The larger food and drink companies in the UK have seen their average margin flat-lined at an all-time low for the past two years, shows the 'Food & Drink 150 Index' published by OC&C Strategy Consultants and The Grocer. This development is, according to the research, mainly caused by pressures from the supermarket landscape. Smaller brands have however been more successful in dealing with the changing grocery retail environment.
The Food & Drink 150 Index is an annual report, published by consulting firm OC&C Strategy Consultants and UK grocery sales magazine The Grocer, in which the financial performance of the top 150 food and drink companies of the UK are reviewed.
This year’s edition shows that the financial performance of the assessed food and drink companies is mixed. Revenue has on average increased by 0.2%, from 5.6% in 2012 to 5.8% last year. However, the research also shows that the companies have seen their average margins stabilise at 5.2% over the past two years, which represents an all-time low.
Pressure from supermarkets
According to consulting firm OC&C, the flat-lined margins are mainly caused by the tumult in the supermarket branch. While supermarkets are trying to save their business and oppose the discounters by slashing prices, their margin is at the lowest level in almost 30 years. The grocery retail industry has seen a drop in growth from 3.7% in 2012 to 2.8% in 2013, a development that is putting increased pressure on food and drinks companies. “Grocery retailers are continuing to put a lot of margin pressure on food and drink producers,” says OC&C Partner Will Hayllar. “But with producers’ margins at an all-time low, there is little scope to squeeze them any further, leaving producers under more pressure than ever before.”
The report also highlights that the smaller brands have been more successful, with profits increasing by 0.2% from 8.3% in 2012 to 8.5% last year. Commenting on the development, Hayllar says: “The challenging operating conditions have meant smaller, nimble players have seen the biggest improvements in performance in this year's rankings, showing that mobility is outstripping size in the current climate.” According to the research, the smaller brands owe their success to their ability to react quickly to the changing grocery landscape and shopping habits, by product differentiation, rebranding, premiumisation, and the entry into new categories.
Tips for surviving
For food and drinks companies to succeed in this changing environment, Hayllar has the following advice: “Engaging consumers by providing genuine differentiation on products is proving hugely successful, with brands like Yeo Valley and Tyrrells great examples in this space. Brands are also reaping the benefits of rethinking their product, price and pack architecture to reflect changing shopper habits in different types of stores. Finally, developing in-house capabilities to react quickly to the changing grocer environment, such as infrastructure that allows for a more flexible supply chain, will also be essential as conditions continue to evolve.”