Manufacturing & Supply Chain

The UK’s largest 150 food and drink producers are bracing themselves for a difficult year ahead as they face increased pressure from supermarkets trying to oppose the discounters, according to research by OC&C Strategy Consultants in collaboration with The Grocer.

OC&C’s Food & Drink 150, the only analysis of the financial statements of the top 150 British food and drink producers ranking them by annual turnover, has revealed an incremental improvement in food and drink companies’ financial performance, with revenues increasing from 5.6% in 2012 to 5.8% over 2013. However, profit margins have flat-lined near an all-time low of 5.2%, unchanged from 2012 and already lower than at the height of previous supermarket price wars in the early 1990s.

Pressures in the grocery retail market, particularly among the big supermarket chains, are creating challenging conditions for food and drink producers. The performance of the grocery retail industry has hit historic lows this year, with year-on-year growth down from 3.7% in 2012 to 2.8% in 2013. There has been a continued decline in like-for-like sales at Morrisons (-2.8%) and Tesco (-1.3%), and a slowdown in like-for-like growth at Sainsbury’s and Asda. In addition, profit margins across the Big Four supermarket chains declined a further 0.1% in 2013 to 4.4%.

Will Hayllar, Partner at OC&C, says: “We are in a time of fundamental change for the UK’s grocery retail sector, as shopping missions fragment and convenience stores, discounters and online continue to grow at the expense of large stores. This has meant that grocery retailers are continuing to put a lot of margin pressure on food and drink producers. But with producers’ margins at an all-time low, there is little scope to squeeze them any further, leaving producers under more pressure than ever before. Fundamental changes are required to adapt to these challenges without further margin declines. The gap between winners and losers will become greater than ever.”

The Food & Drink 150 has revealed that the best performers of 2013 have been companies that have reacted quickly to the changing grocery retail landscape and changes in shopping habits. Smaller branded food and drinks producers have adapted best, seeing a 0.2% increase in profit margins from 8.3% in 2012 to 8.5% in 2013. In contrast, bigger businesses with a turnover of more than £500 million have continued to face declining margins, with large branded businesses’ margins falling by 0.1% from 7.4% in 2012 to 7.3% in 2013 and unbranded producers seeing a 0.5% decline from 3.4% in 2012 to 2.9% in 2013. The changing fortunes of large and small branded businesses is even starker when looking back over the past five years, with large branded business’ margins declining by 4.1% points since 2008, whilst smaller branded players margins have grown by 1% point over the same period.

Will Hayllar continues: “The challenging operating conditions have meant smaller, nimble players have seen the biggest improvements in performance in this year’s rankings, showing that mobility is outstripping size in the current climate.

“In order to succeed, there are a number of important considerations producers need to have front of mind. Engaging consumers by providing genuine differentiation on products is proving hugely successful, with brands like Yeo Valley and Tyrrells great examples in this space. Brands are also reaping the benefits of rethinking their product, price and pack architecture to reflect changing shopper habits in different types of stores. Finally, developing in-house capabilities to react quickly to the changing grocer environment, such as infrastructure that allows for a more flexible supply chain, will also be essential as conditions continue to evolve.”