The last few years has seen continued market volatility, with insolvencies within food and drink manufacturing remaining stubbornly high.
Thomas Swiers, director and national head of food and drink at international advisory firm, Interpath, estimates it to have increased from around 30 a month to 40 (excluding a temporary downturn during Covid - in part due to business relief available at the time).
At the same time, businesses are grappling with a fierce tempest of rapidly emerging consumer trends and structural cost pressures, such as the impact of climate change on operations.
As Swiers rightly said to me: “There’s an awful lot going on.”
When trend chasing goes wrong
Part of the persistent insolvency and M&A narrative in recent years has been driven by the boom and bust of certain categories, including craft beer and alternative proteins.
“There was a lot of money flying around, with high growth businesses effectively latching on to consumer trends,” said Swiers.
He offered All Plants as an example: “That business had geared itself up for growth up to £100 million of turnover off the back of investments, which just did not materialise and then ultimately resulted in the business’s demise.
“It’s a similar story in a lot of these businesses. In fairness to some of the business owners and operators in that space, there was a lot of investment money around – it was all growth, growth, growth. You look at the accounts and the reports for these companies, their KPIs were centred around growth and revenue growth in percentage terms, whereas there is now much more of a focus on financial sustainability and profitability.”
Little Moons was another business which became caught in the hype cycle trap, focusing its whole operation on the short-lived popularity of mochi before having to shutter its new production facility less than a year after opening it.
As Swiers explained, excessive hype can inflate valuations and distort where capital is put in these businesses. So when there is an eventual correction, it can be quite a sharp and sudden plummet – with capital allocation removed or, in some cases, businesses entering insolvency.
Little Moons is still hanging in there, but has since had to restructure, with a new CEO at the helm who is looking to gain sales growth through improving existing products and innovation, as it targets new markets and sales channels.
Growth at all costs is out
This ‘social media-fication’, as Swiers described it, is now dominating board table discussions, with executes deliberating over whether the current hot tickets on the market, such as GLP-1s, are here to stay or not.
As such, businesses and investors alike are becoming more cautious, with companies looking to grow at a much more sustainable pace.
Investors are wanting to place their money in safer areas, especially when there is such a current upheaval around trends.
Thomas Swiers, director and national head of food and drink at international advisory firm, Interpath
“If the whole business model is around what could potentially be a short-term trend, I think that’s where it’s deemed a much higher risk. The capital allocation for those sorts of businesses has learned the lessons.
“Now, businesses are very much growing at a rate which can be supported within their own means.”
Finding a sensible path forward
This in turn has pushed some start-ups to reconsider in-house manufacturing, as both investors and brand leaders have taken stock. Learnings have been taken from backing businesses based solely on a growth plan and trajectory sales outline, which never came to fruition.
For Swiers, the sensible course of action is to focus on what you’re good at. For those looking to manufacture themselves, he urges patience and caution: “Do you really want to take on the hardship of doing your own production, managing overtime, and machine breakdowns, among other things?”
But as food manufacturers have told me in the past, in-house production has made sense for them because it’s been too tricky to contract, or they’ve been sick of having their products pushed to the bottom of the priority list.
In essence, it’s about weighing up your odds – but as Swiers revealed, the overall trend is moving towards more of a co-manufacturing environment.
The rise of big players: consolidation and capital muscle
This isn’t to say we’ll see a stop to start-ups going it alone or overnight viral sensations hitting stores – Marks and Spencers is a testament to the latter – but we’ll likely see it happen more organically, while new ‘viral’ products will become the domain of larger companies who have the customer insight, NPD capability, technical capability to respond quickly – and, importantly, a safety net to fall on.
Does this mean own label will dominate the F&B scene? Quite possibly – but it also means if we do see anyone taking on the retail multiples, it’ll probably be the bigger players.
“Not to say I don’t love an underdog, but I think the winners are going to be some of the big boys. I think you’re seeing that in the consolidation that’s happening – you’ve got the likes of the Compleat Food Group buying up and expanding, backed by private equity; the Greencore-Bakkavor merger, etc. So I think those that have the balance sheet and have the strength of capital to be able to react and flex to the demands and stand up to the retail multiples [will win],” added Swiers.
Financial hangovers
Of course, the financial healthiness of a business isn’t just about betting on the right horse, factors such as Covid played a big part in the consolidation we’ve seen.
Swiers elaborated: “Whilst the proximity now to Covid is quite large, a lot of businesses came out of Covid with pretty unhealthy balance sheets and Covid-related support loans. If businesses have financed their way through loss making periods, they can have pretty fragile balance sheets. If that then goes to liquidity in a shorter runway to solve problems, that inevitably does result in insolvency.”
But we’ve also recently seen food prices slow, so does this now mean manufacturers’ own overheads come down too? Well, it depends what sector you’re in – for those operating in beef – which has seen a very sharp rise in price – perhaps not.
“It depends where you sit within the various commodities as a food producer and what level of openness and transparency on costings you have with your end market, be that the retail multiples or food service.”
What next?
Future investment will likely go into safer bets like ingredient businesses, which have more “sticky customers” and are less impacted by the sway of fickle consumer demands.
For business leaders moving forward, Swiers said it’s critical they have a really detailed understanding of where they make and lose their money in the sector and by product, channel, category and route to market.
And if you are a business trying to react to the very consumer-driven demand world of food, you’ll need to consider what you’re doing in customer insight and within strategic partnerships.
Explore how you can flex your production, be that with co manufacturing partners or within your own manufacturing, to be able to take advantage of some of these ‘hype cycles’; and look at what data points and KPIs you can obtain to prove whether something is or isn’t working.
And of course, as Swiers noted: “A good idea on cash and cash management is always important.”
