Well over a year after the Brexit vote rocked the UK and its businesses, the chickens are starting to come home to roost in the FPJ Big 50 Companies. Many businesses were caught out by the immediate impact on foreign exchange after the referendum, while those that rely on imports or have significant dealings in Europe were hit by sterling’s fall in value throughout the year.
According to David Pattison, senior analyst at market research firm Plimsoll, one of the changes sparked by Brexit has been a move towards strategic, rather than accumulative acquisitions. “It’s early doors on the impact of Brexit. The only real impact so far has been the currency, and there have been some winners and losers in that regard,” he explains.
“We haven’t seen anything like the impact of Brexit before, particularly in Europe. How will businesses adjust? Historically acquisitions are usually the big boys buying the small, but at the beginning of the year we started to see far more strategic deals that will help a business weather the storm of Brexit.
“They often cost more – Tesco is set to pay a decent premium for Booker – but you commit because the magnitude of the gain is quite important. You have to look at how to balance the business and seek out the margins, because there will be some.”
Despite relatively high sales increases, profits are still under pressure across the whole industry, says Pattison, who notes that the biggest declines are among businesses that historically may have enjoyed higher margins. “If you’re not making big margins, it’s quite hard to fall. If you were making a margin of seven per cent and that falls to three or four that brings down the industry average.” There are several factors behind this, Pattison says, including some slightly depressing anecdotal reports of retailers seeing high margins and consequently “asking for the same for less”.
While currency volatility has perhaps had the most visible impact on companies’ accounts this year, Grant Thornton’s Ashley Clarkson says the biggest concern around Brexit is availability of workers. “The more immediate conversation is around people, access to seasonal labour and access to foreign labour more widely,” he says. “The UK economy is slowing down, while parts of Europe have overtaken us. This means foreign workers have more choice, so they are able to work closer to home.”
Another trend he sees is the continued shift by retailers to develop direct sourcing models, with the major example this year being Sainsbury’s restructure and its knock-on effects on many of the companies in the FPJ Big 50. One of the effects of this model is a consolidation of supply bases, supplemented by service provision contracts – another example evidenced by Sainsbury’s. “Service provision is a fixed margin but quite often it’s a lower margin because there’s no trading element,” says Clarkson.
“The long-term outlook is there will be mixed fortunes as retailers continue to develop direct sourcing models. We can quite easily see big companies getting bigger as retailers look for efficiencies and scale,” he adds.
Some of the biggest risers this year have been the suppliers of ‘in vogue’ produce – see avocado supplier Greencell’s impressive 38 per cent rise in sales, Freshtime’s success off the back of added-value salads or most berry companies – suggesting the huge consumer popularity in these products is now starting to pay off, with more growth likely to come in these areas.
As ever, fresh produce is a sector where only the savvy survive, and with the Brexit scenario continuing to play out, strategic partnerships, a balanced business model and hunting down the best growth sectors and margins will be the only way to weather the turbulent years to come.
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