March, 2016

Opinion

What To Expect From Changing Times In The UK Foodservice And Home Delivery Environment

In his latest opinion post, Jim Prevor, the Perishable Pundit, gives his insight into what the UK food industry can expect from the recent Sysco-Brakes and Amazon-Morrisons deals, highlighting that opportunities remain open to innovative and agile businesses  
 

When we launched The London Produce Show and Conference back in 2014, we found that many producers around the world viewed the UK through a dated lens. They thought of four big customers as the only opportunity.

In time, however, the very presence of the event brought more attention to the UK, and soon producers began looking at the market with new eyes. They saw the hard discounters gaining market share and the more upscale, experiential British retailers growing. They began to realise the wholesale markets represented a not insignificant opportunity. As they looked, they realised that the foodservice business had blossomed in the UK as London became a world culinary capital. More careful observation also made it clear that online vendors represented a significant opportunity.

They also took note of the American interlopers, Whole Foods Market and Costco, which, though small, represented a growing market opportunity.

Now there have been two recent announcements… one represents an immediate shift of the American position in the market from a private equity owner to an operating company, while the other is a flare across the British landscape reminding the industry of the potential of another American interloper.

The announcements, of course, are that Sysco has agreed to acquire Brakes and that Amazon has agreed to distribute certain products supplied by Morrisons.

Sysco-Brakes

Why is Sysco buying Brakes, and what does it portend for the UK market?

The purchase is not really a surprise.

In the US, Sysco’s expansion is constrained because of anti-trust consideration. Its attempted acquisition of US Foods in the US was turned down by regulators.

So Sysco is highly motivated to grow outside the US.

With the acquisition of Pallas in Ireland a few years ago, the next logical place was the UK.

The deal probably won’t close until July.

As far as “strategy”, we can assume Sysco will allow Brakes to grow as it can. Now with the advantage of a much larger company providing financial and operational support, tested technology, etc., initially Sysco won’t change much but it will have a much longer time horizon on investment than Brakes’ previous private equity owners did. In the long run this shifting of time horizon is the big change. A competitor or a supplier that is always looking to sell will inevitably be unwilling to do things that a player in it for the long-haul will be willing to do.

Sysco will begin to search internally for best practices and explore synergies to help each other. On some key items, Sysco may look to do consolidated purchasing, say for bananas, to get the best price. And Sysco will be focused on food safety, wanting to always be world class.

Sysco will definitely assess Brakes’ private label line to see if flavour profiles, pack sizes etc., can be consolidated for greater scale to reduce manufacturing costs.

If there are foodservice operators that have a presence in both countries, Sysco will reach out and offer a contract to cover both places – say with Marriott hotels.

It is likely Sysco will task the management of Brakes with growing both organically and by acquisition. After all, the company has a great track record of buying smaller distributors. In Ireland, Sysco followed up the Pallas acquisition with Crossgar Foodservice. In the US, Sysco purchased a company called Fresh Point to be its dedicated produce house since the company found the full line houses were not focused on selling produce and, often, not capable of doing the job well.

Brakes has subsidiaries such as Pauley’s and Wild Harvest, and both are sufficiently produce focused that they have exhibited at our London show. Whether these specialist organisations are sufficient for Sysco’s reach or whether the company feels there is market space to scale up and will look to acquire a major UK produce specialist, it is probably premature to say.

In the US, Sysco has also purchased various specialist distributors, both in product – seafood, produce, etc. – and in niche – Asian foods, etc. If there is a big distributor with a dominant place in, say, Indian food in the UK, Sysco would be interested in buying it.

In time, if Sysco has some success in the UK, it will look to make an acquisition on the continent and might task Brakes with identifying European opportunities.

In general, Sysco is an enormously successful and well-resourced company. Is it more than ten times the size of Brakes. So there are few things Sysco can’t do – if it is committed to doing them.

But Sysco is a large, publicly-held company and so it is constrained in its ability to move quickly, concerned about quarterly earnings presented to Wall Street, etc.

Reasonably projecting, competitors probably have a year-and-a-half while merger issues distract the Sysco/Brakes team to sharpen their reputation and capabilities. Then one can expect a tougher competitive environment than in the past.

Amazon-Morrisons

As far as Amazon goes, the news is a boost to Morrisons and a threat to Ocado but, long term, the point is not the specifics of this deal; it is that Amazon is incrementally expanding in the food business in the UK, growing its geographic footprint and broadening its product range.

What gets lost is this: Tesco’s total market capitalisation is about 14.5 billion GBP, while Amazon’s is 186.5bn GBP!

For the moment, this support by the market means Amazon can invest substantially in building its UK platform. Long term, this disparity in market value indicates that the markets see the future more in clicks than in bricks.

And for vendors across Britain and around the world, the message is clear. The times they are a changin’ and the opportunities are there to be seized by those both innovative and the agile.

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