It's been a challenging year across the sector due to continued disruption; however, positivity is returning as hospitality reopens. It will be interesting to see how things develop over the next few months.
Despite all this disruption, the sector has remained resilient. A recent surge in M&A activity was powered by the largest number of private equity deals since we started our records in 2016.
This is also one of the most-innovative sectors in the economy. However, many manufacturers are still not taking full advantage of the government's innovation incentives.
In our quarterly round-up, we analyse the key themes and opportunities we're seeing across the sector.
Transactions continued to rebound in the first three months of the year, resulting in the highest number of deals for a quarter since 2017. Activity was powered by the completion of pandemic-paused deals and the threat of Capital Gains Tax (CGT) changes in March.
Private equity continued to invest heavily in the sector, including taking several minority stakes in high-growth businesses. This appetite for innovation was echoed by the venture arms of large corporates, which took stakes in areas such as premium desserts and meal delivery kits.
A flying start for deal volume
Q1 set a strong precedent for deal volume in 2021, with 63 announced transactions. This was a 14.5% increase on the previous quarter and up 43.2% on (largely pre-COVID-19) Q1 2020.
Total disclosed deal value for Q1 2021 was £1.3 billion across 30 disclosed deals. This marks a 326.1% increase on the same quarter in 2020 when disclosed deal value was at an almost record low.
The fact that deal value was down 86.8% on Q4 2020 is to be expected as the winter quarter included the £6.8 billion sale of ASDA to TDR Capital and EG Group.
Minority stakes accounted for 66.7% of total disclosed deal value as high growth businesses sought capital to expand, and investors sought innovation in taste, packaging and sustainability.
Business owners cashing out ahead of an anticipated rise in CGT also added to an uptick in activity. While the CGT increase did not actually emerge in the Chancellor’s March Budget, it is widely expected at some point in the future and will continue to be an important consideration for business owners.
Q1’s larger deals include February’s £496.5 million merger of US-based Dole and Ireland’s Total Produce to create the world’s largest fresh produce company, and Intermediate Capital’s acquisition of Alvinesa Natural Ingredients for £321.7 million.
Also worth mentioning (but not included in our figures as the deal details remain unconfirmed) is Canada’s Sofina Foods’ acquisition of Karro and Young owner Eight Fifty Food Group to create a £1.9 billion company.
During the period it took the UK and European Union to reach an exit agreement, several international companies applied a handbrake to UK deals.
Buyers from Europe and North America are now gradually releasing this to establish a foothold (or further invest) in the independent UK market.
It is interesting that Mondelez’s investment in Solihull-based Grenade was its first UK acquisition since it bought Cadbury in 2011.
In Q1, overseas entities acquiring UK and Irish (UK&I) companies accounted for 17.5% of deals, compared to 15% in Q4 2020. We expect this upward trend to continue.
Otherwise, UK&I companies acquiring fellow domestic companies accounted for 65% (Q4: 70%). Meanwhile, UK&I companies buying overseas accounted for 17.5% of deals (Q4: 15%).
In Q1, private equity racked up 34 F&B deals, the highest number we have recorded for a quarter to date, and a 41.7% increase on Q4 2020.
With other consumer subsectors, such as hospitality and travel, temporarily out of play, F&B remained a haven in which to channel funds already allocated to the consumer sector.
The fragmented nature of F&B also continued to attract 'buy and build' deals. Exponent Capital continued to add to its Vibrant Foods stable with the acquisition of Fudco (a deal we advised on) and Everest Dairies.
Again, not included in our figures, but notable, was Limerston Capital’s backing of family-run business Village Bakery, which will finance a new factory.
Q1 2021 saw just two food and beverage insolvencies: one in meat, fish and poultry, and one in fruit and veg supply. In Q4 2020, there were four.
There were three bar and restaurant insolvencies, while a further four were acquired out of administration, including The Hummingbird Bakery, Prezzo and HOP Vietnamese. This is relatively positive news for the foodservice industry, but it must be remembered that the sector is still propped up by government support.
The trends that dominated 2020 showed no sign of slowing in the first quarter of 2021. Premium alcohol, healthy eating, pet food, and snacks continued to be hot areas for activity.
Alcoholic drinks accounted for 21% of Q1 deals. Transactions included Heineken’s acquisition of its remaining stake in Brixton Brewery; The British Honey Company’s acquisition of Union Distillers; and Diageo’s investment in US-based Far West Spirits, a hard seltzer brand.
Deli and plant-based businesses accounted for 9.7% of activity, showing that interest in healthy eating and meat alternatives is not waning. Deals included minority investments in meat-free protein producer Better Nature, VFC (Vegan Fried Chicken) Foods, and synthetic meat company Meatable.
As dog ownership in the UK soared, acquisitions in the high margin pet food sector remained strong, accounting for 6.4% of deals. To cater for a nation of indulgent animal owners, natural dog treat firm Assisi Pet Care (Hollings) acquired Town & Country Petfoods. Meanwhile, Waterland Private Equity backed United Petfood Producers.
The wellbeing trend continued to infiltrate crisps & snacks, which accounted for 6.4% of activity. Deals were dominated by ‘healthier’ alternatives such as HIPPEAS (chickpea based), Proper Snacks (premium popcorn), Fudco (nuts and spices) and We Love Purely (plantain-based crisps).
If 2020 was about reactions to unprecedented events, 2021 will be characterised by a readiness for deal execution while there is still uncertainty around ‘post-coronavirus’ consumer behaviour.
This is particularly apparent for suppliers to the hospitality industry. Are the recent scenes of packed pub gardens a novelty or a sign of things to come? Will diners feel comfortable eating elbow to elbow in busy restaurants? What will happen to the sector when government support ends?
How Brexit will unfold is another unknown. Is the considerable trading admin down to teething problems or a new laborious normal?
Are you ready?
With so much still unclear, both buyers and sellers must prepare themselves to move quickly as soon as the new normal becomes apparent. There are three things that they can do to make sure that they are ready:
1 Follow the big international corporates’ lead. Be clear on strategy and where you see strong future growth. For example, snacking giant Mondelez’s acquisition of sports nutrition manufacturer Grenade shows it is backing the trend for high protein products
2 Trade buyers need to match private equity’s agility and readiness to do deals. For example, Sofina Foods surprised the market with its acquisition of Eight Fifty Food Group, owner of Young’s Seafood and Karro
3 Structure for success. It remains difficult for buyers to validate how much the current circumstances have impacted their targets’ usual turnover. Deals are increasingly structured to mitigate this. For example, they might include an option for further investment, which is contingent on performance. This gives investors the chance to audit sales and reduces exposure for business owners
The question surrounding F&B isn’t whether there will be increased M&A activity. It is who will be ready to benefit.
1 All deal activity is based on the announced date of the deal and includes deals where there has been UK or Irish involvement (target or acquirer). Administrations, liquidations and receiverships are collated but not counted as M&A unless they have subsequently been acquired.
2 Deal values are primarily sourced from corporate websites. However, if no press release is available, they are sourced from deal databases, including BvD Zephyr, CapitalIQ and Mergermarket or from press commentary released at the time of the deal. Deal values may subsequently be amended pending earn-outs or other financial arrangements and/or as further detail is released by the acquirer.
In our constantly evolving environment, now more than ever, business leaders should be focused on understanding, sustaining and increasing margins. This is especially true for the food and beverage sector, where 'true' profitability analysis and realisation techniques have enabled critical data-driven decisions.
Targeted margin improvements: recognising commercial and operational drivers
Our food and beverage clients have varying agendas and objectives, but the solution is often very simple: ask the right questions, then assemble and analyse available data and information to drive decisions that increase and/or sustain margin. Whether your data is held individually or in organisational 'silos,' the recommended approach is the same.
We have found that although decision-making typically focuses on financial information, there can be a significant gap between the operational, commercial, and financial understanding of the business. With our help to bridge these gaps, our clients have gained more powerful insights which inform better decisions.
For example, a large food and beverage business engaged us to review the profitability of their growing product portfolio. The company had a very good understanding of the top-level margin but needed us to conduct additional analysis at product category and product level. Our work for them:
Recognised that the sales team’s revenue-based incentivisation scheme was driving down the price and negatively impacting the gross margin
Discovered volatility in the raw material cost; which is now reflected in the average cost model to ensure that it is being recovered to the greatest extent
Identified that manual manufacturing processes were not reflected in the costing of the specific product category. Processes were put in place to capture the additional cost associated with these products. This has also been reflected in the price
Understanding the commercial and operational drivers underpinning each product category enabled us to allocate the cost to each product and helped our client to make targeted cost savings, as well as vital commercial and operational improvements.
As a result, the client made some changes to their systems and data model, which enabled greater real-time transparency on product profitability. These changes also led to a rationalisation of their product portfolio and customer offerings and optimisation of their inventory.
Asking these key questions about your products, profits and costs is the first step in a proven approach that links relevant commercial and operational improvements to the P&L. Such rigorous analysis might feel uncomfortable to start with, but this level of directness is what you need to improve your business.
For support in asking the right questions and understanding the answers, on business improvement and profitability get in touch with Alex Mumford.
The main barrier to companies in the food and beverage sector (F&B) unlocking innovation incentives remains a simple one – a failure to recognise what the UK tax system accepts as R&D.
Firstly, if you presume it has to involve white coats, Petri dishes or secret labs, think again. It's also important to realise that it is not limited to brand new products on the market. To unlock valuable incentives, you need to do your research!
So, what is research and development?
Have you reformulated a product to satisfy increasingly health-conscious consumers or government targets? Or transformed a process and its operating parameters to achieve efficiencies or make it more sustainable? Perhaps you've enhanced a product’s shelf life or stability period after opening? This is potentially all R&D. There are also wider opportunities to consider across your organisation that may qualify: from manufacturing processes to IT updates (e.g., automation or ERP systems). If you're not recording these activities as R&D, you may be missing out on a lot of potential support and benefits.
Innovation incentives for R&D
The F&B sector is driving rapid innovation in R&D. Whether it’s through advances in developing, manufacturing or packaging products or via the automation of processes, F&B companies of all sizes are constantly evolving in the face of environmental, technological and social change.
The government incentives for these activities may provide you with invaluable support in these uncertain times.
You can receive up to a £33,350 R&D cash incentive for every £100,000 of qualifying revenue project expenditure, even where there are no taxable profits.
So, why are so many businesses not claiming the full benefits for all this investment in innovation?
R&D benefits: do you already qualify?
Like most areas of tax, innovation incentives can be complicated, and you will often require specialist advice to know the claims you can and can't make, as well as how to do it. There are, however, some straightforward questions you can ask to get closer to these well-deserved benefits.
Are you already ahead?
Lost in the day-to-day, we can quickly start to think that our work is ‘business-as-usual’. Compare what you're doing with the wider marketplace. Benchmarking against publicly available knowledge may reveal that you're already leading the way.
Count your failures
No team sets out to fail, but setbacks (for scientific or technical reasons), even those leading to the abandonment of an entire project, are actually often a sign that you're doing R&D.
R&D does not have to be confined to your core activities. Updating your manufacturing processes or IT systems can count as innovation. You may be able to claim for the time spent in scale-up trials or refining operational parameters.
A methodical process for assessing whether you might already be doing R&D will ensure you don't miss anything. This could be a simple ‘yes or no’ checklist completed by project managers to flag potential R&D projects. The method does not need to be scientific; it just needs to be applied consistently throughout relevant parts of your business.
If you want to really know if your activities qualify as R&D, you need to define your priorities. Do you want to improve your understanding of it, and implement processes to optimise the approach to secure innovation incentives? Get in touch with our specialist innovation tax team to discuss the opportunities available to you.