FDBusiness.com

The UK food and drink industry has seen falling productivity as an era of cheap labour has reduced incentives to invest in efficiency-enhancing technologies, according to new research from OC&C Strategy Consultants. The drop in productivity cost food and drink producers an extra £400 million in labour costs in 2016, bringing the total labour cost to £8.6 billion. This productivity squeeze is set to worsen as a result of the government’s planned increase in the National Minimum Wage through to 2020, coupled with an expected reduction in the supply of EU migrant labour following Brexit.

The findings are included in OC&C’s 29^th annual Food and Drink 150 report, produced in collaboration with The Grocer. The study is the only sector-wide analysis of financial statements from the top food and soft drink firms in the UK, and ranks companies by annual revenue.

Drop in capital investment to 2009 levels as consumer confidence plummets

The research finds that revenue growth for the Top 150 was down for a second year running at -0.8%, resulting from a sustained period of deflation and intense competition in the sector. Consumer confidence and capital investment have also fallen to levels not seen since the last financial crisis. Illustrating this point, investments in UK subsidiaries of larger parent companies (which now represent more than half of the Top 150 Index) were down by -9.8%, with 13 companies cutting capital expenditure by more than half.

Notably, the volume of M&A transactions, often leveraged as a key driver of growth for the Index, also fell to its lowest level since 2008, with five deals valued at a total of £0.7bn – less than half the level of a typical year.

Brexit has big implications for food and drink producers

With the food and drink industry employing the highest share of EU migrant workers among any UK sector (30%), the potential ramifications of Brexit are fuelling concern about the productivity crisis facing British manufacturers. The effects are already being felt, with returning inflationary pressure on commodities following the EU referendum triggering a devaluation of Sterling and increasing the cost of imports.

Will Hayllar, Partner at OC&C Strategy Consultants.

Will Hayllar, Partner at OC&C Strategy Consultants, says: “UK food and drink producers are under pressure from all sides amid challenging market conditions and macro-economic headwinds. With labour costs set to jump and the future status of EU migrant workers still uncertain, manufacturers must act now to understand the implications for their business and make the necessary strategic adjustments.”

Own labels pull away from brands

Yet, while the Food & Drink 150 haven’t improved on growth, they have made progress on profitability. Overall, profit margins increased by 0.8% to 6.1% – the largest increase since 1999 and near the long-term average of 6.4%. Eighty-one companies (54%) from the Index saw improved margins, with 31 achieving growth of more than 10%.

However, brand labels continued to underperform in 2016, with the gap in revenue growth versus own labels reaching its widest point since 2014 at 4.6% points. Return on capital employed (ROCE) for own label producers has also overtaken branded competitors for the first time in the 30 year history of the Top 150 Index, increasing by 2.2% points from 2015-16. Meanwhile, branded producer ROCE fell by 0.9% points, reflecting the shift in demand towards own label products.

Winners focus on consumer trends and innovation to drive growth

Within the Top 150, several companies have pursued winning strategies to achieve superior performance. Capitalising on the strong premiumisation trend in the drinks industry, soft drinks brand Fever Tree (rank 137) created a new sub-category of premium mixers to complement the growth of high-end spirits globally, helping it surge into the Top 150 for the first time with 72% year-on-year revenue growth.

Similarly, vegetable specialist Barfoots (rank 111) took advantage of growing demand for domestically-sourced vegetables by upgrading its production techniques to improve quality and operational efficiency, more than quadrupling revenues per employee from 2010-15.

Will Hayllar continues: “Sector leaders such as Barfoots and Fever Tree have shown it is possible to find impressive growth by developing strategies around prevailing consumer trends, as well as leveraging new technologies and capital. With volatile market fluctuations squeezing already fragile margins, and fresh labour challenges on the horizon, manufacturers must consider investing in technologies like automation to protect productivity and profitability against future challenges.”

OC&C and The Grocer’s Food & Drink Top 10 Largest Companies (Revenue) in 2016:

OC&C and The Grocer’s Food & Drink Top 10 Fastest Growing Companies in 2016: Companies with Sales > £200m

Companies with Sales < £200m