As the food industry eats itself, will it be healthier?
A series of mergers and acquisitions is changing the British market, but can it prevent another horsemeat scandal
Around 300 members of the Unite trade union brandished signs with the words "Official picket" outside the Cambuslang meat factory on the outskirts of Glasgow. Many workers also held up umbrellas to shelter themselves from the rain that February morning at 6am, the start of a 24-hour strike over being offered just a 2 per cent pay increase by the factory's owner, Vion.
At the time, a spokesman for the Netherlands-based maker of hamburgers and frozen vegetables read out a bland statement: "Vion is disappointed with the decision, as the company has presented a very fair and reasonable proposal, especially given the current challenging economic climate."
The workers can't have realised just how tough times were for the ¤9.5bn (£8.3bn)-turnover giant. By last November, just nine months after the strike, Vion said it wanted out of the UK. Thousands of jobs were at risk, though management soon bought out the pork business.
The 11 red meat and poultry processing factories, which include another two sites in Scotland and three in Wales, were last week finally bought out by Boparan Holdings, the parent company of Goodfella's Pizza and the 2 Sisters Food Group. This, for now at least, has saved 6,000 jobs and added meat processing to the factories where 2 Sisters debone and fillet chickens brought from nearby farms.
It's also the latest in what has been a spurt of mergers and acquisitions in the food sector over the past 18 months. The Dublin-based salsas-to-frozen Yorkshire puddings producer Greencore, for example, paid £113m for the desserts business Uniq in September 2011, having failed to snaffle rival Northern Foods – ultimately another 2 Sisters buy – earlier that year, and has since bought the ready-meals business International Cuisine for £16.7m.
Greencore, of course, has been dragged into the horsemeat scandal. The FTSE-listed group produced Asda's Chosen for You 350g Bolognese Sauce, a product that had to be withdrawn last month when it was found to contain 4.8 per cent equine DNA. A Bristol facility was briefly shut down for a precautionary deep-clean; more tellingly, Greencore stated, just last Monday, that it was looking to "validate and reinforce" its supply chain.
One of the important results from this wave of consolidations could be to ensure that food manufacturers never again lose quality control over what they produce. The industry is fragmented, with more than 6,000 food and drinks manufacturers.
There can also be as many as 10 steps from a cow leaving a farm to when a rump steak is sold in the supermarket. This can include brokers, who aggregate meat to sell-on, even though many of the bigger manufacturers have people who can source supplies themselves.
Greencore's chief executive. Patrick Coveney. says that brokers are likely to be one of the actors in the food market will dwindle as a result of the crisis. He says: "Some of the historical roles of the industry will have to be reduced so that it's simpler to get from the primary source to the shelf.
"Current events mean that there will be a smaller number of overall suppliers and fewer steps in the supply chain. That may also be a consequence of more mergers and acquisitions."
The crisis could also further depress the valuations of smaller food groups, which have been struggling. As prices have dropped, so there have been more companies available for the likes of Greencore and 2 Sisters to go shopping.
"You've seen a lot of opportunities to build more scale," explains Mr Coveney. "Sometimes parent companies have been struggling and then we can take out costs because of overlapping functions. With Uniq, we announced £10m of synergies, half of which was a result of it being a publicly-listed company that had a management team which overlapped with ours. They were also in similar lines of business, so we have greater purchasing power."
Equally, suppliers to these bigger food manufacturers will look to merge to reduce the competition that results in fees being cut. "Greencore is quite a hard taskmaster," says a leading food analyst. "They're always pushing suppliers to improve their terms, so they have to go away and think about how they can deal with that.
"One way is to consolidate, as there is too much capacity in the market, meaning the likes of Greencore can drive a hard bargain."
The oversupply in the market has been emphasised by the issue of high commodity-price inflation, which the analyst says "simply is not just passed on". Greencore, for example, would find that its customers – which now include Marks & Spencer as a result of the Uniq deal – have their own price wars to fight, so will look elsewhere if suppliers demand more money to make a chicken-and-pesto flatbread or a BLT.
However, food is a basic necessity, so there is always an income to be made out of the sector, one reason buyout barons are so interested in the sector. NBGI Private Equity, for instance, gobbled up the cake division of McCambridge Group late last year for £23.5m, in a deal that also included bakeries in Manchester, Bradford and even Poland.
NBGI also owns Peter's Food Services, which cost £20m and makes savoury pastries, like Firecracker Chilli & Cheese slices and steak and kidney pies. This complements McCambridge's products and is an example of the key obstacle to reducing the number of steps in manufacturing: trade and private equity buyers tend to want to merge at their level in the food chain, not, for instance, go and buy a flour supplier.
This is because the savings are greater. A ready-meal maker is essentially a massive kitchen, so buying another will mean that the combined group might need fewer cooks or could merge their distribution routes. Snapping up a company that turns beef into mince only adds another layer of costs.
"These mergers are a natural process of concentration of assets," says Clive Black, a Shore Capital analyst. "There are better returns in concentrating, which is why some companies will focus on chilled or frozen products rather than have several at different temperatures."
However, industry sources say the bigger groups might well have to suffer these additional costs if they want to keep a close eye on how the meat supplied to them is processed. A maker of a shepherd's pie ready meal might have a contract to get lamb from a slaughterer, but that company might additionally get the meat minced by a third party. The ready meal maker would be as well to buy a slaughterer to ensure that it knew who minces its lamb.
That is also why the rescue of the Cambuslang factory is so important, as, in the words of Tesco's boss, Philip Clarke, supermarkets look to make sure production takes place "closer to home". 2 Sisters will ensure that the underinvested factories continue to process meat and chicken, which do not end up being manufactured overseas where suppliers would be more difficult to monitor.
It will also meet a growing demand for British-sourced food, a further development in the wake of an issue that has seen Romanian factories seemingly unfairly blamed for the problems.
The food market, then, is ripe for even greater consolidation in the coming years. And this everyone involved hopes will raise standards and avert another crisis.
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