Fierce competition and squeezed margins prompts M&A activity in food sector
A fiercely competitive environment and increasing bargaining power of major retailers is putting food producers under growing pressure, reports trade credit insurer Atradius.
The Atradius Market Monitor report on the food industry reveals that while in general the global food sector is performing reasonably well, the margins of many food producing and processing businesses are being squeezed – particularly among smaller businesses.
Combined with the sector’s susceptibility to sudden downside risks, such as commodity price volatility and health issues, food businesses face a difficult trading environment. Atradius cites this as the catalyst for new mergers and acquisitions within the sector across global markets in order to actively mitigate the pressure on margins.
“Positively, food is fairly resilient to business cycle downturns but other factors in play are taking their toll on the health of smaller producers and processors,” commented Stuart Ramsden, Commercial Director UK & Ireland of Atradius. “Efficiency and low production costs are necessary for sustaining a competitive edge, sales growth and margin improvement. To achieve this, alongside further economies of scale and increased bargaining power are best achieved through concentration. Therefore, it comes as no surprise that in many markets merger and acquisition activities and a subsequent consolidation process have accelerated among food businesses.”
Other highlights of the global report include:
Belgium: Increased exports are key for further sector growth – although with the UK being a key export destination, the outcome of a future post-Brexit deal will be eagerly awaited.
Germany: The German food retail market is the most competitive in Europe, with structurally low market prices due to the overwhelming power of the leading food retailers and discounters – accounting for 67% of the German market.
The Netherlands: The value of total food sales is forecast to grow an average of 2% per year until 2025. However, SMEs are under pressure and are expected to lose market share.
USA: Consumers are increasingly health conscious with natural, organic and gluten-free foods being strategic areas of new product focus, at the expense of packaged/convenience food manufacturers.
Stuart Ramsden continued: “Doing business overseas brings with it a host of new challenges – whether the influences of the local economy, politics or market changes such as new consumer trends and habits. UK food exporters need to be aware of the performance of the sector around in the world in order to mitigate potential risks and seize any opportunities that may arise.”
Read the full Market Monitor report and access a suite of free publications and business advice at www.atradius.co.uk. You can also follow @AtradiusUK on Twitter.