Low growth limiting appeal of the food and drink to external investors

The growth of the food and drink sector has been slow compared to other industries in recent years, according to Shaun Browne, a managing director and co-head of corporate finance, Europe, at Houlihan Lokey, who believes this is limiting its appeal to external investors.

Recent data shows that investment in the F&B sector declined by 30.5% between 2019 and 2023.

Browne emphasised the need for ongoing investment in the food and drink sector to maintain competitiveness, ensure high standards of food hygiene, reduce reliance on manual labour, and attract external investors by demonstrating profitability and efficiency in a challenging macro-economic environment.

Browne noted that investment is particularly crucial for the food and drink (F&B) sector for several reasons. First and foremost, all F&B companies require ongoing investment to remain financially competitive. For instance, if a competitor upgrades to a faster and more efficient production line, they can serve customers better and at a lower cost. Companies that fail to invest risk losing market share and eventually the prospect of closure.

“Investment is particularly important in the F&B sector to ensure adherence to the highest standards of food hygiene, which is essential for maintaining consumer trust and regulatory compliance,” Browne said when asked why investment important for the food and drink sector. “It enables the development of new products that can attract and excite customers, thereby staying relevant in a competitive market.

“Investment also helps in reducing over-reliance on manual labour. In a period where labour markets are increasingly competitive and wages are rising, investing in automation and technology can reduce dependency on manual processes, which can become challenging to hire for and manage effectively in the long term.”

Investment is falling as investors have a diverse range of options for investment across different industries, Browne’s analysis highlighted.

“They are economically rational and will invest where they are likely going to generate the highest returns for the least risk,” he reasoned. “As there is a finite pool of investment capital available, projects in the F&B sector must compete with other industries to attract investment by demonstrating competitive returns relative to risk.

“Crucially however, the UK F&B sector is experiencing slower growth compared to other industries, with contributing factors including stable overall consumption, intense retail competition driving down prices, and consumer preference shifting towards lower-cost private label products amid economic challenges. Investing in F&B manufacturing is comparably less attractive than other sectors in the current environment, which has led to the shortage of capital flowing into the industry.”

To attract future investment in the sector, F&B companies need to show potential investors that their money will enhance profitability.

“This involves increasing sales volumes or reducing manufacturing costs while maintaining pricing levels. Enhancing market competitiveness through innovation in product development, operational efficiency, and meeting consumer demand for quality and sustainability is crucial,” Browne continued who foresees challenges continuing for businesses for the next couple of years?

Inflation in raw material input costs and energy costs following the invasion of Ukraine in 2022 squeezed the profit margins of most F&B companies. This was exacerbated by a delay in passing on these higher costs to retailers and consumers, significantly impacting profitability from mid-2022 to mid-2023. Food and beverage prices increased sharply during this period causing a spike in overall inflation figures as a result.

“But, these price rises enabled F&B companies to rebuild their profit margins, thus positioning themselves to become more attractive investment propositions in the future,” Browne assessed. “As investors begin to observe improved financial results from these companies, their prospects for attracting investment are on the rise.

“Nevertheless, investors maintain a rational approach and expect F&B companies to demonstrate that financial investments can effectively boost future profitability. If they cannot do that, investors will invest elsewhere.”

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