Positive momentum in UK foodservice – the independent perspective

Of course, smaller independent operators may be partially insulated from the threat of food price inflation where so-called ‘local sourcing’ is a key mantra in service delivery. However, given that only 15% of all fresh fruit and 55% of vegetables sold in the UK are grown at home, with the majority of the balance coming from the EU, margins could inevitably be squeezed during 2017 if sterling remains weak. It is likely that efficient procurement and robust infrastructure, areas in which many operators invested over the last three years, will increasingly come to the fore in separating best-in-class players from the competition.

Nevertheless we have seen further consolidation in the independent marketplace in the last 18 months with Servest acquiring national contract caterers Accuro and Catering Academy, supporting its continuing brand transition and wider growth in the education, hospital, and healthcare sectors. In the same period the Brookwood Partnership has merged with CH&Co and Elior has acquired Waterfall Catering Group from Lloyds Development Capital, thereby continuing the invigoration of its UK business following the acquisition of Lexington Catering in 2014. At the smaller end of the market, other players have strengthened operations via integration (e.g., the acquisition of Pride Catering by IFM operator Churchill Property Services) or diversification (e.g., Harbour & Jones’s acquisition of education specialist Principals Catering Consultants and ABM’s purchase of the business and assets of care sector operator Talkington Bates Midlands). These transactions demonstrate the value accretive nature of M&A by savvy buyers who can generate substantial cost synergies or enhance brand strength through acquisitions, while driving top line growth and generating purchasing savings. 

Further afield, the private-equity market continues to see attraction in best-in-class investments following Partners Group’s acquisition of Vermaat in the Netherlands, while Lloyds Development Capital has made great strides with Amadeus, the event-catering operation of the NEC Group, which grew turnover by £10 million in its last financial year and delivered £6.2 million in earnings before interest, taxes, depreciation, and amortisation.

At the end of 2016 Sodexo also signalled its intent to reinvigorate foodservice activities in the UK through two quick fire acquisitions, purchasing the fresh food procurement firm PSL, as part of its wider strategy to identify data led businesses that can add value to its clients, followed by five public contracts operated by Peyton and Byrne which will continue to be operated under the incumbent brand banner. Reinvigoration of local foodservice expertise is very much back on the agenda for larger operators and 2017 is likely to be another interesting year for the sector.

The Foodservice Growth Report 2016

2016 represents the fourth year of AlixPartners Foodservice Growth Report (FSGR), reviewing the financial performance of the top 20 independent UK operators over three years and encapsulating wider analysis of sector trends since 2010. In 2016 we saw a mix of new entrants, exits and re-entries to the index.

While several operators reported a tough B&I marketplace last year, the subsector continues to represent the core proposition of members of the index, with B&I or event services delivered by 70% of the top 20 in 2016, including winner Global Infusion Group. However, given the lagging nature of statutory reporting, the makeup of our index is perhaps no surprise, with 2015’s trend towards a relatively buoyant UK market continuing to support growth through B&I and event expenditure across the industry in 2016. In light of more-challenging economic conditions and macro uncertainty in the UK, the index may have a different composition in 2017, as other, potentially more-defensive subsectors return to growth.

On one level, we may have already started to witness this transition as index participation by education specialists has continued to grow, from 25% in 2014 to 35% in 2016. That growth is likely to continue in 2017, with such businesses as Elior, Harbour & Jones, and CH&Co broadening their horizons by way of specialist acquisitions in order to diversify and drive growth. 
 

It appears infrastructure investment in a relatively buoyant market has proven worthwhile with both annual revenue and compound profit growth increasing for the top 20 index members in 2016 when compared to prior periods. Across the index, average annual revenue growth reached 14.7% last year versus 9.9% in 2015 and against an average 10.3% in the prior three reporting periods, highlighting robust top line performance across the board in 2016.

During periods of recurring annual growth, the delivery of further incremental gains become increasingly challenging due to strong prior year comparatives. However, independent operators have continued to make market share gains in 2016, successfully converting new contracts into profit and at higher margins. Average profit CAGR across the top 20 in 2016 was 28.1% (15.7% in 2015), arresting the decline in compound growth that had been observed in 2014 and 2015.

With the 2016 index comprising a higher proportion of niche or premium operators and with strong top-line growth driving economies of scale across purchasing and central overheads, average operating margins across the top 20 also increased, reaching 8.2% (versus 6.0% in 2015), the highest average annual margin tracked since 2013.

Given the uncertainty caused by Brexit and the introduction of the national living wage, 2017 may prove to be a more challenging period for the foodservice sector. Specialist or niche service operators may continue to thrive and the more traditional B&I players may look to broaden their horizons via diversification to de-risk contract portfolios. Regardless, it is likely that the best-in-class players will remain key M&A targets for the larger consolidators seeking to drive returns from operating synergies or rebuild foodservice revenues in the UK.