As the UK business is sold piecemeal, was Vion or the system to blame?

The break-up has begun. As thegrocer.co.uk revealed this week, Vion’s eight-site pork operation, which accounts for 30% of UK pig slaughtering capacity, has been sold to its management.

Whether the sale of the other 30 UK sites completes at the same pace remains to be seen. But the biggest question at the moment is not over who will buy what and when. (As Shore Capital analyst Clive Black said last week, the list of potential bidders for its operations is so long as to make it a futile list-building exercise.) The question is: how did a global meat business with a €9.5bn turnover and an EBITDA of €90.1m last year fail to make its UK scale and global expertise pay?

As sale discussions continue, what does Vion’s exit tell us? Is there a systemic issue in the UK market? Or were Vion’s problems closer to home?

Some sources claim Vion UK is a sacrificial lamb, the sale of which will provide much-needed finance for its parent, Vion Food Group, as it regroups and grows its core operations, following the departure of Uwe Tillmann, Vion’s CEO and chairman, in September, replaced by Dirk Kloosterboer. “The group needs cash. It’s not a UK problem, it’s a group problem,” says a senior meat industry source. The first signs of trouble came with Vion’s 2011 accounts, when an 82.7% fall in pre-tax profit, to €13.8m in 2011, wiped out a staggering €66m in one fell swoop.

The rationale for selling was based on “a strategic decision made at group head office that we will prioritise our resources in our food activities in our traditional markets of the Netherlands and Germany, as well as our global ingredients business,” a spokesman told The Grocer.

But clearly, the UK has been a particular problem for Vion for a considerable time. Some date Vion’s UK troubles back to the £350m acquisition of Grampian in 2008. But as a senior poultry source says: “Although Grampian had its problems and for a period lost its way, Vion bought a profitable business.”

The fact this acquisition coincided with the start of the recession, on the other hand, was always going to be a challenge to a business whose focus at the time was on internal restructuring.

Four years later, with no sight of economic recovery, the 2011 group accounts bemoaned the “weakening of consumer demand and record livestock prices” in red meat in the UK, the “only partial transfer of cost inflation through the chain” in pork, and the “significant increases in key input costs” in poultry.

Stress test

The situation didn’t get any better in 2012. With feed prices rising still further, and market conditions worsening over the summer, bad news came thick and fast: the loss of a major Sainsbury’s chicken contract to the 2 Sisters Group in March was attributed to its lack of investment in integrated processing facilities. In the spring, it severed relations with Debbie & Andrew, as sales of its eponymous premium sausage came under fierce pressure, and it announced plans to close the Hall’s of Broxburn site in July. And in another sign of the stress under which Vion was operating, it’s alleged to have sold Paramount, its ailing pizza business, without informing all of its suppliers.

Vion hasn’t been alone in struggling. In September, Tesco beef packer Hilton Food Group admitted in its six-month interims that operating profit margin had fallen to 2.4%, from 2.7% last year. Chicken supplier Moy Park posted an 82.8% fall in pre-tax profits, to £4.8m, in 2011. And smaller players, too, have suffered - take Faccenda Group - a £312.8m turnover chicken supplier - whose pre-tax profits fell 74.7% in the 12 months to 30 April last year.

On the other hand, some believe Vion hasn’t helped itself with its lack of category focus. While its £2.3bn UK sales made it one of the UK’s largest suppliers, it hasn’t been dominant in any market it operates in, slaughtering 17% of UK poultry, 15% of beef and 13% of lamb.

That’s inevitably been contrasted with the category focus of Ranjit Boparan’s 2 Sisters Group, which reported an 11.9% improvement in EBITDA to £190.3m in the year to 28 July and Cranswick’s 21% year-on-year uplift in pre-tax profits to £22.5m in the six months to 30 September.

“If you are well-positioned you should be able to handle the prevailing market conditions,” says the meat industry source. And having cross-category expertise and being able to talk to them about all key proteins can be a strength, he adds: “Unilever doesn’t appear to have any issue selling both mayonnaise and detergent.”

Customer focus?

Comparisons with 2 Sisters may nonetheless be instructive. And not just because of Singh’s singular focus on poultry.

“As Ranjit Boparan has proved with the successful integration of Northern Foods,” says a senior wholesale source, “it’s not category focus that’s the key to success. It’s knowing what you’re doing, and having a bunch of guys around you that are aligned with your way of working: keeping as close an eye on the customer as on the costs.”

He also contrasts Vion’s management with the leadership style of Fred Duncan, founder of the Grampian business.

“Fred was a bit like Ranjit. He obsessed over every detail, and knew everyone.”

A leading pork industry source believes Vion simply underestimated the power of the UK retailers. “I think they came in a little bit naïve, thinking it was easier to deal with the UK supermarkets than it really was.”