The Big 30: Who's holding the best hand?

The Grocer's annual The Big 30 league table of Britain's wholesalers reveals which companies have played their cards right over the past 12 months and which have been dealt a losing hand. Peter Cripps sorts the jacks from the kings


Fluctuating petrol prices. Food inflation. The squeeze on lending. It's fair to say that the credit crunch has made it a whole lot harder for wholesalers to compete effectively with the multiples over the past year.

Throw into the mix duty fraud (cash & carries claim it deprived them of up to 90% of their usual sales on leading beer brands over Christmas) and an expected increase in the illicit trade of tobacco, and 2009 isn't looking too promising either.

Indeed, if there's one key message to emerge from our 2009 ranking of The Big 30 wholesalers it is that even the strongest operators will have to play their cards right if they are to survive the economic downturn. A streamlined business, honed product range and competitive pricing strategy will all be critical in the months ahead.

Although some wholesalers have enjoyed double-digit turnover growth over the past year and are clearly holding a strong hand, overall average turnover is up just 3% - well short of the 7.9% increase seen in factory gate prices.

Rising consumer demand for value is only compounding problems.

Forced to compete more aggressively on price, many operators have had to take a hit on gross profit margin as they try to help customers hold their own against the onslaught of the multiples and discounters.

C&Cs have arguably fared better than their delivered wholesale counterparts as a result of their stronger focus on price in an increasingly value-focused market. Yet it is a cash & carry that has performed worst. Indeed, Makro is the only player in the Top 30 to have posted a loss - of a whopping £19.4m.

Experts argue that its offer wasn't focused enough. But Makro's problems pre-date the downturn, claims MD Hannes Floto, blaming his company's £219m debt, in part at least, on heavy investment in 2007. The company will return to profit in the next four years as it narrows its focus to hotels, restaurants, caterers and independents, he insists.

Makro may have come off worst, but it's not the only one to have seen its profit eroded heavily over the past year. Even when Makro's loss is stripped out, average overall pre-tax profit growth is still 3.9%. The average profit margin, meanwhile, is stuck at 1.6% - the same level as last year.

When you consider that some of the figures were posted before September when the financial crisis really began to take hold, the table makes for pretty uncomfortable reading at first glance. Look more closely, however, and there are a smattering of players that are spectacularly bucking the trend.

Wing Yip is one. Its turnover has grown 8% and its profit 23% over the past year. For the second year in succession, its 7.6% profit margin is the best in the industry though, as chairman Wing Yip points out, his Chinese food business is "unusual" because its niche proposition means there is limited competition, making it less vulnerable in a downturn.

JJ Food Service has also had a great year. It has nearly doubled its pre-tax profit to £8.6m, while turnover shot up 13%. MD Mustafa Kiamil attributes this to "efficiencies made through computer technology", including new picking and phone systems designed by his son Rifat.

Unfortunately, many wholesalers have been driving efficiencies of a different nature. About a third of the companies that volunteered information for The Big 30 have cut staff levels over the past year, including Brakes and P&H.

Many have also made a concerted effort to adapt their offers to the changing demands of a more value-focused customer and consumer base.

"The wholesalers have readdressed their value offerings and realised how hard their customers have to compete and are working hard to enable them to do so," says John Murphy, Federation of Wholesale Distributors' director general.

They have increased their focus on own label and promotions, for instance, to help customers compete on price.

Given the importance of scale in competing with the multiples, it is no surprise that merger and acquisition activity in 2008 was pretty intense. Last January, table-topping Palmer & Harvey McLane bought WH&HM Young, which had previously occupied 21st place in the table, just six months after its acquisition of T&A Symonds. The deals helped it become the first grocery wholesaler to top the £4bn turnover mark.

Twelfth-placed AF Blakemore snapped up Tyne Tees Cash & Carry in May, continuing on a steady growth path ever since, while Brakes bought part of loss-making Woodward Foodservice in June for an estimated £20m, leaving the rest of the company to trade as DBC Foodservice. Brakes also acquired French foodservice provider Rault in March and in October strengthened its position in the Irish market by acquiring O'Kane Food Service.

The acquisitions are too recent to show up in Brakes' accounts but chief executive Frank McKay claims their contributions have "exceeded expectations". Buoyed by contract wins, Brakes has posted the highest pre-tax profit of The Big 30 wholesalers, at £59m, although it is down 14% on last year because of a one-off charge of £33m for its buyout by private equity firm Bain Capital.

Following the dry-up in bank lending, conventional M&A activity is likely to do the same, warn analysts. The repercussions of the banking crisis won't end there. Businesses are already being charged more for credit and their limits are being reduced. Customers and suppliers are experiencing similar problems.

Businesses throughout the supply chain are asking for changes to credit terms and it is wholesalers that are caught in the middle. "We are being expected to become banks as so many customers are asking for credit," says one Big 30 player bluntly. The dilemma is whether to extend credit to customers with cashflow problems or to turn away trade.

Obtaining trade credit insurance is also becoming increasingly difficult. "Some wholesalers may find they have to start to pay cash up front to suppliers if their insurance levels are reduced," says Murphy. "Again, the businesses with the best cashflows will benefit."

Some sectors will inevitably be affected more than others. Take foodservice. The sector has grown in value by just 1.1% to £6.97bn in the year to 20 December 2008 [Nielsen]. The 'profit sector' - including restaurants, pubs and cafés - has been hit especially hard, as this is where consumers are cutting back. The problem is exacerbated by the number of caterers turning to C&Cs, according to Tom Fender of Him!

"We started the year quite well, but no one really foresaw what a momentous year 2008 would be," admits Nielsen foodservice analyst Justin Grice. "By October the market was completely different."

Both 3663 First for Foodservice and Brakes have a good spread of business between cost and profit sectors, according to Peter Backman, MD of analysts Horizons. But while 3663 increased its turnover by 7% to £2.3bn, overtaking arch-rival Brakes in sales, the company's profit figures paint a different picture.

Although the company refused to release pre-tax profit figures for the year, the latest available, for the year ending June 2007, show profit for the British mainland fell from £49.4m to £43.4m. Parent company Bidvest admitted at its agm that pre-tax profit had continued to slide since July 2008.

However, it's not all bad news. More affordable meal options, such as promotions, are still attractive to consumers and are expected to boost volume sales at least. Booker is focusing on this market, trying to help independent pubs compete with cheap chains such as JD Wetherspoon by offering meals for £2.50 and bottled lager for 99p. As a result of the squeeze on the pub food trade, the 'cost sector' of foodservice - contracts with hospitals, schools and public authorities - is becoming more attractive, wholesalers taking the view that though it is less lucrative, it is shielded from falls in discretionary spend.

The trend towards shopping more locally and more often is another growth area wholesalers can exploit, according to IGD analyst Patrick Mitchell-Fox. "Consumers are turning to c-stores as they look to save on petrol costs and wholesalers can capitalise on this growing market - as long as they provide value for money," he says.

Although wholesalers are increasing their own-label offers, which have traditionally commanded higher margins than branded equivalents, the increasingly price-competitive market has put pressure on margins across the board. Nisa-Today's and Landmark admit they are reducing the prices of their brands and own-label lines and that this will hurt margins.

The recession will nevertheless present an opportunity for symbol groups to grow as independent stores seek the better prices, ranges and advice that being part of a large group can bring, insists Costcutter executive chairman Colin Graves. "If symbol groups can't grow during a recession, they've got a real problem," he says.

With four of its six wholesalers in the top 10 profit margin table, Spar's distributors are looking particularly strong. This is thanks, at least in part, to the strength of the brand, says a spokeswoman. "The Spar offering is well recognised, can fit a wide range of store formats and has a good range, including an own-label range due to be relaunched this year."

Tobacco remains a major worry for wholesalers, however. Sales have struggled since the increase in the legal smoking age and the introduction of the ban on smoking in public places, falling 3.5% by volume and only rising 0.5% in value for the year to September 2008 [Nielsen].

Although tobacco represents 60% of P&H's turnover, CEO Chris Etherington maintains that as the business recruits more c-store customers, it will continue to enjoy growth. "Tobacco is declining but it's a very significant market and will be for some time," he adds.

And how will delivered wholesalers fare in comparison with cash & carries? Soaring petrol prices last year were one of the key factors behind limiting overall turnover growth in the foodservice sector of just 1%. Prices have fallen back to where they were two years ago and 2009 could be the year that delivered comes back "with a vengeance", predicts IGD. "This is the window of opportunity for delivered specialists P&H, 3663 and Brakes," claims Mitchell-Fox.

The year will be tough, but there are opportunities throughout the cash & carry, delivered wholesale and foodservice sectors. Wholesalers are cash-generative businesses after all, and that's a pretty decent ace to have up their sleeve.