Making a success of uncertainty: Highlights from Ben Clarke’s speech to the PwC Food Forum

22 February 2017

One of the great things about the Food Forum is that it gives leading figures from the sector the chance to step back and look at the bigger picture. One of the best examples this year was Ben Clarke’s presentation in early February.  As the former CEO of Burton’s Biscuits he has a special insight into that segment of the industry, as well as some intriguing thoughts about where food as a whole is going.

The three ‘discontinuities’

He started by talking about three ‘discontinuities’ he sees in the global economy right now.  The first is the growing gap between the haves and the have-nots, and the consequent rejection of globalisation which is fuelling the surge in populism, and producing seismic shifts like Brexit and the US election result. The second discontinuity is the discrepancy between food industry valuations and likely growth prospects. For example, profits growth in the top 16 global consumer groups has averaged only 2% in the last five years, and half of them have actually seen sales fall, but at the same time their valuations have doubled and the majority are trading at record PEs. And the final discontinuity is the tension between price deflation for the consumer, and cost inflation for producers. As Ben put it, “I’ve never seen a margin crunch like this before.”  The result may well be more tie-ups like Tesco and Booker, as the UK supermarket sector is forced to evolve a different and more cost-effective business model.

Predictions for the food industry

Ben had some other predictions for the industry as well. First up, that Private Equity investors will continue their recent shift in emphasis from retail to goods within the consumer goods sector. At the same time, they’ll become more aggressive and lower their expectations in relation to returns. This is a big deal because of the sheer volume of cash ready to invest – anything between $150bn and $500bn. Another prediction centres on new market entrants. It’s not just that ‘the Chinese are coming’ and with even more confidence since Trump's election; there’s also a whole new class of players, some of them with vast resources at their disposal – from Family Offices, to sovereign wealth funds, to other forms of ‘hybrid capital’.

There’s also the ongoing impact of the ‘3G effect’ – in other words, the new model for the FMCG sector pioneered by the Brazilian PE group 3G Capital, which has already been applied to the mega-merger of Kraft and Heinz. It’s about ruthless cost cutting, and equally ruthless competitiveness. As Ben put it, “The ‘3G effect’ will drive more transformational strategic deals this year, either done by them, or by other funds trying to emulate them, though thus far, no-one else has managed to make a success of their model. Those new deals will create significant carve-out opportunities.”  With the news of the potential interest in Unilever by Kraft Heinz this prediction was realised within two weeks of Ben making it.  The effect of this will be seen around board tables of the larger FMCG players for years to come, particularly in discussing the budget processes.

What does it all mean?

What does all this change and uncertainty add up to? Ben’s answer was very clear: going forward, there will only be winners and losers - the middle ground will disappear. And the winners will be those who can demonstrate three critical success factors, the first of which is leadership.  “Strong, clear and ambitious leadership has never been needed more and those who display it will be those who win.” The second critical success factor will be innovation (no surprises there): “At Burton’s, we doubled EBITDA in four years by out-innovating the competition. These days, you have to innovate to even stand still. One way to do it is by leveraging your capabilities in adjacent segments.” And finally, international expansion. “The UK food industry is very poor at this - France and Germany and Nordics are much better at adding value to primary products and we need to do same. Brexit may be creating uncertainties but every successful entrepreneur there’s ever been has seen uncertainty as possibility. The devaluation of sterling is a gilt-edged opportunity to build profitable international growth.”

We started the food forum nearly 20 years ago to enable food brands and manufacturers to share ideas on important topics of the day. We have had a series of excellent high profile speakers like Ben in that time. Please let me have any ideas for the next Food Forum speaker.  Many thanks to Ben for his contribution.

To read more articles on global trends in the consumer goods M&A market please see here.

Neil Sutton |  Chairman, Corporate Finance
Profile | Email |  +44 (0)20 7213 1075

 

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