Jan 10, 2021

It’s all been gravy for supermarket suppliers

written by Lisa Eason

Only two industries really did well last year: healthcare and e-commerce. Many others — travel, hospitality, aviation, entertainment, general retail, commercial property, automotive, transport, oil and gas — suffered very badly. One other big sector did hold up: food and drink production and retail. Locked down in a pandemic, we comforted ourselves by eating and drinking well.

Food and drink production is Britain’s biggest manufacturing industry, with sales of more than £100bn a year and 450,000 workers. It is an unusual sector, in that the many thousands of big and small producers are spread across the country rather than located in a few hubs, as is the case with, say, automotive. Indeed, because it is so intimately connected with agriculture, food and drink processing is much more likely to be sited in rural locations than is any other form of industry.

I like the sector because it is constantly changing, so creating endless opportunities. It is also an essential activity for life itself. How food is obtained, prepared and consumed has steadily evolved over the course of human history. Today, more than 8,000 products are launched every year in Britain’s supermarkets. Consumers want a constant stream of new tastes and textures. Ingenious, novel forms of packaging and preservation allow new brands to be created. Convenience, sustainability, health and wellness are key factors in determining success.

As with many categories of manufacturing, scale in food production has its advantages in terms of efficiency and cost. As a result, many segments are heavily concentrated — beer and bread, two I know well, are examples. However, this creates room for independent producers, who can be more flexible, innovative and typically less automated. They can focus on niche markets and make premium, artisan items. These are often the faster-growing segments, with more attractive margins.

Almost all food and drink categories are highly competitive, with plenty of branded and own-label options. Many new ventures are really just marketing exercises, as most manufacturing is subcontracted to large suppliers that produce goods for dozens of rivals. This means that a start-up requires hardly any capital or even technical expertise — what’s necessary is a clever idea, a strong name and an order from a supermarket.

One can argue that full ownership of production gives a business authenticity, more control and (in theory) better margins, but the need to keep facilities busy and meet regulations while maintaining investment in modern equipment can mean that returns are much lower than for a “virtual” brand that subcontracts its production and distribution.

Until this year, I believed that it was better to supply the food service market — hotels, restaurants, pubs, cafés, contract caterers and so forth. This is a fragmented sector that had been growing rapidly and historically had offered reasonable margins. By contrast, Britain’s supermarkets have consolidated, with a handful of players such as Tesco and Sainsbury’s dominating the market. A big order with a big chain can transform a company’s fortunes: a cancelled contract can destroy them.

Lockdowns mean that a large number of food service outlets have shut, and their wholesale suppliers of every description have been struggling. In addition to a sudden lack of sales, bad debts have become a problem as many hospitality companies have no money to pay bills. Suddenly, supplying supermarkets looks a more attractive proposition — they have been doing record business, and never go bust.

Britain has been a net importer of food for a long time. Brexit may trigger a reappraisal of our export and production potential. In segments such as whisky, salmon, chocolate and gin we do well — but compared with the Netherlands we are mediocre. Holland, a small, densely populated country, is the world’s second-ranked food exporter as measured by value. In agriculture and horticulture, it is a powerhouse. We need to learn about agritech from the Dutch.

Traditionally, farming has been a family-owned, conservative business — but institutional investors are now keen to place bets on everything from cultured meat and hydroponics to plant genetics. Improving livestock husbandry, and the way crops are grown, harvested, stored and transported, will lead to higher yields and greater sustainability.

The food and drink trade is, in all its aspects, the most fundamental economic activity. Commodity prices, the weather, changing consumer tastes, legislation and many other factors mean that it can be a volatile career — but also an intensely rewarding one.