The annual review of the UK's top 150 food and drink companies, conducted by OC&C Strategy Consultants for The Grocer Index 2009, highlights the challenging economic conditions faced by these companies, with both inflationary pressures and recessionary concerns impacting the sector. The report emphasizes that while larger, branded companies have managed to navigate these challenges relatively well, smaller branded firms and those in the own-label sector have experienced more difficulty.
Key Findings:
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Cost Inflation: The biggest challenge for the sector was the rise in commodity prices, which increased by approximately 19% in the last year analyzed, adding an estimated £5.7 billion in additional costs. While producers initially absorbed much of this cost, they were later able to pass the majority of it on to retailers, who then passed it onto consumers.
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Margins Impact: Despite the increase in costs, overall margins for the top 150 suppliers did not decrease significantly, only dropping by 0.1 percentage points to 6.8%. This resilience is attributed mainly to the large, branded businesses, which managed to maintain and even increase their operating margins from 9.1% in 2007 to 11.4% in 2008. In contrast, the margins for smaller branded companies decreased by 0.8 percentage points to 7.5%, and for own-label suppliers, they dropped by 1.1 percentage points to 2.5%.
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Sales Growth: Large companies outperformed smaller ones in terms of sales growth, averaging 9.5% compared to 7.7% for smaller players.
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Margin Performance Disparity: The performance disparity between branded and own-label suppliers was stark. Two-thirds of branded businesses reported growing their margins last year, whereas the same proportion of own-label businesses saw their margins slip.
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Strategies for Success: The success of the larger branded companies can be attributed to their ability to negotiate aggressively for price increases, maintain investments in marketing and branding to retain consumer loyalty, and benefit from recent restructuring and investment programs that improved facilities, streamlined operations, and reduced underperforming brands.
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Impact of Restructuring: Many of the largest own-label businesses initiated restructuring processes during the year, which had a significant impact on their profit margins. The process was two years behind some of the branded players, resulting in a notable effect on their financial performance.
This report underscores the varied impacts of economic conditions on different segments of the food and drink industry in the UK, highlighting the resilience of large, branded companies and the challenges faced by smaller brands and own-label suppliers.
