Wholesalers are fighting harder than ever for business - but at least there is still business out there worth fighting for. This is the message coming out loud and clear from this year's The Big 30 poll of the UK's biggest wholesalers. While last year most of the companies on our list were predicting tough times ahead, sales were up 5.3%, profits up by 7.2% and profit margins nudged up a touch from 1.48% to 1.5%.
That is not to say there has been anything easy about the trading conditions faced by wholesalers over the past 12 months, simply that wholesalers appear to be working hard to ensure their businesses continue to grow. Just five of the companies on this year's Big 30 suffered a fall in sales, while only seven saw their profits hit and only one company, Blueheath, dipped into the red, this following some high-profile problems last year. However, the company went through a major restructuring process in 2006 and made big changes to its business model. However, new chief executive Mark Aylwin says he is confident the company is now coming out the other side.
What is clear is that it's tough at the top with profits at both of the UK's two biggest wholesalers taking a battering when they last reported. Palmer & Harvey McLane topped the poll once again after growing its turnover by 1.2% to £3.53bn. Chief executive Chris Etherington says he was delighted to be named the UK's biggest wholesaler for the third year running. However its profits were down 14.1% to £19.6m.
"Our profit decreased primarily due to a reduction in tobacco, inflation and higher interest costs. However this was offset by a good overall performance in trading activities," claims Etherington. He is predicting a better year ahead although the challenges remain many and varied.
"Sales excluding phonecards, increased 2.4%, This year growth is considerably higher," he says. "However, rising costs and labour shortages are likely to come to the fore in 2007. Our challenge will be to defray some of the underlying inflationary costs by operating more efficiently. At the same time we need to continue providing retailers with a best-in-class solution that enables them to take advantage of the growth potential of chilled, fresh and functional foods."
The worry for both P&H and Booker is that they are operating on a wafer-thin profit margin of 0.6%. The nature of wholesale dictates it is a high-volume, low-margin industry but a margin of under 1% is precarious in anyone's language. Booker chief executive Charles Wilson agrees but is confident that he now has the company heading in the right direction and expects to see a significant improvement when the company unveils its next set of results in March.
"When I joined in 2005 we had borrowings of £361m. Last year we had reduced this to £70m," he says. "There is still a heck of a long way to go. We are doing a better job, but we can still do significantly better. My aim was to have a recovery plan in place by March 2006, focus the business by 2007 and work on broadening and driving the business forward by March 2008."
The plan, says Wilson, was a simple one. "We listened to our customers and they told us that choice had got worse, prices had gone up and service levels were down. As a result we lost £500,000. Therefore we have worked on our new strategy of choice up, price down, better service."
A key example, he says, is with fruit and veg. Last year Booker began sourcing locally rather than centrally, which enabled retailers to get produce one- and-a-half days' fresher. The initiative also enabled Booker to slash prices on certain fresh produce lines by up to 30%. Over the course of the year Booker has reduced prices on more than 500 lines and worked to make its promotions tighter.
Like P&H, Wilson is worried by the raft of measures that are set to be introduced later this year, which will impact tobacco sales, and has been working to become less dependent on these sales. Over the course of this year the workplace smoking ban will be introduced to England, Wales and Northern Ireland, the age for buying tobacco with be raised from 16 to 18, and manufacturers could be required to put graphic images on packs of the damage to health caused by smoking. This, says Wilson, could be a triple whammy on the wholesale sector, which in the past has been heavily reliant on the high volumes of tobacco sales despite its slim margins.
Mike Colley, MD of Birmingham-based CTN specialist Rippleglen, predicts the initial impact of the smoking ban could be a 10% fall-off in tobacco sales, before stabilising at about 4% below current levels. The knock-on effect for wholesalers will be severe.
However, retailers and wholesalers are looking at ways to improve margin and become less reliant on the traditional booze and fags mainstays.
Indeed, for some, profit margin is significantly better than at the two wholesaling giants. Two wholesalers at different ends of our chart are way out in front in margin terms. Bestway and Wing Yip both enjoyed a healthy margin of 4.3%, something that all of the major multiples, with the exception of Tesco, would be envious of.
Bestway achieved this by earning profits of £73m on a turnover of £1.7m having fully integrated the Batley's Cash & Carry operation which it bought for £100m in January 2005. This kept Bestway in fourth place in the Big 30 while the full integration at MBL of the Londis symbol group and the continued disposal of company-owned stores meant that it leapt from ninth last year to third on our latest list with a turnover of £1.8bn. Profit figures for MBL were not available as the company is now part of Irish grocery chain Musgrave Group and the company does not separate out the profits for its UK operations.
Wing Yip, owned by the UK's richest chinese entrepreneur, held on to its spot at number 30. This year the specialist Chinese food wholesaler increased its sales by 2.5% to £81.3m but suffered a 7.9% drop in pre-tax profit to £3.5m. Despite this it remains on a par with Bestway as the wholesaler with the strongest margins and has plans to open up to six new cash and carry supermarkets by 2009.
Bestway chief executive Zameer Choudrey says the UK wholesale market remains very challenging, which is why the group has diversified into a number of other business areas such as banking and concrete.
"The group is not dependent on wholesale to deliver profit as it once was. This year's results prove this course of development was the right thing to have done," says Choudrey. "Despite the problems for the wholesale market as a whole, I am delighted that Bestway's cash and carry market share has increased to 17% this year. This proves the value of our decision to grow through acquisition."
Our table of the Top 10 wholesalers by profit margins shows that Bestway and Wing Yip are very much the exception. Hothi Cash & Carry produced a margin of 1.7% having recorded a profit of £2m on sales of £119m. Only six of the companies in this top 10 are traditional wholesalers. As well as Wing Yip, it includes US discount wholesaler Costco with a margin of 2.8% and both the national foodservice providers.
Brakes may be ahead of rival 3663 in the main list in terms of turnover but 3663 now makes more profit. 3663 has a margin of 3.6% based on profits of £51.5m from sales of £1.42bn, while Brakes' profits are £50.6m from a turnover of £1.63bn - a margin of 3.1%. 3663 CEO Fred Barnes credits overseas expansion and an operational restructure among the reasons for the improved performance, with sales and profits up by more than 12%.
While a further four wholesalers have margins of more than 1%, the most concerning figure is that 12 of our Big 30 wholesalers are operating on a margin of just 1% or less.
It is these tight margins that have prompted many observers to speculate that the sector is due for a period of major consolidation. Two years ago Bestway had taken over Batley's while Blueheath bought both CTN Wholesale and AC Ward. This year Woodward Foodservice is making its first appearance on the list having completed an MBO from the Big Food Group and has taken over DBC Foodservice, which was number 15 last year. The new company is number nine with annual turnover of £550m. The company was unable to provide figures for its pre-tax profit as it only completed the takeover in October, so an accurate picture of the new company's profits won't be available until next year.
The other new entry on this year's list is Surrey-based Elbrook Cash & Carry, which following a good year has made it to the main list, after being just short of it last year. Elbrook, run by MD Fakira Khalid, operates one depot in Mitcham specialising in wines, spirits and confectionery.
When we last put together this list Elbrook, which is a member of Landmark Wholesale, posted a turnover of £73.7m, putting it top of the list of companies we identified as bubbling under. This year Elbrook's turnover rose 26.6% to £93.3m, putting it comfortably in among The Big 30 in 25th spot. Pre-tax profit was less impressive, up 1.1% to £896,000, on a profit margin of 1%. Elbrook's success means TRS Cash & Carry slips off our list.
Last year was eventful for Nisa-Today's. A public row with some members over the collapsed merger with Costcutter and Icelandic investment bank Kaupthing ended with rumours that the group remains a potential takeover target for Bestway. There's also speculation that it could be lining up a collaborative working agreement with fellow buying group Landmark. Earlier this month the Today's Group was celebrating successfully enticing Makro Cash & Carry into joining the buying group. Makro has a turnover of £1.1bn and has significantly boosted the Today Group's buying power.
Today's now has six members in The Big 30 with combined sales of £1.89bn. The capture of Makro has fuelled speculation that Landmark members may even force the group into a tie-up with Today's. It is thought they would not want to lose out to Today's wholesalers who may now be able to secure more favourable terms from suppliers.
A second rumour is that Landmark may seek to counter the impact of the Makro deal by approaching the UK arm of US cash & carry operator Costco Wholesale. Costco is currently just below Makro in eighth position with a turnover of just over £1bn.
However not everyone in the sector has heralded the Makro deal as positive. "Neither business was exactly a happy house," said one leading wholesaler. "Everyone knows about Nisa's problems with Costcutter while it's a bit odd the Makro chief executive Phillip Dautzenberg moved on at the same time as the deal was concluded. Suppliers are looking for strong operators who are going to help build their brands. If there is to be further consolidation this year it should be the right move driven by consumer needs."
Wholesalers will also be looking forward to this year's investigation by the Competition Commission. Leading figures in the industry such as Steve Parfett, Younus Sheihk, Rodney Hunt, Peter Blakemore and Charles Wilson all joined the FWD's John Murphy as part of a top-level delegation to the commission in September. While all are hoping it will introduce measures to level the playing field with the multiples, few are pinning all their hopes on a cure-all solution, especially since the Commission concluded this week wholesalers were financially viable and that prices were not "consistently" lower for supermarkets.
Wilson certainly won't be falling into the trap of hoping the inquiry will solve all of the sectors problems. "Whatever happens with the inquiry we are certainly planning on Tesco staying successful," he maintains. "Even if the Competition Commission comes up with solutions that will help the sector, Tesco will find a way of making the best of it."
P&H's Chris Etherington agrees that wholesalers must continue getting their own houses in order. "Inevitably, competition will intensify in the small shop sector with survival and prosperity dependent on professionalism and innovation," he says. "Demand for convenience retailing continues to expand, and with this the role of the local shop. Improved standards among retailers will be a key driver, as will the development of chilled, fresh and functional foods. This is recognised by the major fmcg companies who are putting increased investment behind their brands in these categories in order to realise their potential."
Today's Group MD Rodney Hunt says: "While we are all hopeful about the outcome of the Commission's inquiry and are confident we have put forward a strong case, no one can afford to rest on their laurels. Our job is to continue to support our members and the wholesale sector in general in doing this."
Key questions face the sector. These will revolve around the future relationship between the buying groups, how successful will the buying agreement between Spar UK and the Co-operative Group be and will this form a template for other companies reluctant to become involved in messy and complicated mergers?
The future ownership of those companies in the hands of private equity is also likely to lead to increased speculation. Will investors seek to capitalise on their investments and is the sector likely to attract other private equity approaches?
As the public smoking ban takes effect how will smaller wholesalers adapt? But most critically, with the Commission due to report at the end of the year and continued speculation surrounding some of the biggest businesses, 2007 promises to be as challenging.
That is not to say there has been anything easy about the trading conditions faced by wholesalers over the past 12 months, simply that wholesalers appear to be working hard to ensure their businesses continue to grow. Just five of the companies on this year's Big 30 suffered a fall in sales, while only seven saw their profits hit and only one company, Blueheath, dipped into the red, this following some high-profile problems last year. However, the company went through a major restructuring process in 2006 and made big changes to its business model. However, new chief executive Mark Aylwin says he is confident the company is now coming out the other side.
What is clear is that it's tough at the top with profits at both of the UK's two biggest wholesalers taking a battering when they last reported. Palmer & Harvey McLane topped the poll once again after growing its turnover by 1.2% to £3.53bn. Chief executive Chris Etherington says he was delighted to be named the UK's biggest wholesaler for the third year running. However its profits were down 14.1% to £19.6m.
"Our profit decreased primarily due to a reduction in tobacco, inflation and higher interest costs. However this was offset by a good overall performance in trading activities," claims Etherington. He is predicting a better year ahead although the challenges remain many and varied.
"Sales excluding phonecards, increased 2.4%, This year growth is considerably higher," he says. "However, rising costs and labour shortages are likely to come to the fore in 2007. Our challenge will be to defray some of the underlying inflationary costs by operating more efficiently. At the same time we need to continue providing retailers with a best-in-class solution that enables them to take advantage of the growth potential of chilled, fresh and functional foods."
The worry for both P&H and Booker is that they are operating on a wafer-thin profit margin of 0.6%. The nature of wholesale dictates it is a high-volume, low-margin industry but a margin of under 1% is precarious in anyone's language. Booker chief executive Charles Wilson agrees but is confident that he now has the company heading in the right direction and expects to see a significant improvement when the company unveils its next set of results in March.
"When I joined in 2005 we had borrowings of £361m. Last year we had reduced this to £70m," he says. "There is still a heck of a long way to go. We are doing a better job, but we can still do significantly better. My aim was to have a recovery plan in place by March 2006, focus the business by 2007 and work on broadening and driving the business forward by March 2008."
The plan, says Wilson, was a simple one. "We listened to our customers and they told us that choice had got worse, prices had gone up and service levels were down. As a result we lost £500,000. Therefore we have worked on our new strategy of choice up, price down, better service."
A key example, he says, is with fruit and veg. Last year Booker began sourcing locally rather than centrally, which enabled retailers to get produce one- and-a-half days' fresher. The initiative also enabled Booker to slash prices on certain fresh produce lines by up to 30%. Over the course of the year Booker has reduced prices on more than 500 lines and worked to make its promotions tighter.
Like P&H, Wilson is worried by the raft of measures that are set to be introduced later this year, which will impact tobacco sales, and has been working to become less dependent on these sales. Over the course of this year the workplace smoking ban will be introduced to England, Wales and Northern Ireland, the age for buying tobacco with be raised from 16 to 18, and manufacturers could be required to put graphic images on packs of the damage to health caused by smoking. This, says Wilson, could be a triple whammy on the wholesale sector, which in the past has been heavily reliant on the high volumes of tobacco sales despite its slim margins.
Mike Colley, MD of Birmingham-based CTN specialist Rippleglen, predicts the initial impact of the smoking ban could be a 10% fall-off in tobacco sales, before stabilising at about 4% below current levels. The knock-on effect for wholesalers will be severe.
However, retailers and wholesalers are looking at ways to improve margin and become less reliant on the traditional booze and fags mainstays.
Indeed, for some, profit margin is significantly better than at the two wholesaling giants. Two wholesalers at different ends of our chart are way out in front in margin terms. Bestway and Wing Yip both enjoyed a healthy margin of 4.3%, something that all of the major multiples, with the exception of Tesco, would be envious of.
Bestway achieved this by earning profits of £73m on a turnover of £1.7m having fully integrated the Batley's Cash & Carry operation which it bought for £100m in January 2005. This kept Bestway in fourth place in the Big 30 while the full integration at MBL of the Londis symbol group and the continued disposal of company-owned stores meant that it leapt from ninth last year to third on our latest list with a turnover of £1.8bn. Profit figures for MBL were not available as the company is now part of Irish grocery chain Musgrave Group and the company does not separate out the profits for its UK operations.
Wing Yip, owned by the UK's richest chinese entrepreneur, held on to its spot at number 30. This year the specialist Chinese food wholesaler increased its sales by 2.5% to £81.3m but suffered a 7.9% drop in pre-tax profit to £3.5m. Despite this it remains on a par with Bestway as the wholesaler with the strongest margins and has plans to open up to six new cash and carry supermarkets by 2009.
Bestway chief executive Zameer Choudrey says the UK wholesale market remains very challenging, which is why the group has diversified into a number of other business areas such as banking and concrete.
"The group is not dependent on wholesale to deliver profit as it once was. This year's results prove this course of development was the right thing to have done," says Choudrey. "Despite the problems for the wholesale market as a whole, I am delighted that Bestway's cash and carry market share has increased to 17% this year. This proves the value of our decision to grow through acquisition."
Our table of the Top 10 wholesalers by profit margins shows that Bestway and Wing Yip are very much the exception. Hothi Cash & Carry produced a margin of 1.7% having recorded a profit of £2m on sales of £119m. Only six of the companies in this top 10 are traditional wholesalers. As well as Wing Yip, it includes US discount wholesaler Costco with a margin of 2.8% and both the national foodservice providers.
Brakes may be ahead of rival 3663 in the main list in terms of turnover but 3663 now makes more profit. 3663 has a margin of 3.6% based on profits of £51.5m from sales of £1.42bn, while Brakes' profits are £50.6m from a turnover of £1.63bn - a margin of 3.1%. 3663 CEO Fred Barnes credits overseas expansion and an operational restructure among the reasons for the improved performance, with sales and profits up by more than 12%.
While a further four wholesalers have margins of more than 1%, the most concerning figure is that 12 of our Big 30 wholesalers are operating on a margin of just 1% or less.
It is these tight margins that have prompted many observers to speculate that the sector is due for a period of major consolidation. Two years ago Bestway had taken over Batley's while Blueheath bought both CTN Wholesale and AC Ward. This year Woodward Foodservice is making its first appearance on the list having completed an MBO from the Big Food Group and has taken over DBC Foodservice, which was number 15 last year. The new company is number nine with annual turnover of £550m. The company was unable to provide figures for its pre-tax profit as it only completed the takeover in October, so an accurate picture of the new company's profits won't be available until next year.
The other new entry on this year's list is Surrey-based Elbrook Cash & Carry, which following a good year has made it to the main list, after being just short of it last year. Elbrook, run by MD Fakira Khalid, operates one depot in Mitcham specialising in wines, spirits and confectionery.
When we last put together this list Elbrook, which is a member of Landmark Wholesale, posted a turnover of £73.7m, putting it top of the list of companies we identified as bubbling under. This year Elbrook's turnover rose 26.6% to £93.3m, putting it comfortably in among The Big 30 in 25th spot. Pre-tax profit was less impressive, up 1.1% to £896,000, on a profit margin of 1%. Elbrook's success means TRS Cash & Carry slips off our list.
Last year was eventful for Nisa-Today's. A public row with some members over the collapsed merger with Costcutter and Icelandic investment bank Kaupthing ended with rumours that the group remains a potential takeover target for Bestway. There's also speculation that it could be lining up a collaborative working agreement with fellow buying group Landmark. Earlier this month the Today's Group was celebrating successfully enticing Makro Cash & Carry into joining the buying group. Makro has a turnover of £1.1bn and has significantly boosted the Today Group's buying power.
Today's now has six members in The Big 30 with combined sales of £1.89bn. The capture of Makro has fuelled speculation that Landmark members may even force the group into a tie-up with Today's. It is thought they would not want to lose out to Today's wholesalers who may now be able to secure more favourable terms from suppliers.
A second rumour is that Landmark may seek to counter the impact of the Makro deal by approaching the UK arm of US cash & carry operator Costco Wholesale. Costco is currently just below Makro in eighth position with a turnover of just over £1bn.
However not everyone in the sector has heralded the Makro deal as positive. "Neither business was exactly a happy house," said one leading wholesaler. "Everyone knows about Nisa's problems with Costcutter while it's a bit odd the Makro chief executive Phillip Dautzenberg moved on at the same time as the deal was concluded. Suppliers are looking for strong operators who are going to help build their brands. If there is to be further consolidation this year it should be the right move driven by consumer needs."
Wholesalers will also be looking forward to this year's investigation by the Competition Commission. Leading figures in the industry such as Steve Parfett, Younus Sheihk, Rodney Hunt, Peter Blakemore and Charles Wilson all joined the FWD's John Murphy as part of a top-level delegation to the commission in September. While all are hoping it will introduce measures to level the playing field with the multiples, few are pinning all their hopes on a cure-all solution, especially since the Commission concluded this week wholesalers were financially viable and that prices were not "consistently" lower for supermarkets.
Wilson certainly won't be falling into the trap of hoping the inquiry will solve all of the sectors problems. "Whatever happens with the inquiry we are certainly planning on Tesco staying successful," he maintains. "Even if the Competition Commission comes up with solutions that will help the sector, Tesco will find a way of making the best of it."
P&H's Chris Etherington agrees that wholesalers must continue getting their own houses in order. "Inevitably, competition will intensify in the small shop sector with survival and prosperity dependent on professionalism and innovation," he says. "Demand for convenience retailing continues to expand, and with this the role of the local shop. Improved standards among retailers will be a key driver, as will the development of chilled, fresh and functional foods. This is recognised by the major fmcg companies who are putting increased investment behind their brands in these categories in order to realise their potential."
Today's Group MD Rodney Hunt says: "While we are all hopeful about the outcome of the Commission's inquiry and are confident we have put forward a strong case, no one can afford to rest on their laurels. Our job is to continue to support our members and the wholesale sector in general in doing this."
Key questions face the sector. These will revolve around the future relationship between the buying groups, how successful will the buying agreement between Spar UK and the Co-operative Group be and will this form a template for other companies reluctant to become involved in messy and complicated mergers?
The future ownership of those companies in the hands of private equity is also likely to lead to increased speculation. Will investors seek to capitalise on their investments and is the sector likely to attract other private equity approaches?
As the public smoking ban takes effect how will smaller wholesalers adapt? But most critically, with the Commission due to report at the end of the year and continued speculation surrounding some of the biggest businesses, 2007 promises to be as challenging.
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