Helena Drakakis looks at how wholesalers can manage impending industry acquisitions.
Drop. Cover. Hold on. It’s the age-old advice given to people caught in an earthquake. If you’re lucky, you’ll survive the tremors but there are still aftershocks to navigate, then the long-term fallout.
Wholesale witnessed its own seismic event this year – the Tesco/Booker deal. To date, there are no casualties, but if it is ratified, what will emerge is a very different industry landscape.
More recently, Sainsbury’s £130m takeover talks with Nisa have confirmed the predicted ripple, with experts warning that the sector will be unrecognisable in three years’ time.
“Consolidation – long-predicted – is now under way with a vengeance. Expect more mergers and takeovers because there is now a serious race on for a share of the fastest-growing convenience sector,” warns David Gilroy, managing director of online retail platform Store Excel.
Fuelling it, in part, is a static food and drink market causing a fierce battle for market share. Growth is being bought at the expense of margins. There probably isn’t a supplier, wholesaler or retailer now wondering how they might win the race.
“If you listen to the rumours, there will only be three people left,” Bestway’s Martin Race told the recent Better Wholesaling Summit.
So, will the remaining multiples throw their hat in the ring? Which wholesalers will merge with other wholesalers? And will buying groups consolidate?
“There are many variables,” says Federation of Wholesale Distributors (FWD) chief executive James Bielby. “It’s difficult to predict anything and major events like the Tesco/Booker deal make it even more difficult to predict the future.”
The behavioural move away from the weekly shop, higher consumer expectations on price driven by the discounters, and increased delivery expectations by virtue of digital platforms such as Amazon have all placed pressure on the multiples. In wholesale, declining tobacco sales aren’t being easily replaced.
The Tesco/Booker deal, hailed as the best in town, is a win on many fronts. “The big win is on trading terms, then technology, followed by Tesco added-value services and Tesco scale applied to Booker,” says Gilroy, adding that this deal has put Nisa’s weaknesses in more of a sharp focus, as the market tightens.
According to ex-Landmark Wholesale managing director Martin Williams, a worst-case scenario would be if the deals currently on the table happen and a slew of other reactive tie-ups follow – such as if a multiple also comes forward to buy struggling wholesaler Palmer & Harvey.
“Britain is a nation of shopkeepers, but there’s a danger that nation will become multiple-owned,” Williams says.
However, barriers to a multiple takeover do exist, not least because most independents are family-owned, family-run and family-staffed.
“Many convenience stores have a weekly turnover of less than £20,000 and this is uncomfortable territory for the multiples,” Store Excel’s Gilroy points out.
Likewise, a compelling offer from a ‘super-wholesaler’ may not match compliance in the retail estate. Take chilled and fresh, for example: an outstanding proposition must also run alongside investment, as many retailers would need to be educated how to present, range and merchandise that proposition, not to mention how to manage the waste from it.
Williams is keen to point out that “there are some fantastic independents out there doing brilliant work servicing their community. There’s a lot of good things going on with quality stores, investment and technology – it’s not all doom and gloom.” However, he adds: “There is this black cloud.”
If you talk to retailers, consolidation is largely good news, provided the finer details of any deal benefit their business. Resistance does exist, but Mo Razzaq, who runs a Premier and Family Shopper store in Glasgow, believes mergers address the reality of 21st century retailing, not least the pressures of legislative changes.
“Some retailers reacted badly to the Tesco/Booker deal until the Sainsbury’s/Nisa deal was on the table. Now they see the opportunity because it will improve them, improve their range and price and improve their profits,” Razzaq says, adding that under any franchise model, retailers can vote with their feet if they are dissatisfied.
Providing major players entering the convenience channel don’t push for lock-in packages, the FWD’s Bielby believes the opportunity for wholesalers lies in retailers having that choice, especially if stock procurement benefits are not passed through the supply chain.
“If retailers don’t like the offer given to them by Booker and Tesco, they can go somewhere else. If other wholesalers get their offer right, work with suppliers and get distribution right, there’s an opportunity there,” he says.
This point is also made by Today’s Group retail director John Kinney, who confirms that the group’s support of independent wholesalers in servicing independent retailers will continue “for as long as it’s viable to do so”.
He adds: “We have to ask, what have we got that everybody else seems to want? Are we making the most of it ourselves before other people take share of it?
“If anything, this should make us more keen to maximise what we do and make sure we are servicing our customer base fully.”
Suppliers who have already looked to wholesale to minimise risk through increased market diversity may concentrate more effort in the sector. “Consolidation has to be a massive worry for suppliers. Prices being driven down in the hands of a few players could, arguably, further increase suppliers’ desire for market diversity, and more reliance on wholesale as a route to market,” says Williams.
Smaller-scale consolidation has been happening for some time, with larger wholesalers picking off cash & carries or delivered wholesale businesses. America’s Sysco Corporation acquired the Brakes Group for £2.2bn last year, while Bidfood has bought four regional foodservice wholesalers since 2012.
“What we are seeing is classic market consolidation – natural selection in action,” says Gilroy. Wholesalers and buying groups are likely to be forced to consolidate or collaborate further.
For the FWD’s Bielby, diversification may also be a way of mitigating the impact. “There are around 40,000 convenience stores, but 350,000 caterers, so another opportunity lies there. It’s not about exiting the retail market, because there will always be a need, but wholesalers need to be asking: how can we service retailers? How can we service foodservice? How can we service contract catering?
“That’s the thinking that will be happening, rather than sticking with an existing model that may not be right going forward.”
This view is tempered somewhat by Gilroy, who warns foodservice is “no panacea”. He adds: “These customers are a higher cost to serve and expect higher standards. Investment in vehicles, refrigeration and stock means there are upstream costs for uncertain downstream rewards.”
Wholesalers that have concentrated on finding their niche and are doing it well are already ahead. Parfetts, for example, restructured last year to drive efficiencies and focused on customer service. Likewise, Dhamecha is winning on a no-frills, price-driven model.
According to Gilroy, others must scrutinise their offer: “The market is still over-supplied by those players without an effective customer proposition and those inefficient by today’s new exacting parameters will perish,” he warns.
Whatever shakes out, the age-old advice of ‘drop, cover and hold on’ will give way to ‘adapt, evolve and thrive’. In what form and at what cost remains to be seen.