Food for thought: growth in the ingredients industry

The average food ingredients company in the UK over the past three years has seen sales decrease, a fall in profits and contractions rather than growth marking many areas of business. On a positive note, the food ingredients industry has succeeded in reducing debt levels over the past three years. A new report released this week takes a closer look at the movers and shakers in the UK food ingredients industry and analyses overall growth and profitability of this niche industry.

Focusing on the 141 leading companies operating in the food ingredients industry, the report from The Prospect Shop affirms that two key players - Associated British Foods and Tate & Lyle - currently dominate the market, each boasting a turnover of more than £4 billion (€6.2bn) in 2000/01. The remaining companies fall within a turnover band of between £140 million and £736 million.

The other companies to feature in the top ten by turnover (2000/01) are Unilever Bestfoods UK, Rank Hovis, Kerry Ingredients, Pura, Napier Brown & Co., Archer Daniels Midland, Cerestar UK and Anglia Oils. Only two of these companies could exceed the report average pre-tax profit margin of 6.5 per cent - Associated British Foods and Unilever - with three reporting a negative figure, Tate & Lyle, ADM and Cerestar (UK).

Pura and Anglia Oils were the only two companies to see year-on-year improvements across the report period. Asset utilisation figures were slightly more encouraging, with half of the companies surpassing the industry average of 1.40. In 2000/01, five companies recorded increases in this ratio - Tate & Lyle, Kerry Ingredients (UK), Pura, ADM and Cerestar UK. Kerry Ingredients (UK) extended these improvements across the whole report period.

Moving to the top ten companies by pre-tax profit margin for 2000/01, Unifine Dohler (UK) heads up the list, and it is otherwise the only food ingredients distributor to appear in the table. Other companies making an appearance include: Overseal Foods, British Sugar, Sensient Flavours, Burns Philp (UK), Rayner & Co and HP Foods. According to the report, five companies reported increases in their pre-tax profit margin between 1999/2000 and 2000/01, and of these, Burns Philp (UK) and HP Foods also managed increases between the previous years.

Four companies exceeded the report average for asset utilisation but only HP Foods witnessed increases in the latest year of analysis, in addition to the other years.

The report reveals that gearing levels are encouraging, with six companies reporting debt levels below their net worth and the industry average in 2000/01. McCormick Foodservice was the only company in the top ten companies by pre-tax profit margin for 2000/01 to report zero borrowings at any point during the analysis period.

Continuing the positive feel, sales growth, according to the report, is promising with seven of the eight companies with figures available bettering the industry average of minus four per cent. Rayner & Co and Holgran achieved the highest sales growth.

On a less than optimistic note, all of the four main profitability ratios have deteriorated over the three years of analysis. The pre-tax profit margin has fallen from 7.3 per cent in 1998/99 to 5.4 per cent in 2000/01, only to rise slightly in 2000/01 to 6.5 per cent. Return on capital mirrored this pattern, dropping to 12.5 per cent in the final year of analysis. Return on total assets and return on investment followed the trend, finishing the three years on 9 per cent and 13.1 per cent respectively.

The Prospect Shop reports that efficiency ratios have also suffered over the past three years reviewed. In 2000/01, each pound of assets generated £1.40 (€2.19) of sales, a slight decline on the 1998/99 figure of £1.50. The sales to fixed assets ratio remained stable, reporting a figure of 2.8 in the final year reviewed. The proportion of stocks to sales marginally improved from 9.9 per cent in 1998/99 to 9.7 percent in 2000/01.

Turning to growth, compound sales growth for companies within the food ingredients industry stands at minus four per cent, having improved from a 5 per cent contraction between 1998/99 and 1999/2000 to a three per cent contraction between 1999/2000 and 2000/01. At 44 per cent the Pilgrim Food group recorded the highest sales growth in the report.

Pre-tax profit growth showed a substantial improvement from minus 30 per cent in the first period to 16 per cent in the latter half of the three years. These figures resulted in compound pre-tax profit growth of minus ten per cent. Finally, total assets and the number of employees remained more stable reporting compound growth figures of minus one per cent and two per cent respectively.

In short, the past three years has clearly been a testing time for the food ingredients industry in the UK. With global economic difficulties continuing to have an impact on the food and drinks industry, the next three years could prove to be equally trying for the industry.