Price remains the key battleground for the major grocery multiples

Despite recent figures confirming that consumer price inflation (CPI) is falling, price remains the key battleground for the major grocery multiples. Tesco’s recent management reshuffle at its UK operations, now being led by chief executive Phil Clarke, will only intensify its focus on driving down prices as it seeks to claw back market share. Whilst this will cause Tesco’s rivals to retaliate, it will be the suppliers who will really feel the pressure – as their customers squeeze them further on price – driving down margins.

Scale is essential for food manufacturers, to ensure they can enhance operational efficiencies, which help to preserve margins, and to strengthen relationships with an extremely powerful customer base. Consolidation is the key to achieving scale quickly – and a number of deals in the food sector have occurred in recent months which confirm this, such as Theo Muller’s acquisition of dairy group Robert Wiseman and Young’s purchase of Cumbrian Seafoods.

Another factor which may help to accelerate the pace of consolidation in the food sector during 2012 is commodity prices. The price of raw materials has generally followed a downward trend from the peaks experienced during 2010, and many had anticipated a continued moderation this year, helping to alleviate some of the pressure on manufacturers’ profit margins.

However, whilst prices of wheat, cream and butter have fallen considerably over the past 12 months, the wholesale price of eggs has more than doubled in the same period, following a change in EU legislation banning the use of caged eggs. Oils are another group of commodities where prices are rallying upwards. The price of key industry staples such as palm, canola and rapeseed oils have all risen, in some cases reaching 9-month highs in recent weeks. These spikes, while most likely to be relatively temporary, will cause further pressure on the margins of food manufacturers.

So how will the M&A market fare in 2012? We expect further consolidation to spur a pick-up in M&A activity this year. Private equity continue to be attracted to the sector by the relatively stable cash flows of food companies, the opportunity to realise synergies through further consolidation and to sharpen the focus of such businesses. But keep a lookout for international trade players – who will be attracted in particular to some of the larger assets that come to the market. Not only do such deals offer the ability to capture a strong foothold in the UK, they also provide a real opportunity to transfer well developed technological & distribution skills and brands into their core fast-growing emerging markets.

 


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