Foodservice SECTOR REVIEW
by Azeem Ahmed, Director
THE SECTOR REMAINS RESILIENT IN THE FACE OF PROLONGED BREXIT UNCERTAINTY
2019 has proven to be a challenging environment for UK businesses and consumers alike with the economy almost tipping into recession for the first time since 2009. The extended period of economic and political uncertainty continues to bite with a Brexit deal remaining out of reach and the UK set for yet another general election before 2019 closes.
Alongside the uncertain macroeconomic backdrop, rising food and drink cost pressures coupled with ongoing labor cost pressures1 has made the going tough for many operators. However, the prevalent trends of healthy, fresh, sustainable and convenient food continue to transform the entire food and drink industry and provides opportunities for operators that relentlessly focus on setting themselves apart from the rest of the competition.
I remain highly impressed at the resilience of the sector and continued growth of the operators, which is clear evidence of the ability of smaller, nimble independent operators to successfully innovate and provide a proposition that delivers to customers’ demands.
Our report focuses on the fastest-growing operators in the UK market, who while margins and top-line growth were below that of the prior year, continued to prove resilient. However, an analysis of all potential index participants and larger listed corporates in the UK sector indicates that 2018 was more challenging for the wider market than the review of the top 20 might suggest.
"With no clear outcome in the Brexit negotiations, businesses have been left in the dark about the eventual impact on food prices and labor shortages once the UK leaves the EU."
-Azeem Ahmed, Director, AlixPartners
For example, an analysis of more than 50 corporates active in the UK foodservice marketplace, highlights that average margins contracted in 2018 are for the third year running down from 5.9% to 5.8%, with average revenue growth also decreased from 14.8% to 9.6%. This includes large global players such as Compass and Sodexo, who often struggle to grow given their scale and maturity in Western markets. It also highlights the impact the well-run independent market has had on industry leaders, slowly chipping away at the large corporate contract bases. Nevertheless, several smaller independents have also suffered, with 53% of those outside the top 20 reporting a decline in margins last year.
However, 2019 proved to be a buoyant year for M&A with major investments by private equity in WSH and CH&CO respectively, the return of Compass to the acquisition trail in UK contract catering, and the highly strategic acquisition of City Pantry by delivery powerhouse Just Eat. This confidence in acquiring in the UK contract catering industry is indicative of the resilience of the sector to perform during turbulent times, and of the potential to build value through acquisitions in the sector.
With no clear outcome in the Brexit negotiations, businesses have been left in the dark about the eventual impact on food prices and labor shortages once the UK leaves the EU. While a storm may be brewing for the entire UK economy, the resilience of the foodservice sector means that innovative and well-managed operators are well equipped to navigate the choppy waters ahead.
M&A TRENDS – TRANSACTION ACTIVITY 2019
Despite the uncertainty that Brexit has created, 2019 has been an incredibly busy year for M&A activity. The year has been characterized by the confirmation of private equity’s confidence in the sector with major investments in two of the leading independent caterers, WSH and CH&CO. In the midst of the parliamentary chaos of the doomed Brexit negotiations in early January 2019, CD&R, a major US private equity firm, invested in WSH.
Equistone soon followed suit with its investment in CH&CO, the second-largest independent contract caterer. Credit should be given to CH&CO’s ability to successfully execute its sophisticated strategy of bolt-ons with the tuck-in transaction with Inspire Catering, just before the transaction with Equistone was consummated, followed by the carve-out acquisition of Gather & Gather from Mitie plc and finally the investment in Company of Cooks last month. Despite there being a number of potential acquisition candidates, bolt-on deals require care to execute as there are a number of hurdles from identifying a target to successful completion, not least convincing the owners to sell to you given the number of potential suitors and options available.
Compass’s acquisition of Dine Contract Catering, the B&I caterer, is notable as it also signaled a return to acquisitions in the UK contract catering sector, with the acquisition being the first for Compass in the UK since Cygnet in 2011.
In addition, Just Eat’s acquisition of City Pantry points to the potential for disruption in corporate catering from delivered-in solutions. While we may expect competition from technology-enabled platforms to attract smaller corporates, it will be interesting to see whether a B2B delivery platform can compete on a larger scale or with the very high culinary standards that an experienced contract caterer can provide.
REPORT TRENDS – 2019
Margin pressures that were anticipated across the UK market have begun to manifest themselves in our latest top 20 dataset. Nevertheless, we have continued to observe recurring sub-sector growth trends in the last two to three years, which we expect to continue through 2019 and 2020.
Indeed, the resilience of the pureplay B&I market is impressive, maintaining its 20% of the overall end-market proposition (or 45% alongside B&I/education operators) of index members. It remains a testament to the B&I sector that it has been able to win business and expand with an entrepreneurial approach to client delivery.
A number of venue and event operators also appear to be performing well with 25% of the top 20 operators operating in that segment. The UK business of international operator Delaware North has entered the top 20 for the first time on the back of new contract wins.
Several familiar names have continued to secure places in the top 20, which is highly significant given the need to maintain service levels and continue to innovate to stay ahead of others.
We've had two ever-present members of our index for the past seven years, led by WSH, the independent sector’s standout player, which surpassed £877 million in annual revenues in 2018. Last year, WSH maintained its operating margins of 7.9%, on the back of 5.9% sales growth, which highlights WSH’s ability to successfully pass through costs of products and services while providing clients with high-quality food and services tailored to their demands.
Our other ever-present, Wilson Vale, continues to be one of the leading lights in the sector. The operator achieved in excess of £33 million sales in 2018 while operating Source: Company statutory accounts margins have been maintained above 10%. This is highly impressive as the business has been able to continue to grow through winning additional contracts while maintaining one of the highest operating margins in the sector.
The Proper Food and Drink Company has taken the top prize this year, achieving very strong top-line growth through winning notable sporting contracts such as Formula E and The Ryder Cup in France and also acquiring Absolute Taste. The performance of The Proper Food and Drink Company is commendable given the internal re-organization process of merging the activities of its three catering companies.
At a margin and compound-profit growth level, a comparison of the top 20 index to last year’s participants (see figure 3 in PDF) highlights a slightly weaker reporting period with average margins down from 7.2 to 6.5%. This, as ever, is likely to have been partially driven by end-market mix, which can skew annual comparisons given that membership varies year-on-year, but the average compound profit growth has tempered slightly from the prior year of 34.3 to 22.5%.
While we have already noted that the wider dataset reported increasing margin pressure in 2018, by contrast the top 20 members delivered stronger average annual revenue growth and margin performance when considered in isolation, down to 11.6% (2017: 23.4%) and 6.5% (2017: 7.2%) respectively, with particularly strong top-line growth reported by Vacherin, Aspens, and Eventist, among others.
Given the uncertainty and pressures circling the UK at present, 2019 has proved to be a challenging year for the sector. 2020 is likely to continue to prove difficult but the upside could exist if a resolution can be found to the current Brexit impasse. However, we expect operators to demonstrate resilience and the most innovative operators will still find ways to continue to grow profits for another year.
1Catering Services in the UK & Foodservice Services in the UK – IBISWorld