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Market Report: Food for growth By Ceri Jones
Whatever other pressures there may be on a family budget - money is always spent on food. UK food service grows, however uncertain the times, irrespective of terrorism, market corrections, rising interest rates, or the pound's According to Euromonitor, the number one produce consumed by volume in the UK is root vegetables - mainly potatoes at 5.8 million tonnes. We also eat 2.5 million tonnes of sugar and sweeteners, 2.8 million tonnes of meat, 4.2 million of fruit, and just 0.9 million of fish and seafood; and consumption in each category has grown in line with expectations for the last nine years. Packaged foods are also growing steadily, with only three exceptions - sales of oils, tinned foods and packaged soups dropping off, as health-conscious consumers attempt to cut their fat intake and eat more fresh food. The snack bar market grew exponentially between 2001 and 2002, while noodles have been the growth phenomenon of the last two years.
Threats to the market But if demand is steady and predictable, one of the biggest threats to the market can be legislation. Restricting the advertising of so-called junk food when children are most likely to be watching TV could impact on certain high fat or sugar foods; although the link, identified by the Institute of Medicine in Washington associating obesity in children with watching TV, might reveal more about their sedentary lifestyle than the influence of ads on what they eat. Safety issues can produce a bombshell, such as the culling of turkeys at Bernard Matthews on fears of bird flu, or Cadbury Schweppes' (CBRY) recall of one million chocolate bars because its chocolate crumb was contaminated with a rare form of salmonella - a PR fiasco which analysts say could cost up to £40 million in lost sales. But these crises can be recovered from surprisingly quickly. In 2005, Premier Foods (PFD) was forced to recall 474 lines containing the carcinogenic Sudan food dye that had contaminated a chilli powder used to make Worcester sauce. The company toughed out the storm with a rationalisation programme. Its acquisition of RHM last year marked its return to glory, making it the UK's largest food supplier with sales of £2.6 billion and a brand portfolio that includes Ambrosia, Bisto, Branston, and Crosse & Blackwell. Digesting RHM has not been easy, but is slowly producing cost savings and synergies. Last month the group announced profits up by 12%. The shares are also supported by a prospective dividend yield of over 4% and a fairly undemanding prospective PE of around 16. Agricultural commodities Another issue to watch is the cost of agricultural commodities. Global sugar prices have been falling this year as a massive surplus accumulates despite increased use of sugar cane for making ethanol. This will help profitability of the Silver Spoon, Billington and Ovaltine lines at Associated British Foods (ABF), which ironically were hit by soaring sugar prices only last year. Frozen and chilled products maker The Real Good Food Company (RGD) even bought sugar group Napier Brown Foods to guarantee its supply. The group's profits rose 35% last year, but the shares still languish on a PE of 6.6. Wheat is having a tough time, however. In February Carr's Milling (CRM), a hotchpotch of flour milling, animal feeds, agriculture fertilisers, and oil sales, warned of a significant deterioration in its flour margins owing to higher wheat prices and energy costs, particularly in the compound feed business where higher input prices have not been offset by an increase in sales prices. However, Carr's is a solid business and a possible recovery play. Convenience food Several companies, such as chilled convenience food specialist Uniq (UNIQ) and collagen products manufacturer Devro (DVO), which might otherwise be ripe for takeover by venture capital, have pension deficits that have got in the way. Uniq disposed of its spreads and Belgian salads businesses last year for a total of £288 million, which has been used to pay off a loan, but pushes the prospect of profits further away than ever. It has now changed its year-end - often a bad sign - from March to December, and reported a pre-tax loss of £58.5 million in the latest nine months, which is even worse than the £45.3 million deficit in the previous 12-month period. Devros' recent approach, believed to have been from John Magnier's Swiss investment vehicle Acomita, may also have floundered because the sausage skin maker is struggling with variability in the supply of raw materials, escalating energy prices, and currency exchange between the dollar and the Czech Koruny; although demand for sausage and meat production is still strong. Soft drinks In the soft drinks market, private equity firm Permira has taken a 14% holding in Britvic (BRIC). The drinks giant has been adding new products to its Robinsons fruit juice portfolio as it looks to capitalise on sustained consumer interest in the health trend in the UK and profit from last year's £7.5 million investment in an aseptic production line, which allows it to create soft drinks without the use of preservatives - a strong selling point in a highly competitive and mature market. The investment followed the launch of Fruit Shoot H2O, which quickly became market leader in the children's bottled water segment. But the company still has a lot of exposure to the stagnating fizzy drinks market through its licences for the Pepsi and 7Up brands in the UK. Britvic's slumping profits contrast with rival IRN BRU maker AG Barr (BAG), which has made record profits on the back of a policy of buying up various healthy drinks brands such as Strathmore Mineral Water Company to diversify away from its reliance on sugary, fizzy drinks. Packing One to watch is meat packing company Hilton Foods, which is coming to market soon. One of the best established meat packers in the UK, the company currently packs half of Tesco's (TSCO) beef and lamb and wants to use the funds to expand into Europe and into organic and premium lines. Last year, it generated revenue of £527 million and a pre-tax profit of £15.5 million, increases of 17.6% and 13.7% respectively on the previous year, having benefited from the consumer trend across Europe towards convenience and one-stop shopping.
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