The fight for survival rages on in food & drink. And this year’s OC&C Top 150 reveals that the UK’s biggest manufacturers are standing tall. By Catherine Wheatley

Food and drink in 2010 was not a place for the faint-hearted.

The high hopes for economic recovery faded as consumer confidence remained low and the banks held tightly on to their purse strings, lending far less than many said was needed to rekindle the good times. In the wake of the global recession the war for shoppers’ diminishing weekly grocery budgets raged on.

Yet for Britain’s 150 biggest food and drink suppliers, the fact that turnover grew by just 4.5% in 2010 the lowest figure for seven years and a sharp fall from the 7.7% growth recorded the previous year can in hindsight be seen as a time affording the industry some breathing space.

True, many of the giants were forced to take decisive action numbers one and three on our list, Associated British Foods and Premier Foods, pressed on with comprehensive restructuring plans but analysis by OC&C Strategy Consultants reveals that producers’ operating margins rose 50 basis points to 7% thanks to a slowdown in the rising cost of raw materials in the first six months of 2010.

And it was predominantly the giants of the industry that outshone smaller challengers when it came to operating margins recording average margins of 7.8%, compared with the 5.2% recorded by their smaller rivals.

Being the little guy in the land of the giants is never easy. It was even tougher in 2010. Save for a few agile small fry that successfully scrapped for sales, the giants outperformed the market. Of the top 20 firms by turnover, Cadbury, Britvic and Boparan all posted double-digit sales increases. Average revenue growth at companies with sales of more than £500m was 4.7% against the 3.8% recorded by those with revenues of less than £500m.

“Size and financial muscle have helped the bigger companies through a difficult time,” says OC&C partner Will Hayllar. “They’ve found it easier than smaller firms to raise bank finance for new product development and that gap has widened over 2010. Scale economies have helped them to cut costs and reinvest their savings in products and marketing.”

Increased NPD in tough times
Innovation continued despite the chill winds. “We saw increased innovation because of the tough times, not despite them,” says Terry Jones, director of communications at the FDF, which puts the amount invested by British food and drink companies in R&D in 2010 at more than £1bn. “The sector’s resilience is down to its ability to produce efficiently and respond to changing consumer tastes.”

Companies of all sizes have embraced NPD in a bid to stay ahead of rivals. United Biscuits 11 on the list gave us mini Hob Nobs, Weetabix (44) launched its child-friendly chocolate cereal, Nichols (137) splashed out on Cherry Vimto, and Heinz (22) introduced its Heinz Beanz fridge packs. The latter delivered a particularly strong performance, recording sales growth of 4.3% with an operating margin of 17.3% while boosting sales across its entire range of ketchup, beans and babyfood products thanks to the ‘It Has To Be Heinz’ campaign.

NPD helped Aunt Bessie’s producer Symington’s break into the Top 150, hitting the 145 spot in 2010. “We have a big engine room of NPD in terms of brands and people,” said David Salkeld, CEO of Symington’s. And he prefers to build the business through NPD rather than synergies. Indeed, In the 12 months to August 2011, the private equity-owned company launched 282 new and 244 refreshed products including four new Aunt Bessie’s gravy flavours.

Meanwhile, another giant, United Biscuits (11th place), won praise for effective cost-cutting and capital management. Owned by Blackstone and PAI, the private equity players, the McVitie’s and KP Nuts manufacturer has driven down costs by introducing ‘lean’ manufacturing processes across all its sites. A hike in capital investment from 3% to 4% of revenues is helping to improve efficiency and health & safety. As a result, turnover rose 3.8% while profits were up 8.8%.

Smaller suppliers cannot hope to compete with the financial firepower and superior efficiencies that larger companies enjoy. So how can they compete? Entrepreneurial companies such as Tyrrells Crisps and Gü Puds have used nimble thinking and speed to market to develop new products and attract fresh consumers. “Retailers tend to be supportive of such companies because they are bringing something new to the category, cranking up the competitive pressure and helping to keep the bigger players in check,” Hayllar observes.

Precision targeting
You have to chose your weapons wisely if you’re going to slay a giant. AG Barr (59), for example, took on the titans of soft drinks with niche brands such as Irn-Bru and precision targeting in its key heartlands of Scotland and northern England. NPD investment and marketing have been focused on labels with niche appeal, including the exotic juice label Rubicon. The company raised turnover by 10.4% and boosted profits by 9.6% last year.

Family-owned Bettys & Taylors of Harrogate (124), manufacturer of traditional tea and cakes, also delivered strong growth to both the top and bottom lines by successfully weighing up risk and reward before engaging with the giants. The company concentrated much of its investment in established brands like Yorkshire Tea and was rewarded with 15.9% growth in turnover.

But support for successful products was balanced by measured expansion into new markets, such as the relaunch of the Betty’s Tea Shop website. Giants always have their weaknesses and savvier smaller players have done well to exploit these in larger, more mainstream rivals’ portfolios. For example, soft drinks supplier Nichols has used Vimto’s wacky Seriously Mixed Up Fruit campaign to reach a younger audience.

Others have realised the importance of having big friends the supermarkets and restaurant chains on their side when taking on the giants. Prepared fruit and salad supplier Natures Way Foods has worked closely with McDonald’s and Pret a Manger to understand and deliver exactly what they need.

Crucially, these smaller suppliers use their ability to act swiftly and decisively to outstanding effect. Natures Way was the first to understand and respond to demand for sweet and crunchy salads in the UK, for example, while English Provender spotted an opportunity to attract new young customers and rapidly brought its Very Lazy range of chopped ingredients to market.

Brands, big and small, have successfully competed against own label using price promotions. But according to OC&C’s analysis, the balance of power is starting to shift. Hayllar points to the 4.5% combined turnover growth of own-label producers such as Greencore, Northern Foods and Bakkavör only slightly behind brand-focused businesses at 4.6% and an increase in such companies’ average margins from 2.2% to 5.6% over the past two years.

Sainsbury’s Taste The Difference, Tesco Finest and other supermarket own-label premium products have become trusted names in their own right, he adds. “Brands are having to work at being innovative and engaging to justify the premium price.”

A perfect storm
The wise are working hard indeed. Coca-Cola Enterprises’ Open Happiness campaign a bid to appeal to hard-pressed consumers by emphasising the brand values of optimism and authenticity helped lift turnover by 3% last year. Haribo Dunhills turned in growth of 15.2%, an achievement managing director Herwig Vennekens puts down to Haribo’s quality and value, emphasised by increased marketing spend. “In difficult times, consumers will trust the brands they know and love. If you have a pound to spend, you spend it wisely,” he says.

Of course sales were only part of the battle. As the year wore on, commodity inflation started to rise steadily again, cranking up pressure on margins. After a respite in which suppliers saw margins improve, the prices of rice, oats, palm oil and soya all soared in the second half of the year. By the final quarter, 76% registered a rise in the average cost per unit of output, against just 18% reporting a fall.

“The end of last year felt like a perfect storm: modern manufacturing is extremely complex and just about everything that could increase in price did so,” says the FDF’s Jones. As a result, between the first half of 2010 and the first half of 2011, margins for firms that report quarterly fell from 7.7% to 6.8%, according to OC&C.

Evidence suggests the industry is learning how to manage price fluctuations, however. When commodity inflation first kicked in back in 2005, the entire supply chain was slow to respond. In the following year, suppliers, unused to asking retailers for more money, saw their margins shrink. Food and drink producers have been catching up ever since: last year their average margins were still 1% below where they were five years ago, according to OC&C.

But lessons have been learned, and an arsenal of cost-cutting tactics, operational efficiencies and good old-fashioned price hikes to maintain profitability is now in wide use. “This time both producers and retailers are more aware of what’s happening and understand how to actively manage rising prices,” says Hayllar.

Some companies are stripping out costs by restructuring. Associated British Foods, Britain’s biggest supplier, improved margins by 9.1% last year with a series of operational revamps such as moving the production of Twinings tea from North Shields to Poland and shifting Ryvita production to a new facility in Poole.

Others, meanwhile, are focusing on driving down fixed costs. Heinz, for example, has shaved 13% off its annual energy costs with an initiative to capture waste heat at its Kitt Green factory in Wigan. Last year HP Foods, a subsidiary of Heinz, recorded the highest operating margin at 32.9%.

Slings and arrows
Such focus on efficiency will need to continue. An FDF poll in the final quarter of 2010 found just 12% of businesses were optimistic about the outlook while 30% felt more pessimistic than in the previous three months.

With good reason. Consumer sentiment and disposable income have only worsened in 2011. OC&C notes a 0.9 percentage point decline in the operating margins of leading food and drink players in the first half of 2011 to 6.8%, citing increasing input costs. Broker forecasts for margins at companies including Premier and Britvic indicate growth of less than 0.5% in the coming financial year. Consensus forecasts only a modest pick-up in consumer expenditure through the remainder of this year and next. Commodity futures prices suggest that inflation will continue for the rest of this year, followed by a gradual decline in 2012.

In the coming months the giants will have to draw on their size and financial firepower to acquire rivals, restructure inefficient operations and refresh brands. And the smaller challengers will have to respond quickly and cleverly to what the market throws back at them too.

The lowdown on the giants

Nestlé UK (7)
Turnover: £1.63bn
Expanding into new markets and adding value to existing brands through healthier or ethically sourced variants has protected Nestle’s margins. Last year it launched the Jenny Craig diet programme in the UK, while Kit Kat’s switch to Fairtrade cocoa ensured supply security.

Coca-Cola Enterprises (6)
Turnover: £1.67bn
Defying the downturn, annual sales of Coke, Diet Coke and Coke Zero smashed through the £1bn barrier for the first time in Britain last year. Investing in a wider choice of products and sizes and promoting brand values of optimism and authenticity went down well with consumers.

United Biscuits (11)
Turnover: £1.23bn Decisive responses to changing consumer trends, such as halving the saturated fat content of McVitie’s Digestives and Hob Nobs, have helped improve turnover at UB. The firm has also boosted efficiency by increasing capital investment, which stood at 3% of turnover last year.

Boparan Holdings (20)
Turnover: £838m
Fast becoming a behemoth of British food and drink. Founder Ranjit Singh Boparan is on a buying spree. His latest acquisition earlier in 2011, Northern Foods, would have put Boparan well in the top 10 with combined revenues of £1.5bn, had it been completed in time.

Heinz (22)
Turnover: £768m
Proved its mettle by protecting its category-leading positions throughout 2010. Innovative packaging formats and new product design such as the Heinz Beanz fridge packs have been key, as has the investment in the ‘It Has To Be Heinz’ marketing campaign.

 

The giant slayers

Haribo Dunhills (112)
Turnover: £113m
Offering consumers a guaranteed bag of happiness has been key to confectionery business Haribo’s recent success. Last year the company introduced £1 packs, supported by a larger marketing spend. It offers quality and value shoppers trust, says MD Herwig Vennekens.

Natures Way Foods (131)
Turnover: £95m
Collaboration is delivering long-term growth at Robert Langmead’s bagged salad and prepared fruit business. The firm has focused on tailored products for a few big clients such as Tesco and McDonald’s. Strong links with farms have improved supply chain efficiency.

Nichols (137)
Turnover: £84m
The manufacturer of Vimto has refreshed parts of the market larger drinks brands cannot reach. Vimto’s Seriously Mixed Up campaign attracted a million newcomers and its new cherry flavour delivered sales of £3.7m. Last year’s purchase of Ben Shaw also aided revenues.

Symington’s (145)
Turnover: £76m
Aunt Bessie and Ainsley Harriott were never A-list, but their ranges of granulated gravy and flavoured rice have delivered solid returns for Symington’s. Its focus on ambient foods has proved a smart one, as its recent successful launch of dried Campbell’s Soup has underlined.

The English Provender Co (149)
Turnover: £72m
Very Lazy may have been theme in a £1.5m marketing campaign, but it hardly describes the condiment company’s business approach. Since late 2009 it has rolled out new recipes and revamped packaging in a bid to attract young consumers.