Top of the food chain worry list
Compliance has always been an issue, but it’s consistently a top three worry now. The hidden costs of Lockdowns keep coming in opportunity costs: reduced covers, fewer sittings, lower footfall on Friday/Mondays, and increased no-shows. And then there are the cost hikes from increased staff absence, ingredient inflation and scarcities. Some will blame Brexit, others vaccines or bankers, but that is not the issue, the Lockdowns are proving to have a long and damaging tail, especially for the food industry in its many guises.
There are auditors, technology teams, and consultancies all helping, but the cumulative effect of these issues since 2019? Sure, some big retailers can still afford to run compliance teams and their on-costs nationwide, but how on earth are smaller teams in catering, hotels, restaurants, pubs and clubs supposed to cope?
Two drivers
Government stats showed 84k firms in restaurants and food service activities in ’19, while they now show 93.4k businesses active. The vast majority of those 9.3k new business are in tiny teams (sub 10 employees; +7.3k). The headlines are all around the decline in medium-sized firms (-2.9%), but there are +2k new businesses in the 10-50 employee bracket too. While the turnover in this sector declined by £5.1bn between ’19 and ’22, over £4.5bn of that was in the larger firms. The 10-50 employee business sector actually grew by almost £1bn.
The macro picture is growth in everything from pop-ups to boutique businesses, while the high street economics continues to depress opportunities for the ‘chains’. The new teams will be delighted to find anyone able to package and sort the compliance burden from day one too, and plenty do.
Clearly the cost pressures on the larger businesses are acute and a macro -12% hit on the top line (’19-’22) can threaten to wipe out profitability altogether in many cases. It is driving the propensity of food businesses across the board to outsource all or parts of their compliance processes. Sometimes these are whole compliance teams coming out of, eg public sector bodies, but more commonly it’s in ones and twos. The food safety industry is heavily populated with refugees over time from M&S, Nestle, Mondelez and ABF among others, not to mention teams of ex-EHOs. Today there are over 140 food safety specialist teams offering everything from software to training, and auditing to certifications, and that’s before you look at the generalist HR/HSE compliance teams like Peninsula, Mentor, or Worknest.
Are you being well served?
These changes are driving industry shifts. Publishers, for example, typically don’t fare well here as their market (typically in-house compliance teams) contracts. Technology teams spring up both as independents and within consultancies offering ever more ingenous apps and tools. It’s early days too, but IoT (internet of things) and AI plays are surfacing already too. Innovative plays from audit automation to supply chains are plentiful. Insurers and regulators continue to drive fear of non-compliance with inspection routines and the threat of fines. Certification teams also find their generic approaches challenged by niche and industry-specific ones, while major supply chain players insist on controlling their requirements if necessary to the exclusion of the generic supply chain certifiers.
So what? Well it means the big brands, the NSF, SAI and even BRC brands are not always the port of first call any more. NedIntel’s research focused on eight sectors – from agriculture, wholesale, manufacture and laboratories, through retail, to the food service sectors of catering, pubs & clubs and restaurants and hotels. Manufacturing and retail are well served while labs and agriculture are relatively poorly served with independent safety teams. These two sectors are the most likely to see little or no profitability among suppliers, and it takes a long time to establish a reputation there too. The good news, however, is that the food service sector is the one which is both the most volatile economically, but also the best served. There are 89 firms focused on the sector which ranks ahead of manufacturing in scale (£56m). It is also growing the fastest of any sector at 11-13% growth pa.
It’s reassuring. When a market is sustaining three or more serious new entrants each year in technology or consulting services supporting food service businesses in their compliance chores, food businesses can relax. The calibre of the backers for this industry is impressive too. There are eight listed companies, 3 seed/VC players, six major private equity teams, four overseas conglomerates, and three large not-for-profits. Teams like Cinven, KKR, Hg and Goldman know their stuff and don’t invest in these markets short term. A whole new £300m+ market has the industry’s back.
The real wrangle
That’s not the half of it. The food safety services market will grow well to 2030 and beyond, but the real wrangle now is between technology solutions and apps, management systems, and supply chain services. While interest rates are high, the investment from private equity will remain muted, although the technology potential here is significant. Ideagen snapping up Qadex was a case in point. The nedLegal Report shows that given the investment tolerances and timings, there is certainly all to play for. The big brands will continue to do well, notably NSF, Eurofins, FoodChainID, CampdenBRI, and BRCGS, but look out for FoodAlert, FSSI, Shield, Acoura, Envesca, Monika and Qadex too. The regulatory headaches may be piling up, but so too are the solutions from the smiling faces in the collage accompanying this piece.