In M&A, deal volume declined, but value remained robust. Several subsectors remain very attractive to investors, and as restrictions ease, businesses are becoming increasingly confident.
In addition to the particular challenges of the current circumstances, there are other issues that the sector needs to think about. Cyber attackers are increasingly targeting food and beverage businesses, sometimes by exploiting vulnerabilities in their supply chain.
In our quarterly round-up, we look at the key themes of Q2, and share our insight for success in Q3.
There's lots to say about the food and beverage M&A landscape in Q2, and it's important to look beyond the severe drop off in deal volume: a 47% decline on Q1.
The first quarter of the year was supercharged by external factors and, importantly, in Q2, deal value remained stable. International interest in the UK and Ireland continued to increase, reflecting continued overseas interest after Brexit.
Announced quarterly M&A activity in food and beverage
Deal volumes1 almost halved in Q2, compared to the previous quarter (33 vs 63). This might not be as shocking as it first appears, and there are reasons to believe that it's not indicative of a new trend towards declining deal volumes.
M&A activity in Q1 was supercharged by two exceptional factors: the thawing of deal flow frozen by COVID-19, plus concerns about changes to capital gains tax in the March Budget.
These factors go some way to explaining why the traditionally busy months of April, May, and June actually experienced a drop-off in comparison to the previous quarter. Another contributing factor may have been that businesses hit by coronavirus decided to shift their focus to operational strategy instead of exits.
Anecdotally, throughout Q2, we have witnessed a strong appetite for deals from our clients and are confident that volumes will rebound again.
In contrast to the decline in the volume of deals, the value2 remained robust.
In Q2 2021 the total value for the 16 disclosed deals was £3.7 billion, compared to £1.3 billion for disclosed deals in Q1. The substantially higher value of disclosed deals for this quarter was largely accounted for by Bain Capital’s acquisition of Valeo Foods Group from CapVest.
I've also identified some significant investment trends in the quarter's largest deals.
Kerry Group’s bid to strengthen its taste & nutrition business was responsible for two deals. In a clear out of non-core operations, the Irish company divested its meats and meals business to US poultry producer Pilgrim’s Pride for £704 million. Meanwhile, it acquired global food technology firm Niacet from SK Capital for £735 million to further strengthen its ingredients business.
CapVest oversaw an aggressive acquisition campaign at Valeo Foods Group, which saw its portfolio grow to include names such as Kettle, Jacobs, Rowse and Balconi. We expect to see new owners Bain continue the B&B strategy, potentially acquiring larger businesses.
Buyers from Europe and North America continue to snap up UK firms to establish a post-Brexit foothold.
Private equity (PE) activity also dipped in Q2. PE activity only accounted for a third of the 33 deals announced in Q2, compared to 54% in Q1. Total PE deal value for Q2 was £2.0 billion, up from £552 million in Q1, but, like total deal value, this figure was inflated by the £1.5 billion Bain Capital/Valeo Foods Group deal.
Despite consumer health trends and government anti-junk food measures, two notable Q2 deals revealed that PE still has a sweet tooth.
Ferrero vehicle CTH Invest acquired Jammie Dodgers' maker Burton’s Biscuits for £300 million. The move makes sense in a pressurised, yet still enormous market, where larger players have an advantage.
At the premium end of the 'sweet treats' market, Exponent Private Equity acquired gourmet dessert brand Gü Puds from Noble Desserts Holdings for £150 million. The deal recognises that consumers are willing to splurge on at-home indulgences, a trend that was accelerated by multiple lockdowns and consumers trading up instead of eating out.
Q2 2021 was was an unremarkable period for insolvencies, with just three companies suffering: two restaurant businesses and one supplier to the energy, food, and farming sectors.
As we noted in our previous quarterly, the UK economy is still supported by government furlough measures. It will be interesting to see what happens in late September, when these are due to end.
Alcohol, plant-based products, and functional foods show no signs of losing their allure for investors.
In the coming months, three external forces are likely to put pressure on food and beverage suppliers.
The government furlough scheme that has kept the UK hospitality industry afloat is set to end in September 2021, while many restaurants and bars face a recruitment crisis.
These recruitment problems, including servers leaving mid-shift because they have been offered better pay elsewhere, are well documented. Affected venues face three ‘choices’: don’t open at all, accept fewer bookings, or open with a skeleton staff and risk customer dissatisfaction.
Sadly, the fallout from this convergence is likely to impact suppliers.
In July, the Morrisons board accepted a £6.3-billion takeover offer by a consortium of funds led by PE firm Fortress. It follows ASDA’s £6.8-billion sale to Issa brothers and TDR Capital last year.
While both investments show strong appetite for a presence in the food retail sector, it's likely that these businesses will continue to try to reduce costs, which will concern suppliers. Sainsbury’s announcement that it will invest £50 million into lowering prices will increase pressure industry wide.
On 15 July the government published its National Food Strategy report, led by Henry Dimbleby, the founder of casual dining chain Leon. Headline recommendations included the introduction of salt and sugar taxes, and cutting the nation's meat intake by a third (though it stopped short of a meat tax).
In response, the environment secretary has promised a white paper within six months. This advice creates uncertainty for food and drink suppliers and prudent players will be keeping a careful eye on developments.
In spite of all these challenges, Q3 can bring great opportunities for firms that can strengthen their position. It is a prime time for investors to seek consolidation, and target companies that can resist price pressure with a unique offering.
By its (literally) vital nature, the food and beverage industry will always remain resilient. What will change, however, is the distribution of winners and losers.
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 2020 the food and beverage service (F&B) sector's revenues declined by 42%. The story of 2021 is hopefully more optimistic. The sector has been recovering since outdoor table service was permitted in April and indoor table service resumed in May. By the end of that month, the sector’s turnover recovered to 78% of May 2019 levels.
This is remarkable, given that indoor service only contributed to half the month’s trading in May. It is a positive sign of the much-anticipated consumer spending bounce in the sector.
Hopefully, with consumers returning to restaurants and bars, F&B suppliers will also be on the road to recovery with a hike in demand, following a tough 16 months with many casualties. Unfortunately, even for businesses that survived, the changing dynamics of the sector mean that there are new challenges to cope with before it completely recovers.
Since reopening, the hospitality sector has faced a critical problem with staff shortages. Business leaders state that up to a quarter of those employed in the sector before coronavirus will not return to it.
Further up the supply chain, the HGV driver crisis continues to cripple businesses supplying into the sector. Warehouse staff and fresh produce pickers are reportedly also in short supply.
These shortages have led to wage inflation for specific roles, and the impact of these rising costs will adversely affect profitability as businesses try to navigate the revenue recovery path.
The National Farmers’ Union and 12 other major F&B trade bodies have commissioned us to put together a report on labour shortages in the food & drink industry. It is hoped that the findings from the report will drive change in the sector.
Lenders to the hospitality and F&B sectors will closely follow the trading recoveries being made by businesses. For their credit risk assessments, lenders will focus on weekly trading results, compare performance against pre-coronavirus trading, require robust financial projections, and place more scrutiny on operational management capability.
As before, borrowers will need to demonstrate how their business model has been adapted to consumer behaviour changes and how their proposition remains attractive in a dynamic and very competitive sector.
Management will need to demonstrate any permanent benefit to trading from self-help cost-saving actions, and show consistent uplifts from online or takeaway services. Presenting this information in a clear and compelling way will be critical for borrowers.
If you're interested in tailored advice and support for your business, get in touch with Kevin Coates.
Around the end of May this year, JBS S.A, the world's largest meat supplier, suffered a catastrophic cyber attack. The business supplies around one-fifth of global meat production, and this cyber attack was the largest and most high profile data security breach on a food production business.
Before that, at least 40 major incidents on food producers occurred in the preceding 12-month period. The entire sector needs to be prepared for similar incidents.
The JBS S.A attack was thought to involve an infamous Russian-speaking ransomware-as-a-service (RaaS) gang: REvil. To regain control of their businesses and data, JBS S.A was compelled to pay the hackers £8 million.
Our team has also flown to Ukraine to help one of the largest dairy manufacturers rebuild its computer systems after another cyber attack. While its computers were offline, its milk was curdling in silos.
Integrated production and customer management systems can bring unique opportunities for efficiency and 'just in time' manufacturing and cost optimisation, which are critical to modern F&B businesses. The problem is that the biggest risk factor for a data security incident is...data.
There's an optimal level of data to hold, or 'sweet spot,' but many businesses exceed it, becoming 'data hoarders'. Collecting data that you don't actually need risks unnecessarily exposing you to cybersecurity attacks, and the costs can be astronomical.
Our Cyber Defence Centre is currently working with a production company that lost records for up to one billion data subjects in a cyber attack. That’s approximately one-seventh of the global population. The advent of GDPR laws and other global data protection regulations means that businesses need to ask if they actually need all of the data they are collecting.
The average combined cost of fines and business impact for losing a single data subject's personal information is more than £100. Imagine one billion £100 fines. Or one million. Or even one hundred thousand. Globally, the average cost of fixing the fallout from a cyber attack is around £3 million.
This is why you need to think about the amount of data you hold and look for opportunities to reduce it. I strongly advise: if you don’t need the data, don’t keep it! And if you do need the data, keep it safe.
One notable pattern in cyber attacks on the food and beverage industry in 2021 is that on top of exploiting vulnerabilities in their target's own business, they also infiltrated them through their suppliers, distributors, and other third parties.
Supply chain risks have rapidly demonstrated that even if you are the world’s largest drinks manufacturer with unlimited budgets to secure your IT systems, your logistics company may not be equally equipped.
Your packaging manufacturer, your sugar supply company and your nitrogen gas vendor each may be more focused on what they do well, and that will almost certainly not be IT and cybersecurity. A vulnerability in their business may become a vulnerability in your business.
Hackers are opportunistic and will find a weakness in the 'attack surface' wherever they can find it.
Hackers aren't going away. We all use computers, and we all generate and hold data. As long as cyber criminals can use it, they will find a way to make financial gain through your pain.
Fortunately, several relatively low cost or free cyber hygienes can dramatically improve your data security management. 'Multi-factor authentication', good password policies and password audits, and the use of secure data channels (VPNs), especially for remote working, can significantly reduce your cybersecurity risk.
For a no-cost consultation and access to a 60-day free trial of our solutions, get in touch with our Vijay Rathour.
Our latest International Business Report, surveying 10,000 companies across 29 economies, shows record levels of economic optimism as business confidence across the globe returns to pre-COVID-19 levels. This optimism amid uncertainty also applies to businesses in the F&B sector.
In the UK, confidence in the future of the economy is at pre-Brexit levels, with renewed optimism also reflected by the strong recovery in revenue and profit expectations. Business investment intentions are rising too, with a clear focus on improving productivity over increased capacity. Firms are undoubtedly feeling the benefits of a negotiated Brexit and the relaxation of coronavirus restrictions.
This improved general outlook is unfortunately tempered by some specific concerns. Economic uncertainty remains high, and there are a record number of respondents citing ‘red tape’ as a barrier to growth.
Overall, the message is positive, but there are clear reminders that we aren't out of the woods yet. The F&B sector must also contend with some unique issues.
The sector has remained remarkably resilient throughout coronavirus, despite significant challenges and headwinds caused by it, Brexit, and other significant F&B regulatory changes, many of which remain active.
One significant area of challenge has been around labour. Food retailers and their supply chain significantly outperformed most parts of the sector during COVID-19 and have been coping with increased demand for their products and focusing on keeping up with demand. This challenge was exacerbated by significant staff and supply shortages which are ongoing.
Meanwhile, ‘out of home’ retailers and their supply chain were facing nearly opposite issues, with very little to no demand for their products at times, compelling them to furlough staff and mothball operations.
Anecdotally, many hospitality workers have moved away from the industry into jobs such as delivery driving, which grew in demand during the lockdowns. A variety of high-profile casual dining chains and pub groups have been forced to close venues due to lack of staff –because of an inability to hire or because of staff self-isolating. Supermarket depot workers and food manufacturers in England have now been made exempt from quarantine rules, but this exemption does not cover all roles in the sector.
Another significant challenge for hospitality venues even after the relaxation of some restrictions was social distancing guidelines, which forced businesses to operate at lower capacity, generating lower profits and higher costs.
Other significant issues for the sector include continued supply-chain disruption, as well as increased VAT and customs requirements to move goods across borders. On top of this, businesses are facing increasing pressure to comply with environmental, social and governance (ESG) requirements, in addition to other sustainability expectations, both from legislative and consumer perspectives.
Despite these challenges, there are plenty of opportunities for food and drink businesses to capitalise on. With restrictions easing in England, consumer demand for ‘out of home’ food and drink will increase again, but as the amount of food people consume will not change dramatically, this will take away some demand from other channels.
The UK sector prides itself on innovation, and there's plenty of opportunities for organisations to respond to and capitalise on changing consumer tastes and trends, including health and wellness, convenience, sustainability, plant-based, and local provenance, as well as more-efficient business models and alternative routes to market. With this, they can also claim back tax credits on their R&D expenditure.
As well as leveraging these opportunities, the sector does need to prepare for some emerging issues.
While England has removed almost all restrictions and the devolved administrations look set to follow, these changes might not be the ‘irreversible’ watershed that some people currently suggest it is.
Any new restrictions may be accompanied by additional support, but it's not guaranteed - and we will likely continue to see inconsistencies in each nation's approach – causing headaches for pan-UK businesses.
As world leaders meet to discuss growing concerns over climate change, it's likely that new initiatives and requirements will be announced at the summit. Given the global reach of the UK's F&B sector, any new measures are likely to have a significant impact on it.
HMRC are increasingly talking about ‘full border implementation’ at the start of the next year. The situation in Northern Ireland means that these changes will be of particular interest to the F&B sector.
Finally, although we have identified some of the global trends that are impacting the UK sector, the long-term influence of these issues remain to be seen.
For more insight on our International Business Report 2021 and the outlook for the food and beverage sector, get in touch with Tom Rathborn.