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Big is beautiful again

Huge diverse conglomerates fell out of fashion in the 90s, but the foodservice industry has put mergers back on the business agenda. By David Read.

In the 1970s and 1980s (when I was in my formative business years) the world was dominated by conglomerates – huge collections of diverse businesses with limited connectivity. I joined one, fresh out of university in 1979, in a hotel business owned by a brewing company called Bass.

In those days the prevailing wisdom was that having a wide array of companies in different industries enhanced the bottom line. Poorly performing investments were offset by others doing better. By diversifying, the risks inherent in a single market were mitigated. In addition, businesses owned by conglomerates had access to internal capital markets, enabling faster growth at lower cost.

Since the 1990s it has become clear that the size of conglomerates can actually damage share value (known as conglomerate discount). The sum of the value of the individual companies held by a conglomerate can easily add up to more than the valuation of the whole business – by anywhere up to 15%, in fact.

In the 17 years since the millennium. specialisation has been the watchword – particularly in the food, drink and hospitality sectors. Genuine giants have emerged – McDonald’s, Tesco, Compass, Nestlé, Coca-Cola and AB InBev, to name but a handful. These businesses have successfully combined strong organic growth with the acquisition of highly complementary businesses, where the scale, skills, technology and expertise of the acquiring business can be exploited in the companies that are gobbled up.

Nowhere has this been more prevalent than in the contract catering sector, where the emergence of Sodexo, Compass, Aramark, Elior and BaxterStorey has led to significant market domination and overseas expansion. Recent deals involving Bill Toner’s Host Management (first with CH&Co and then more recently with Harbour & Jones) have continued this trend, as did Elior’s recent acquisition of Waterfall Catering.

But some more surprising strategies have also emerged in recent times – some of them successful and others apparently less so, but all seemingly driven by the increasingly blurred lines between market verticals in our sector.

Last year Tesco sold its Giraffe restaurant chain to Boparan Restaurants for an undisclosed sum, having earlier bought the business out of private equity ownership for £49m. Boparan is of course Ranjit Boparan, founder and owner of the enormous 2 Sisters Food Group, which in 2011 snapped up Northern Foods, and now has a handy portfolio of restaurants including FishWorks, Harry Ramsden, Cinnamon Collection and Ed’s Easy Diner. So in three years Giraffe moved from traditional casual dining ownership to major food retailer to major food manufacturer. Until the past few years, this kind of integration within the food value chain was extremely rare.

These deals signal a new direction, where value comes from applying scale, capital, technology and expertise to adjoining or complementary sectors. These are often deals inspired by the “disruptors” such as Amazon and Deliveroo. The latter’s success has inspired businesses such as Uber with no historical experience of food to get involved.

And in June Amazon announced it will buy Whole Foods for $13.7bn (£10.6bn) at $42 per share – a 27% premium on its previous day closing price. The buyout, due to be concluded this year, will massively expand Amazon’s operations as a physical rather than online retailer.

Another example of a new direction in the search for value was the proposed merger between Tesco and Booker. The earlier diversification by Tesco with Giraffe was a defensive reaction to falling sales in the company’s large out-of-town stores, and was at the vanguard of a plan to create destination-style experiences for shoppers. It took just three years for this plan to fail and be reversed.

The Booker merger is much more offensive in nature. The merger of the UK’s largest and most powerful supermarket with the UK’s largest cash-and-carry wholesaler (under the Booker and Makro brands) – which also owns foodservice suppliers Chef Direct and Ritter, and the convenience retailers Budgen and Londis – is formidable. As well as giving Tesco immediate access to the “out of home” food market, the big prize is the extra power it gives both of these businesses in their upstream supply chains. There will be significant efficiencies to be realised there, but time will tell whether this will be the good news for manufacturers and growers that Tesco and Booker claim.

There are also times when the match might not be one made in heaven. When Unilever rebuffed Kraft Heinz’s approach, the former saw no synergies between the two corporates. Unilever was committed to building “brands with purpose” within a truly sustainable business, and Kraft was committed to cost-cutting (though it has since announced a huge new corporate social responsibility programme).

But watch out for more blurring of the edges in the years ahead. Who will buy Deliveroo, for example? Will it be Amazon or Uber, or perhaps Just Eat? Or will it be more leftfield, perhaps with players such as Sainsbury’s, Sodexo or Ocado entering the fray? Could we see the contract caterers enter the casual dining or quick service restaurant world more seriously? How long will it be before the dots are joined up and we start to see home delivery of hot food using supermarket restaurants as a host? Will a major drinks player enter the home delivery market? The possibilities are almost endless.

In this new and more fragile environment we need to ensure that strong leadership delivers these changes in a sustainable and environmentally acceptable way. Only this week there was renewed focus on the gig economy, fuelled by the likes of Deliveroo and Uber, thanks to the Taylor review. Whether the system allows employees freedom and flexibility or is unfair and under-regulated remains unclear, but change is happening fast and the government is clearly keen to try to catch up.

What is clear is that the old paradigm of focused growth by doing “one thing well” is fast in the process of being ditched in the face of a new and exciting range of diversification – where capability and technology are the new drivers in the search of value. The years ahead will be fascinating.

David Read is chairman of Prestige Purchasing.