Some of the leading supermarkets are considering establishing or acquiring their own manufacturing facilities, in order to further increase their control of the supply chain, according to Grant Thornton.
“This is a model that Morrisons has led the way on to date, and could be the nail in the coffin for many food manufacturers, particularly the more vulnerable smaller players,” Trefor Griffith, head of food and beverage at the accountancy firm, told FoodManufacture.co.uk.
This would compound the pressure food manufacturers were already under from the supermarkets, which were squeezing margins in order to win back customers from the discounters, he said.
“Tactics have included cancelling planned new store openings, closing unprofitable stores, reducing the number of SKUs [stock keeping units] stocked, further squeezing supplier margins by slashing prices and delaying payments to suppliers,” Griffith added.
This “ongoing and increasing pressure” was one of the main reasons why the number of food manufacturers going into administration increased by 178% during the first half of 2015, versus the second half of 2014, ventured Griffith.
131 food manufacturing businesses failed
According to analysis by Grant Thornton, 131 food manufacturing businesses failed in the first half of 2015, compared with 47 during the last half of 2014.
A significant proportion of these companies were in the farming, meat and seafood sectors.
More encouragingly, over the same period, eight companies – Johnstone’s Just Desserts, J E Wilson & Sons, Bakeaway, The Simply Great Drinks Company, Ferrari’s Coffee, Ashbury Chocolates, ANA Poultry Packaging and Cooplands of Doncaster – were acquired from administration.
Griffith observed several commonalities among those food manufacturers which were thriving in the difficult climate.
“Successful businesses in the sector have typically followed several routes to market strategies. They have made an early entry into relationships with the discounters, developed the foodservice channel and expanded into export markets,” he said.
Conversely, he noted that companies that were struggling typically relied heavily on the big supermarkets as an outlet for their products.
'Failed to establish relationships'
“They may also have failed to establish supply relationships with the thriving discounters and have not reduced their dependency on the major multiples by moving into new channels such as foodservice and export markets,” he added.
He predicted that both sides of this trend would drive deal activity in the sector, as growing businesses expanded into new channels and the strong swallowed the weak.
The second quarter’s largest deal was the £1.9bn sale of Permira Capital-backed Iglo Foods (the owner of Birds Eye) to Nomad, an acquisition company set up a year ago by two consumer goods dealmakers. Nomad plans to create a sizeable European frozen food manufacturing group supplying the UK’s major supermarkets.
The company confirmed that it was in talks to acquire Findus’s European frozen foods businesses.
In June, Brazilian food group JBS, the world’s largest meat packer, announced that it was to buy UK-based poultry business Moy Park from fellow Brazilian group Marfrig for £945M.
Other deals included the acquisition of ailing British chocolatier Thorntons by Italian family-owned company Ferrero, and Valeo Foods’s acquisition of Balconi, an Italian producer of cake products, wafers and biscuits, for an estimated €200M.