Although there has been a great deal of negative reporting about the food & drink sector this year, there seems to be general acceptance that the worst is yet to come in terms of insolvencies and job losses, with a second UK lockdown having started in November.
Food-to-go manufacturers at all levels, including large players such as Greencore and Bakkavor, saw a significant drop in demand when lockdown hit. People felt as though they had more time and tried to put that time to good use - the UK also saw a record increase in the sale of sewing machines at this time!
Fewer ready meals were bought and more cooking and baking undertaken – with a shortage in flour bags seen for some weeks. This trend did seem to be reversing in the autumn as the novelty wore thin, with big manufacturers reporting improving LFL figures - albeit still negative.
City-based food-to-go businesses have had and continue to have a very difficult time as large office environments remain largely deserted, while travel hub-based businesses have possibly seen their turnover slump the most – including large players such as SSP and WH Smith.
Many players have boosted their liquidity in this space as much as possible, with rights issues and debt renegotiations in addition to government loans where possible, to give themselves as much time as possible to see some improvement.
A number of press reports of spikes in COVID cases at food manufacturers’ factories have not helped the sector’s reputation. Some plants have been forced to close. This is obviously disruptive and costly although we are yet to see the exact impact on specific companies.
“Eat out to help out” (EOTHO) had a very positive initial effect persuading diners back into establishments – in excess of 60m meals were served. Social distancing caused capacity issues at times, but trade was reported to have been strong for a number of restaurant chains, even though it was natural that a proportion of the sales simply transferred from later in the week.
As EOTHO finished at the end of August, a number of chains reported that they would continue to offer the discount throughout September. As was occurring pre-COVID, the sector seems to be very happy to discount to achieve footfall at the cost of building and maintaining margin. Meanwhile, the VAT reduction seems to have been retained to a notable extent, which is understandable and provides a windfall to the industry.
It feels as though foodservice companies selling to schools and the higher education sector could be facing a continued difficult period, as canteen and luncheon facilities remain very restricted. LFL results are expected to remain negative for some time. When you factor in the lack of big events, concerts, festivals, Christmas parties etc, and the significant drop in tourist numbers in 2021 most foodservice companies are having a difficult time.
The M&S / Ocado merger is a notable sector transaction in recent times, and started to trade in September. Ocado has reported that trade is going very well- it was reported in October that it had already sold all of its Christmas slots.
It has not all been negative – some retailers and product manufacturers have seen double digit growth – but it is fair to say 2020 has not provided the ideal preparation for the difficulties that Brexit will present shortly to much of the sector.
The advent of CVAs, “landlord-only restructurings” in various forms, and the introduction of moratoriums will probably all contribute to the survival of more businesses than would otherwise be the case but it is difficult not to conclude that a significant increase in unemployment, a reduction in discretionary spend and trade disruptions from Brexit will ultimately result in an increase in the number of sector insolvencies in the next 18mths – 2yrs.
Sadly, with hospitality companies and non-essential shops closing on 5 November for at least a month, the Christmas trade many companies were counting on to get them through may now be lost.
One to watch is the Asda takeover, announced in early October. Wal-Mart have agreed to sell a majority stake in Asda to TDR Capital and Mohsin and Zuber Issa, the shareholders of Euro Garages. The deal is expected to complete in Q2 2021, with details not yet clear.
Written by Laura Devoir, Senior Underwriter – Credit.
Read our other sector articles:
The information contained in these articles and documents are believed to be accurate at the time of date of issue, but no representation or warranty is given (express or implied) as to their accuracy, completeness or correctness. TMHCC accepts no liability whatsoever for any direct, indirect or consequential loss or damage arising in any way from any use of or reliance placed on this material for any purpose. The contents of these articles/documents are the copyright of Tokio Marine HCC. Nothing in these articles/documents constitutes advice, nor creates a contractual relationship.