What’s in store for our food and drink producers

The UK food and beverage (F&B) industry has long been considered to be a fragmented scene and some sector analysts will be looking at the market and thinking that 2023 might be the year when we start to see more consolidation.

The sector is one of the key strengths of the South West economy, with a GVA of £2.08 billion (source: Food & Drink Federation) – only just behind the South east on £2.09 billion and ahead of the West Midlands’ £1.78 billion; Wales with £1.7 billion, and Northern Ireland at £1.07 billion. The industry employs some 29,500 people on a patch stretch- ing from Gloucestershire to Cornwall.

The argument for consolidation often starts from an interest in taking out costs and achieving operational efficiencies. That makes sense when there is concentration in the customer base – there are, after all, only so many supermarkets – but the case for change can also be part of a growth strategy.

Management teams often want to reprioritise resources and focus their energies where the business can play to its strengths or respond to consumer trends, such as the demand for more products related to health and well-being and faster growing sales channels.

There is plenty of sentiment around that 2023 will continue to be very challenging.

Our own research on the Cut Back economy, conducted with Retail economics, showed that 41% of consumers expect the squeeze on living standards to impact their spending habits until at least the end of 2023. Faced with rapid inflation, ris ing interest rates, and higher taxes, household finances are being tested from all angles, affecting consumers’ ability to fulfil their wants and needs. trefor.a.griffith@uk.gt.com

It has to be said that consumer spending is only one of many factors influencing the sector and is difficult to predict, sometimes proving to be counter-intuitive and contradictory.

Yet the reality is that it, and other headwinds, facing food and beverage businesses may drive a higher level of distressed transactions in the F&B sector, particularly where businesses have high levels of debt and more commoditised products.

Some market analysts do believe that there is excessive negativity about the fundamentals of UK PLC and too much hype around the waves of industrial action that are linked to the cost-of-living crisis. They believe that whilst we are being tested as a country, these challenges exist elsewhere too. The crisis will pass – the only question is when?

We see these sentiments play out in the South West and elsewhere in terms of mergers and acquisitions. The level of deal activity around F&B firms certainly dipped in the second half of 2022 as a number of private equity houses and management teams took a step back to reflect.

Timing is a powerful dynamic. There are deal processes that got underway last year that were not completed. And others where shareholders made the decision to sell but decided not to start the process. And then there is a third group who probably would like to explore the opportunity to sell but are not doing it now because of the market conditions.

Some will be expecting a bounce, similar to the one we saw when coming out of the first Covid lockdown, which led to a flurry of completed transactions.

None of us have a macroeconomic crystal ball but we do all understand that things change. The turmoil in the global economy caused primarily by the war in Ukraine, which has generated unprecedented volatility in the food supply chain, will not last forever.

But for now, I think the South West’s food and beverage industry wants stability more than anything else. Stability breeds confidence and drives the actions that create jobs, growth, and opportunity. There are challenges ahead, but the food industry has coped incredibly well with the many hurdles that have appeared over the last few years.

The industry in the South West is world class and is obviously of vital importance to the economy and all of us as consumers. The new year is a time to roll up our collective sleeves and go again.