Is your business and your board ready for the challenges ahead? We're nearing the end of 2021, so as we look back at Q3 in food and beverage, we're also thinking forward to the future.
Steady M&A with growth in niches such as plant-based diets show that the sector is innovating, but the story of the quarter is of factors that might seem outside your control. The labour shortage is making headline news, and COP26 climate summit is going to bring even more demand for serious investment in ESG. As these external pressures intensify, your board needs the purpose and skill-set to find the opportunities in them.
In this quarterly round up we explore the the information and ideas you need to know about to achieve your goals.
An expected uptick in deal volume failed to materialise in Q3, with numbers remaining similar to Q2. It remains to be seen if this is a hangover from the bumper volumes at the start of the year, or caution due to the sector’s many current challenges.
Quarter-on-quarter reported deal value also remained steady at £3,803.5 million, with the three largest completed deals driven by private equity.
To help you understand what happened in Q3 we’re sharing our insight on everything you need to know about food and beverage M&A.
All deal activity is based on the announced date of the deal, and includes all transactions with UK or Irish involvement (target or acquirer). We do collate administrations, liquidations, and receiverships, but don't count them here as M&A unless these companies were subsequently acquired.
Deal activity remained stable in Q3 2021, with 32 transactions announced or completed, compared to 33 in Q2 2021.
This inertia could be caused by any number of headwinds facing the industry, including:
We primarily source deal values from corporate websites, but we also look to deal databases, including BvD Zephyr, Capital IQ and Mergermarket, or 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.
Total disclosed deal value for Q3 2021 was £3,803.5 million across 12 deals with disclosed deal value. The largest deals in the quarter were:
Of the 32 deals announced in the quarter, 43.8% involved private equity (PE), compared to 33.3% in Q2. This could be due to trade buyers switching their focus from deals to organic strategy as they battle the operational headwinds described above. However, it's encouraging that PE’s typical 3-5-year outlook on the sector is positive.
Total deal value for PE was £3,701 million, up from £1,989 million in Q3 2021, notably inflated by PAI Partners acquisition of PepsiCo Inc. Excluding this, the total of disclosed deal values was £1,325 million.
Cross border deals dominated the market in Q3, accounting for 56% of activity compared to 48.5% in Q2. In particular, overseas investments in the UK rose to 43.8%, compared to 30.3% in Q2, showing that foreign investors still see potential in the right UK opportunities.
There were seven insolvencies in Q3, compared to three in Q2. The casualties included three manufacturers, one grower, and three hospitality providers. To date, none have been acquired from administration. Now that government support measures are finished, we expect to see more business failures in coming quarters.
Meat-free and multinational
Deli/plant-based food and beverage companies accounted for 22% of deal activity, showing that this trend has no sign of abating. Private equity has been particularly active in this growing sector, which is now attracting niche funds, such as vegan investors Veg Capital. Notable deals include:
Unovis Asset Management acquired Wicked Foods Ltd, a plant-based meats, meals, and desserts business for £10.1 million.
S Ventures Plc acquired Pulsin, a plant-based nutrition protein bar manufacturer, for £7.5 million.
Veg Capital invested in Clive's Purely Plants: plant-based pies, savoury tarts, quiches, and nut roasts. The deal value was not disclosed.
It’s worth noting that it’s not just minnows who are innovating in the plant-based sector. From October, vegan fast-food fans can tuck into a McDonald's newly launched McPlant burger (and nip out to buy a Cadbury’s plant bar for dessert). Likewise, Nestlé introduced the dairy-free KitKatV in July. The entrance of large multinationals, and their established teams of food technologists, into this market may be a challenge to the smaller companies currently dominating the field. On the other hand, they could be a source of future investment.
Although carbs have fallen out of fashion with health-conscious consumers, bakery remains a huge sector with opportunities in niche spaces.
Bakery deals accounted for 13% of deal activity in Q3, including Bain Capital’s £200.0 million acquisition of Bread Holdings Ltd, owner of GAIL’s Bakery. GAIL’s, an upmarket bakery chain with high street locations, is well-positioned to profit from suburban home-workers looking to buy lunch. On this, Pret A Manger chief executive Pano Christou recently commented that in the face of a hit on its city stores, the chain would focus on where its customers are located, with a push on delivery and the launch of retail products.
Other Q3 bakery deals included the sale of Healthfull Holding’s Group (parent of Wholebake Ltd) to its management and Elysian Capital, which we advised on. Wholebake’s portfolio includes weight management, sports nutrition, toddler snacking, healthy indulgence, vegan-friendly, digestive health and mainstream better-for-you brands. The above-mentioned sale of Pulsin, which makes Keto and protein bars, also falls into this category.
The flurry of Q1 2021 deal activity was driven both by a thaw in coronavirus-frozen deal flow and the prospect of a capital gains tax (CTG) rise, which failed to emerge in the March Budget. Businesses are well aware that the CTG threat hasn’t gone away and we may see a similar spike in deal activity before the next budget.
As for uncertainty surrounding the industry’s reaction to challenges such as staff shortages, increasing costs, and consumer confidence, our advice to acquirers is to focus on target companies that are prepared to ‘expect the unexpected’ –ready to take advantage of opportunities and deal with challenges. Buyers must ask themselves if their target has the following three assets:
A strong management team
Does it have the skillset to adapt to changing and unexpected industry conditions? Suppliers, for example, will be closely inspecting their relationships with the respective new owners of Asda and Morrison’s (which recently agreed a sale to US private equity group CD&R). Private equity’s modus operandi is to reduce costs, and F&B management teams will need to strategise accordingly.
Does it have strong underlying finances to support a sudden change in direction, or deal with rising costs?
Clear market position
Does it have a strong USP? Eg, how is a new meat-free product different to the many other plant-based alternatives already on the market?
The vital nature of F&B means the sector will always be resilient. Successful M&A lies in identifying which businesses are fit enough to flourish amid current challenges.
For more information and guidance on M&A in the food and beverage sector, get in touch with Trefor Griffith.
As Trefor notes, potential purchasers need to ensure that any business they buy has a strong management team that can cope with unexpected developments. That's something all businesses need at this time. One of the biggest challenges is staff shortages. We all know that there are several factors causing these, but it does look like the recent implementation of IR35 for the private sector is contributing to it. The impact of these new rules are a permanent change for the industry, but there's positive action you can take to manage it.
In April of this year, the government changed a tax regime known as ‘IR35,’ to introduce the ‘off-payroll rules,’ which determine whether a contractor operating via a personal service company (PSC) or similar intermediary is classified as self-employed or employed. Previously, it was up to the contractor to make this classification themselves, but now it's the responsibility of the company who is the 'end-client' of their services.
This classification is important because it determines whether the business which pays the individual and their PSC for the service is responsible for paying National Insurance Contributions (NIC) and operating PAYE in respect of that individual. In response to a risk that contractors are misclassifying themselves, and therefore depriving HMRC of tax & NICs, the new rules put the responsibility of assessment on the business that uses their services.
What does this mean for the food and beverage sector?
As businesses can employ many contractors, the cost of having to pay any back taxes and associated penalties for not assessing a contractor correctly under the new rules can be very substantial.
Some businesses have decided to manage this risk by classifying all their contractors as employees, typically by outsourcing to an agency - meaning that these workers now take home less pay. One group affected by this change is HGV drivers, where there is significant shortage of drivers and, supply chains are suffering. Other contractors across the food and beverage sector are also affected by this change.
There are many circumstances where people can continue to work within your business as genuinely self-employed contractors, however, it's vital to properly assess their status.
What can you do about it?
There are several solutions for simplifying this process:
employment tax analysis of IR35, and assessment of the tax risk and cost implications of your labour supply chain
assessing the potential employment tax risk of your current approach
Embedding best practice and upskilling your engagement team to ensure that this meets HMRC's 'reasonable care' test.
We’ve recently shared our technical expertise on all these solutions with multiple businesses across the sector. Another option for you is our Employment Status Intelligence Platform (ESIP). This market-leading tool includes numerous features for monitoring and assessing the status of your off-payroll workers:
collecting information required to perform status assessments of your workers quickly and accurately
hosting a database to store and monitor new and existing off-payroll populations, including a risk-rating in all cases, highlighting how often each off-payroll worker should be reassessed while they are engaged
managing contractor appeals in line with legislation, and other communications.
Over 100 organisations use ESIP, amounting to 1800 individual users, and 8000 reliable employment status assessments. As HMRC's expectations of accuracy in IR35 compliance checks are only going to rise, this tool can help you make the right decisions.
Using our tool can help you keep on top of IR35, but you still have to cope with the wider labour shortage. You can find out more about how these shortages are impacting the food and beverage sector in the results of our recent survey on labour trends. Katie Nightingale and Kevin Wilson explain what they mean for you.
The current headline challenge for the food and beverage sector is the labour shortage. Our recent research across 73 respondents found an average vacancy rate of 13% (with a median of 10%).
If the average national vacancy rate is similar, then across a workforce of 4.1 million people, the UK food and beverage sector is currently coping with more than 500,000 unfilled jobs.
This estimate correlates with other more granular industry figures which suggest a shortage of up to 100,000 HGV drivers, and 188,000 vacancies are in hospitality.
For some organisations the situation will be far more pronounced. 5% of respondents cited vacancies of over 50%. Across the 73 businesses providing data, we found the highest proportion of vacancies in processing, averaging 43%. The second highest level of vacancies was for operational roles, with 35% jobs unfilled. These figures indicate that the sector is struggling to recruit semi-skilled or unskilled labour.
What can you do to bring new people to your business?
Investing in your recruitment strategies by utilising social media campaigns or reaching out to the local community can help bring in people who might not have previously considered working with you.
The most effective solutions for incentivising new joiners and retaining your existing people is improving wages and conditions. In addition to better pay, people are now looking for different ways of working, such as flexible shifts or, where possible, remote or hybrid working.
You can also refresh your employee benefits with additional annual leave, voucher schemes, subsidised food and transport, cycle to work schemes, or retention bonuses.
Other initiatives you can provide includes investing in on-site accommodation and facilities, extending worker welfare services, supporting
employee development: eg, in-house training and upskilling: CPD and professional qualifications, and temporary to permanent transition
Is automation the alternative?
The food and beverage sector has been investing in automation and robotics for the past decade. This is a long-term commitment to reduce dependence on low skilled workers and create a safer and more efficient working environment. Automation can make production more systematic and leaner, ultimately increasing output.
Automation will change the skills base across the food and beverage sector. Supporting opportunities for more highly skilled roles that offer competitive salaries will help you attract the right people. We've seen this happening in warehousing and packing plants, milking and cheese making equipment, cutting and slicing machinery, automated labelling, and factory systems.
The graph shows that business investment by the agricultural sector regularly exceeds 40% of its Gross Value Added (GVA), or about £5 billion a year since 2000, compared to about 15% for food manufacturing and 10% for the economy as a whole.
Business investment as proportion of sector GVA output
If the food and beverage sector pursues a similar strategy it can also earn the rewards for this investment.
Whether your business is looking to expand your workforce or turn to automation, it's vital to proactively put yourself in the best position to access the resources you need to achieve your goals.
If you're looking to bring new people into your business one thing you can do is deliver a brand that's on point with current sentiment. And that means taking ESG seriously. It seems like we've talked about it for a long time, but in light of COP26 significant and impactful action is now critical. As Tristan Yelland explains, to sustain its own future, the food and beverage sector needs to invest in ESG.
One of the most striking trends across the corporate world is the rise of environmental, social and governance (ESG) concerns. Once considered the preserve of niche investors or activists, COVID-19 and the growing climate crisis have moved these issues into the mainstream consciousness.
This is increasingly affecting the food and beverage industry, as consumers become much more aware of the environmental impact of what they eat and drink. The explosion of interest in plant-based diets and the renewed appreciation for local produce is testament to this.
You're being judged on your ESG response
Producers and retailers are rightly coming under pressure to re-evaluate their business models and demonstrate how seriously they are taking climate change, sustainability, ethical production, and good governance.
Many of the world’s most well-known food and beverage brands are making vocal climate change and sustainability pledges. In the UK, members of the Food and Drink Federation (FDF), which includes companies like Cadbury, McCain, and McVities, have signed up to the organisation's Ambition 2025 sustainability targets.
What's the problem?
While this ambition is to be admired, affecting meaningful change is no small task for an industry that accounts for a quarter of the globe’s greenhouse gas (GHG) emissions, historically produces an enormous amount of food and plastic waste, and relies on global supply chains that start in some of the most impoverished and politically challenged countries in the world.
Perhaps surprisingly, transport costs are a relatively low percentage of the food and beverage industry’s total emissions. Most of it is generated by food production or the conversion of forests and other natural habitats into agricultural land. In response to growing concerns over the sustainability of large-scale agricultural practices, some food and beverage companies are now adopting better sourcing strategies throughout their supply chains.
And, what's the solution?
Senior leadership cannot just pay lip-service to ESG issues. To make meaningful change, boards and directors need to identify the issues most relevant to their business and develop strategies to manage and mitigate them.
Targeted, focused intelligence gathering is key to identifying poor governance at an international subsidiary or human rights or environmental abuses in a supply chain – in one recent assignment we discovered salmon farmers who were consistently manipulating data about mortality and antibiotic use.
Once a company’s ESG exposure has been identified, the most effective way of managing it will be to implement a formal ESG Compliance and Investigation Programme. This programme should embed ESG commitments into the overall corporate strategy and identity of the business.
It’s vital that any ESG strategy covers your supply chain: as new laws will require companies to undertake mandatory human rights due diligence on their supply chain, companies should ensure that their contracts with supplies include rights of audit, as well as ESG targets and incentives against which compliance can be measured.
A sustainable future for the planet, and your profits
It may seem daunting, but as the conversations around COP26 show, fundamental changes to your business are becoming increasingly critical to a sustainable future. And, a strong case is emerging that firms with robust ESG policies are also generating superior financial returns. So, by taking ESG seriously, you will not only be doing good for the planet, you will also attract a growing body of consumers who want to positively support businesses that align with their own values.
For further guidance on how you can take your ESG strategy forward get in touch with Tristan Yelland.
The challenge of creating a sustainable future is immense, but it's also manageable. If you have the right leadership. Karen Brice shares five actions for ensuring that your board has the mindset and skills to navigate all these issues: from IR35 to ESG. You can also use our bespoke tool for evaluating the effectiveness of your own board.
On passing my local pub last weekend I noticed the sign outside; “Beer shortage coming - fill up now!”
Whilst the sign made me smile, we are all aware of the threat the current complex trading climate is putting on the UK's food and beverage sector: the talent battle, Brexit, energy crisis, carbon dioxide shortages, scarcity of HGV drivers - you name it, boards are having to deal with it. Unlike the boards of online retail and technology, many in the food and beverage sector haven't had the burning platform needed to drive change.
The past 18 months has changed all of that. Challenges have accelerated the need for fresh thinking, with demands on the board that require pace and agility in response to unpredictable market conditions and supply chain disruption. Fast decision making requires fast feedback.
In the past, reflecting on a board's overall capability and lessons learnt from experience, hasn't always been high on the agenda, but an ever-expanding list of responsibilities and regulatory reporting, not least in ESG, sustainability, and section 172 of the Companies Act means that evaluating impact and effectiveness of the whole board or management team is a progressive thing to do. The definition of effectiveness needs to expand to take in the new skills of alignment, collaboration, diversity, and board purpose. Defining best value for each organisation's board is useful for stakeholders and a business a like.
Five development actions to help your board perform better
1 Look at the 'three horizons'
The ‘three horizons for growth’, created by McKinsey and Company, is a useful model for boards to gauge their effectiveness. For instance, what is the role of the NED in the current climate? Where does purpose take over from different agendas? We've adapted this model to highlight the different phases of COVID-19 and its impact on your board and business.
2 Understand your board's purpose
Is it always the North Star of accountability for your decision making? A board without a collective purpose is in danger of being seen as detached, fragmented, or even arrogant and out of touch. That is a significant risk for the owner or chair. The new board is one that is interconnected with the organisation adding value where and when needed.
3 Make away days more than just strategy
By using a shared lens of 'how' and 'what,' your board and management can explore the whole reality. What and how will the business be 18/24/36 months from now? As an example, with so much work being done by leaders in 2020 around wellbeing and mental health, trust could be lost if the successes of last year aren’t built into the future plan. One way to hold yourselves to account is to engage a board facilitator/coach for the important discussions. Their role it is to enable the best of generative thinking, ‘outing’ any bias but not commenting on content. Likewise, challenge yourselves on ‘always doing what you have always done.’ Is a once-a-year event enough now or should quarterly board development sessions become part of the board’s growth agenda
4 Think outside the succession box
To thrive, your succession-planning needs to be focused on the skills you need for growth and future performance. Is a group of industry-specialist NEDs enough, or would an entrepreneur or strategist change the dynamics and take the quality of your conversation to the next level? More and more, chairs want greater synergies and value from their NED pool. Likewise, how seriously is your board taking the succession of your senior managers? The step up can be huge and the new skills that will be needed beyond technical capability have to be evident. How effective is your senior management succession development plan - is it generating well-rounded directors, and if not, what is needed for the level below?
5 Evaluate your board
Few boards and management teams see evaluation as anything other than an interruption at least and disruption at worst. And yet done well, evaluations should highlight fresh insights of interest and growth. Lack of trust and/or misalignment at the board or management team is thought to be the single largest driver of underperformance, so why not choose a more progressive way to evaluate effectiveness across your board’s agreed key result areas instead of the traditional annual performance reviews? The outputs should be a rewarding set of results for feedback and development.
We've partnered with Boardclic to develop a bespoke evaluation tool that looks at goals, priorities and areas of interest and difference. Yes, it is provocative, but in a positive way, and our clients say the outputs generate a different level of discussion with tangible actions. This new approach to evaluation won’t supersede the value of confidential one-to-one interviews, but they can add insight and evidence to support the conversation.
If you would like to discuss any of these concepts, get in touch with Karen Brice.