Traditional UK grocery sales fell for the first time in 20 years this week. But while the supermarkets struggle, foodservice is actually buoyant - delivery issues notwithstanding due to possible driver shortages - and this week’s deal between Fresh Direct and Brakes is designed to capitalise on this growth.
So what exactly is the deal? Brakes owner Bain Capital has bought a majority stake in Oxfordshire-based fresh foodservice specialist Fresh Direct for an undisclosed amount. In doing so it will move Brakes’ three specialist fresh and chilled divisions - Pauleys (fresh produce), M&J Seafood and Wild Harvest, a specialist seasonal ingredients supplier to restaurants that operates out of Covent Garden - under a restructured Fresh Direct.
The company started life as a local greengrocers in 1966 and has been run by the founding Harris family ever since, growing to a £220m a year, specialist fresh food supplier to hotels, bars and restaurants, delivering seven days a week from its seven depots across the UK. Current owner Nigel Harris will retain a significant stake in the new company and current MD David Burns will become CEO.
Brakes chief executive Ken McMeikan argues that bringing together Fresh Direct’s expertise and Brakes’ scale will be good for customers across the country. “I am delighted to be entering into this joint venture with Fresh Direct because of the significant opportunities this will create for customers in what is the fastest-growing part of the foodservice market. Bringing together these four businesses, under Fresh Direct’s leadership, will provide something really special in the marketplace.”
It is understood Bain will have opportunities to buy out the rest of Harris’s stake at a later date, but McMeikan suggests this will not be imminent as the reputation Fresh Direct has and the continued involvement of Harris and Burns were important factors in doing the deal in the first place.
For Burns the deal was an opportunity to accelerate Fresh Direct’s growth plans. Last July, it hired Duff & Phelps to explore avenues for raising capital for expansion and the company explored “all sorts of opportunities” before being introduced to Bain.
He says Fresh Direct is now two years into a five-year business plan, with the deal taking the business from seven to 21 depots and giving it a far better geographical spread. The number of employees will grow from 1,000 to 2,000 while sales will also nearly double to £400m. The companies are a great fit, he argues, and doesn’t envisage any redundancies as a result.
The three companies that make up Brakes’ fresh division in effect make up one-third of its £1.9bn turnover, with equal contribution from frozen and ambient grocery.
The key to the deal for Brakes is Fresh Direct’s delivery expertise, which offers day one for day two delivery and even day one for day one. In terms of fresh, Brakes is currently offering day one for day three delivery.
“We have three businesses that were close to Fresh Direct. Bringing them together will add simplicity for our customers,” says McMeikan.
“This allows us to unlock faster the choice we believe customers want,” he explains. “Now we have that choice we can offer continuity of service if customers are happy with that or move them on to the new option through Fresh Direct.
“We know that fresh is the fastest-growing part of the market and if we had been doing this on our own we wouldn’t have been able to provide such a service for another two years at least.
“We all know that if you don’t provide what your customers want today they will go and find it somewhere else.”
One rival foodservice operator admits that the deal is probably a good one for both parties but questioned whether, with less price tension in the market, it would be good for customers. “The rationale Brakes is giving to some shoppers is that too many of their customers still perceive them to be a frozen foods business and see this as the best way to establish themselves as a major player in fresh. Interestingly, most customers now perceive M&J as a frozen fish supplier,” he says.
Having the fresh businesses run by the Fresh Direct team will now allow Brakes management to focus on a wider growth agenda, explains McMeikan. The company is currently investing £125m in new depots, growing its capacity to offer multi-temperature deliveries and driving e-commerce by building stronger relationships with chefs and caterers.
It is also continuing to focus on international growth.
“We are delivering growth in the UK and seeing growth in Sweden, and despite the current challenges of the French economy we are outperforming the market and growing market share,” he says. “In all three countries we have worked hard to earn the right to grow ahead of the market and doing what is right for the customer, including doubling the number of new products we have launched in the last 12 months.”
With integration not due to start till early 2015, Burns is keen to point out it is very much business as usual in the key run-up to Christmas. And despite wet conditions over the past two months he says so far there are no weather-related problems affecting fresh supply.
“A lot of what we have for Christmas is already out of the ground and waiting to be delivered,” he explains. “We are basically hoping we don’t get a prolonged period of very cold weather next year.”
● Started in 1966 as greengrocer H&H Fruiterers - a partnership between founders John Harris and Bill Hawkins.
● After 10 years, expanding to 32 shops, and with a refrigerated warehouse, it changed its name to FreshGro.
● In the 1980s it grew to become a fruit & veg wholesaler. Hawkins retired in 1987 and the Harris family took over, changing its name to Fresh Direct.
● This week, it sold a majority stake to US private equity firm Bain Capital. John Harris retains a ‘significant’ stake.