Opinion: Simon Peacock

My recent trip to Eire not only reminded me of the qualities of ‘the black stuff’ but also that there are a number of small and innovative drinks businesses out there in an industry that is very sensitive to the current economic conditions. In the off-trade alcoholic market, innovation is leading the fight against falling sales and heavy price promotions: Fosters is modernising its cans, Jack Daniel’s has launched a JD and Ginger in a can, and Captain Morgan, the dark rum drink, is now showing a more handsome character.

Across non-alcoholic drinks the story is mixed: fizzy drinks and impulse occasions are growing however consumers are more price conscious than ever and premium smoothies are falling out of favour. The tactics here seem to be intelligent differentiation with Perrier using Dita Von Teese on labels to be more ‘chic’ and who could have missed the most recent format development ‘the shot’ for the high growth energy sector? The trends in M&A have also been interesting. Past trends have included the global drinks players paying premium prices for highly scalabale ‘on trend’ formats such as PJ Smoothies and V Water which were bought by Pepsi. Coke acquired a share of Innocent, and also bought the mineral drinks business Abbey Well.

More recently I’ve seen some very interesting and quite clear cross-border and cross-sector steps being taken. Britvic acquired Fruite in France earlier this year, a big business to absorb considering the challenges in their Irish portfolio. Even more insightful was the acquisition last November of Orangina Schweppes in France by Suntory, the Japanese drinks business better known for its alcoholic portfolio.

In a mature industry where consumers are always ready to try new things, drinks businesses with strong balance sheets will want to ensure they are not just investing in the short terms trends but also the longer term ones. I suspect that some longer term trends may actually be outside the current core offerings for drinks businesses and so there lies the choice of internal development or strategic acquisition. Either way the market will have some fizz. Cheers!

Despite Sainsbury selling out of 50,000 world cup vuvuzelas, retail sales have been flat across the big UK retailers. Sainsbury reported like for like growth of only 0.1% for the twelve weeks to June 2010 (after adjusting for the VAT change impact) citing low food inflation.

Figures from the British Retail Consortium seem to confirm that financial uncertainty is dampening the consumer mood. The trade body said that total retail sales in April fell 0.2%, and were down 2.3% on a like for like basis. At competitors Tesco, the departure of Sir Terry Leahy and subsequent departure of fresh foods commercial director Colin Homes will be important gaps to fill. Ocado meanwhile is tempting loyal consumers (those who have spent over £300) with the chance to buy shares in their likely initial public offering, despite still being loss making before tax. All of this says that retailers need new ideas to find profit growth, but from where?

The issue is compounded by the competitive promotions between retailers. Take beer for example, during the world cup I believe the main retailers must be actually losing money on every sale of beer or lager as they look for a decisive ‘land grab’. Tesco were selling a 24 pack of beer for £10 or 54p a pint in one of my local stores. The profit growth won’t be coming from here!

One area I am acutely aware of that the retailers are looking at carefully is the direct marketing and promotional spend. Right from the cost of printing material through to the cost of digital images and efficient workflow management of the marketing campaign, there are opportunities to think creatively to cut costs while maintaining the effectiveness of the management and execution of the campaign. I experienced this first hand with the Inspired Thinking Group (ITG), for whom I helped raise development capital from the private equity industry. ITG provides services that help marketing departments significantly improve the efficiency of their marketing operations using the latest digital and data technologies. I believe this is a trend that will continue as experienced entrepreneurs are fleeter of foot than the large retailers and will help them with outsourcing and reducing big chunks of the retailer’s marketing costs.

So what of vuvuzelas and the world cup? Well I hope they are a short lived line, but nevertheless retailers will look more towards cost cutting and bringing in outside ideas while inflation stays low and promotions stay high. Entrepreneurs in retail services will be an important part of retail in 2010.

I still believe M&A in the food & drink sector over the next six to nine months will include some of the world class mid and small sized businesses here in the UK, something I'm even more positive about following my role as a judge for the Grocer Gold awards in late April. Whilst I can’t reveal the shortlist for the awards, there are some very likely candidates that will be acquisition targets and possibly one or two who may turn trade acquirers in 2010 and 2011.

Earlier this month, I presented at the ICAEW on the state of the food and drink M&A market and I was delighted by the response I received from my predictions. The food and drink industry has declined by 50% in deal value globally and by 90% in the UK in 2009 versus 2008. This is pretty severe and it has been very hard hit in the mid-market. I predicted in a seminar including sector experts and business directors that the food and drink industry will bounce back.

My reasoning for this is three-fold: firstly the industry itself has been one of the first sectors to show growth in the UK coming out of the recession; secondly overseas acquirers have continued to acquire in the UK at the same proportion of the total market as before 2007; and finally from a survey of private equity houses their appetite to invest in the sector has only marginally reduced since the Lehman’s collapse compared to other sectors where they expect not to invest in at all in the short and medium term.

It is no surprise to me then that a recent survey by ACG / Thomson Reuters Deal Makers at the end of 2009 showed that 82% of respondents expect M&A activity to increase over the first six months of 2010. The first quarter of 2010 has showed that UK Food and Drink M&A volumes were roughly on par with where 2009 finished. 2010 volumes were just under one quarter of 2009’s full year deal volume. This means that the next six to nine months could see the increase in deals coming through.

Of course there is still uncertainty. A hung parliament and the Greek economy cannot be taken lightly. The latter has seen a pretty speedy response giving confidence back to the markets. Let’s hope on the former that Cameron, Clegg and the Labour party see fit to serve the electorate in a similar timely manner.

At Catalyst I’m pleased to say that we’ve continued to focus on the food and drink sector through the downturn in 2009 and uncertainty in early 2010. This has meant we are well placed to understand the buyers and sellers of businesses as opportunities come up throughout 2010. I’m feeling pretty upbeat about this year and look forward to doing more deals in the food and drink sector!

Recent stock exchange announcements show the power of brands within the food & drink sector with impressive growth, albeit with other associated issues, from the likes of industry giants Premier and Northern Foods.

While Premier reported strong sales in the relaunched Hovis and Lloyd Grossman cooking sauces, their expected trading profits disappointed the city with cost inflation squeezing margins. Meanwhile, Northern Foods reported a ‘solid’ Christmas period with the relaunch of it’s Rocky biscuit brand, but the ‘competitive’ environment coincided with it’s chilled division showing profits well behind last year.

I believe the picture in food and drink is therefore mixed. Examples of this appear regularly: Unilever found itself in the unusual position of being considered a better credit insurance risk than the UK or US governments, following the recent rise in demand for corporate bonds. And despite the mighty oracle from Omaha, usually silent on such deals, Warren Buffett giving clear warning that this is not a time to rush, overpay or over leverage despite the opportunities, Kraft have overcome the opposition of management and swallowed up british icon Cadbury.

I’ve visited many food and drink businesses in the last year and three months in particular, and I’m aware of a long list of managers and shareholders ready to commit themselves to processes involving M&A in 2010.

The clear impresssion that I am left with from these meetings is that there are three good reasons why branded businesses and those with strong market positions will come to market first in the food and drink sector.

Firstly there is continued strong performances in brands because consumers remain loyal to branded treats and manufacturers continue to invest in brands attracted by their growth. Secondly the competitive pressures being felt in the sector are felt even more by the weaker players with either secondary brands, low market share or undifferentiated private label portfolios.

And the third point is that branded and niche food and drink businesses fit the private equity investment model very well. Whilst private equity houses saw a 96% drop by value in UK food and drink sector buyouts in 2009, private equity investors in general have a build up of cash to invest once the market stabilises and will seek out bargains in the sector.

Challenging times for the food and drink sector indeed, however those with strong brands will be at a premium in the early part of 2010.

I read with astonishment that Desperate Housewives star Marcia Cross, who plays Bree Van De Kamp, is to become the new advertising face of Rooster branded potatoes since this is not the kind of the product these stars have usually fronted. However this is perhaps an astute move on behalf of Albert Bartlett sensing the change in the shopping habits of the average housewife (or househusband in these credit crunch times) away from fancy consumer goods and back to trusted brands and simple food stuffs.

In a recent league of the fastest growing privately owned food businesses in the UK prepared by Catalyst for the Grocer magazine this month, a number of well trusted brands appear in the list. For example: Butterkist (Tangerine Confectionary); Aunt Bessies (William Jackson & Sons); Crosse & Blackwell (Symingtons); Warburtons and of course Roosters (Albert Bartlett) all ranking in the league.

In difficult economic times consumers can tend to polarise in terms of their buying habits showing either a flight to lowest price or a flight to trusted brands. With this growth of companies owning trusted brands, housewives will be desperate no longer. Perhaps this is also the kickstart that the second half needs in the food and drink M&A market. As businesses with better balance sheets seek counter cyclical growth they may look to trusted brands and we could find a number of them changing hands if they can be prized from their long established owners.

With the economic downturn likely to continue through a big part of 2009, home cooking, casual and simple meals and recession-proof dining are some of buzzwords in this year’s culinary world. The Daily Telegraph is printing recipe ideas to help its readers make the most of their leftovers. Traditional recipes and ‘necessary luxuries’ like chocolate, wines and baking are expected to make people feel a bit safer in this turbulent and stormy period.

These ideas are also being echoed at boardroom level and in the latest M&A deals. Asda CEO Andy Bond has reported a 40 per cent increase in sales of cooking ingredients, alongside a similar drop in the sale of certain ready meals. Cadburys first quarter results show chocolate up seven percent due to their standard dairy milk brand rather than the premium niche Green and Blacks. And in a period where private equity buyouts are at their lowest in the first quarter of 2009 for thirteen years, a £24m buyout of a sauces business, TSC, takes up most of the second page of Companies and Markets in the FT.

So what does this mean for consumers, owners of businesses and investors? Will consumers continue to spend on traditional foods and spend time in the kitchen rather than buying their usual convenience food? Will the next flurry of food deals involve a ‘Good Life’ styled Tom and Barbara management team? Will the financing community resemble their neighbours the middle-class Jerry and Margot, who cannot bear the realities of this return to prudence and self-sufficiency? The reality is that food businesses can be a resilient sector in the current recession. A return to a ‘Good Life’ self-sufficiency may be an extreme but the growth in food ingredients and basic food pleasures is a trend that is probably here for a little while longer.