-cost UK produce means there will be a real opportunity to dislodge overseas suppliers, particularly in categories that receive a high volume of produce from overseas such as the pork and chicken industries. Finally, producers must invest to drive productivity in the face of increasing labour costs fuelled by the National Living Wage and a likely reduction in the supply of migrant labour. 

Currency devaluation is also likely to boost M&A activity out of its recent lull. Cheaper UK assets, combined with continued innovation from UK producers and a predicted slow process for Brexit negotiations, means that M&A activity cannot be on hold indefinitely and is likely to rebound. 

Will Hayllar continued: “Brexit uncertainty can be turned into opportunity, but producers must be proactive if they are to do this. With sterling at historic lows, there’s no longer such a price premium for buying British and this opens up a market that had previously been facing stiff competition from cheaper overseas suppliers. Along with aggressively pursuing these growth opportunities, the time has come to kick-start M&A strategies to capture growth. Recent sector performance cannot continue, and the time has come for food and drink companies to reverse their recent fortunes.” 


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METHODOLOGY

Now in its 28th year, OC&C and The Grocer’s Food and Drink Top 150 analyses the latest available public company accounts of the 150 largest food and soft drinks companies in the UK to provide a unique insight into the overall performance of the sector. The Top 150 aims to include businesses whose primary function is manufacture of food and soft drinks and analyses performance of the statutory accounts of the entity that is most relevant to the UK operations (e.g. the UK subsidiaries of multinational businesses and overall accounts of smaller UK focused businesses). A consistent methodology is applied to define Operating Profits and Return on Capital Employed of all businesses, hence the figures shown may be adjusted from the headline published Operating Profits and Return on Capital Employed. Firms are classified as ‘branded’ or ‘unbranded’ based on whether the majority of their sales are generated by branded or unbranded / own label products.