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Three lessons for the food industry for 2014

Posted on: January 13th, 2014 by Will Carter

Looking back at our work in the food industry during 2013, we are struck by a number of key learnings which we would take into the New Year.

We have been lucky enough to work closely with some of the companies delivering best practice in different areas of their businesses, but have also watched others from a distance who have learned the hard way and suffered huge costs through getting things wrong.

And the themes of these three lessons?

Firstly, that skillful management of price and consumer value in an era of volatile commodity costs can be a source of very significant competitive advantage.

Secondly, that despite many observers viewing developed western food markets like the UK, as “mature” and therefore “low growth”, we have witnessed smart innovation and brand stretch delivering strong double digit growth even in very well developed categories.

Finally, we have again witnessed the fruits of strong preparation, and the bear-traps of a lack of preparation when businesses or brands are being readied for sale.

Beginning with price management then, 2013 has seen a softening of some commodity prices, but shifts in global demand levels and harvests hit by climate-change mean that raw material costs continue to be very volatile; a trend which we would expect to continue into the future.

Against this backdrop, we have seen the huge costs (both financial and non-financial) which manufacturers face if they get cost recovery wrong. Once again the trade press has carried headlines of brands and portfolios of brands facing delist from major customers as a consequence of failed negotiations on pricing and input cost recovery. The fallout from such failed negotiations often lasts years before sales volumes achieve pre-delist levels.

At the other end of the spectrum, we have witnessed manufacturers who have put value management at the heart of their commercial processes. In trade interviews we have heard these suppliers lauded for adding value and profitability to their categories, whilst others are vilified for hampering the retailer imperative of offering great consumer value during recessionary times.

And what of growth in our “mature” UK food market?

In 2013, we have heard first-hand nervousness amongst some international investors over the low growth prospects in developed western food markets like ours, and yet we have seen some spectacular successes in achieving growth – even in seemingly “mature” categories.  Several of the business we have diligenced have driven strong volume growth, or value growth well ahead of inflation through value-add mix management, innovation and brand-stretch.  And then in December came reports of the scale of the growth achieved by Mondelez with their Cadbury Dairy Milk brand.  Here was a mature, market-leading chocolate brand, in a mature chocolate confectionery market, delivering not just modest levels of growth, but a full 14% of growth, adding over £60 million of sales to take total UK revenue to over £500 million.

How was this achieved?  It was not the result of any “bet-the-ranch” or mould-breaking innovation, but rather good old-fashioned, well-executed, close-to-home product development and brand-stretch.  Launches like CDM’s Marvellous Creations and CDM with Oreo should act as a lesson to all of us on the growth attainable with simple, good-quality marketing and on the returns which multi-national powerhouses can generate, not only via cost synergies, but also through growth when acquiring strong and responsive “local” brands even in seemingly mature markets.

So onto the third lesson for 2014; one which we’ve been pushing for some time now.

It concerns preparation for the sale of businesses by shareholders and management teams alike. In 2013, Food Strategy Associates has been involved in a number of business and brand sale processes, and we’ve witnessed a number of others.  Without doubt, these experiences have reinforced our belief that preparation and readiness on the part of the vendor is the key to success.

The smoothest process we witnessed at close hand involved a business where the CEO had been actively laying the foundations of a sale process for at least two years prior to its kick-off if not longer.  His senior executive team had been deliberately “over-clubbed” to afford sufficient resource to run the day-to-day highly effectively, as well as laying the groundwork amongst the bidder universe and the investment banking community.

The process ran like clockwork and delivered to all expectations, whilst elsewhere in the UK’s food industry, several less well prepared processes foundered and aborted without a disposal being completed.

The consequences of a failed process through lack of adequate preparation is always highly damaging both to Management and Shareholders and yet it is a pitfall we see businesses risk falling into time and again.

In 2014 we will again look out for the best (and worst) examples of these and other lessons from our industry.

If you’d like to hear more of our thoughts on and approach to these and other issues please don’t hesitate to contact us.

A happy and prosperous 2014 to all.

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