Bestway and Booker are in the driving seat, but will consolidation among the big 30 wholesalers accelerate and what form will it take? Elinor Zuke reports


With fuel prices through the roof, inflation and unemployment on the up, a VAT increase, and the prospect of a rise in interest rates, there’s a sense of foreboding in wholesale.

Until now, as The Grocer’s Big 30 report once again confirms, the industry has carried on intact: sales were up 6%, and pre-tax profit margins remained steady at 1.1%.

Indeed, this year’s list includes double-digit sales increases at Smiths News, Costco, Matthew Clark, James Hall & Co, HT & Co Drinks, Crown Crest, United Wholesale, Reynolds Catering Supplies and DCS Europe. And there was also a notable improvement in profits for Booker, Bestway, Smiths, Menzies, James Hall, Parfetts, Appleby Westward and East End Foods.

Indeed, only two in the Big 30 recorded a loss: Makro, which continues to be supported by Metro, its parent and the world’s second-largest retailer; and WaverleyTBS, the loss-making on-trade wholesaler, bought last summer by private equity group Manfield Partners.

However, only for one company do the year-end accounts in the Big 30 include financial information relating to the disastrous final quarter of 2010, when Arctic conditions brought much of the country to a standstill, and GDP slumped by 0.5%.

And with signs that even the supermarkets are struggling, many will share the view of Today’s Group CEO Bill Laird that “2011 will be everything we thought would happen last year but didn’t. This year is going to really, really hurt.”

The danger, says Laird, is that the warning signs may go undetected until it is too late. He uses a cooking analogy: “If you put a lobster in a boiling pot of water, it will immediately try to jump out. But if you put it in a pot of cold water and slowly heat it up, it will allow itself to boil to death because it doesn’t really appreciate the changing conditions. That’s the situation in wholesale right now. It won’t be a sudden change in intensity, but the continual ratcheting up of the pressure from a number of events, making the day-to-day grind that much more difficult.”

Warning signs that hard times lie in store are already starting to emerge. Begbies Traynor, in its latest Red Flag report, found the sharpest rise in companies facing “significant or critical distress” among wholesalers. It reported 6,520 wholesalers faced financial distress in Q4 2010 30% more than the previous quarter.

Begbies executive chairman Nick Hood says wholesalers are “caught in an unholy squeeze” between input costs and pressure from customers that they cannot resist. He predicts smaller and medium-sized companies will be worst-affected. “They spent the last three years shaking out all the costs they could from their fixed cost base, and there’s no hiding place left.”

As a result, says Hood, the wholesale industry could be looking at the biggest round of consolidation ever seen, with a host of smaller wholesale business looking at the trying trading conditions that loom and thinking “is it worth it?”, says Hood. “Whatever consolidation there has been since the previous recession in the early 1990s is nothing by comparison with what is likely to happen in 2011,” he adds.

Hood predicts a “cull of the marginal operators” with a turnover of about £1m. But even the Big 30 are at risk: a third of them have a pre-tax margin of 1% or below. And Booker CEO Charles Wilson also expects further consolidation this year.

“We’re heading more towards [the scenario of] 2008 when you saw companies like Entertainment UK and Dawson News quit the market. It wouldn’t surprise me if you see some pretty big challenges [out] there,” he says.
Of course, wholesalers are quick to point out that the market has been tough for some time and they’ve learned to adapt to narrow margins. And the fact that bank lending has been loosened since the initial shock to the system in 2008 will also help, says Tim Marlow, manager of Ford Campbell Corporate Finance.

Marlow specialises in the sale of companies with a turnover between £5m and £50m. “There was a lag in 2008-9 where businesses couldn’t get the value they wanted and decided to freeze the sale process,” he says. “Now is a good time for a quality business to sell. Buyers can get access to finance and pay more.”

In November, Ford Campbell acted for specialist food distribution specialist Bri-Tal in its sale to Westbridge Foods. Marlow says that type of sale was put on ice until recently when the debt market freed up, and others are sure to follow in its wake.

The last year has also seen the return to the market of private equity players. After its acquisition of WaverleyTBS, Manfield is rumoured to be eyeing the 50% stake of Punch Taverns in the other on-trade alcoholic drinks wholesaler, Matthew Clark. In the meantime, UK drinks player Constellation has sold the other 50% stake to Australia’s Champ Private Equity.

Indeed, the flipside to the high number of ailing businesses is some big opportunities for growth. This is clearly the way Bestway and Booker see it, with both enjoying a busy 2010 on the acquisitions front. Bestway, through its Batleys arm, bought Bellevue in June and five months later snapped up CJ Lang’s C&C arm Martex. Together the deals added five sites in Scotland.

Booker also made two acquisitions last year, focusing its efforts on smaller on-trade and catering specialists through the purchase of speciality fine food supplier Ritter-Courivaud for £14.5m and on-trade wholesaler Classic Drinks for £4m.

The acquisitions were reflective of two markedly different strategies Bestway is gunning for blanket UK coverage. Buys were 80%-based on location, says group CEO Zameer Choudrey. “We were very strong in the south and Midlands but the north was weak. We needed to grow geographically to cover major Scottish cities.”

As for Booker, its purchases were clearly geared towards growing its on-trade presence, an area in which it currently trades towards the lower end of the market. However, with Classic and Ritter-Courivaud added to the group portfolio, Booker could grow more than £200m of additional business over the next few years, says Wilson.
“Ritter-Courivaud is one of the best experts in supplying speciality foods to the restaurants I’ve ever seen. And Classic has a great sales force and a better cask ale range than Booker. If you can harness their expertise with our scale, you can get to something we think will improve service for a lot of customers.”

Key to Booker’s ambitions will be how quickly Wilson and his team can scale up these much smaller businesses, says Richard Lowe, Barclays Corporate head of retail. “If it’s buy and build, it’s build out quickly. Otherwise time and effort expended on small acquisitions just won’t pay back.”

While Bestway and Booker’s methods may differ, their aim is the same spread the risk and grow through diversifying the business. It’s a blueprint that others are sure to follow, says Patrick Mitchell-Fox, senior business analyst at IGD. “The way people are moving is looking to broaden the scope of their fairly specialist businesses. Businesses on the front foot are looking to be as flexible as they can and taking initiatives,” he explains.

Denys Shortt’s business is a good example of this trend. His decision to invest £2m in a larger cosmetics factory, and to enter manufacturing in 2006, continues to reap rewards. DCS’s Enliven brand of personal care products is enjoying the cache of being “made in England” with export sales jumping 37% in the year to December 2010, and 75 countries now served. Its Enable Software, which specialises in overrider and rebate management systems, also reported a record year, with sales of £1.7m.

Another company making inroads into new markets is P&H, which is building up its non-tobacco business. It has recruited a local sales team to sign up independent businesses to its Mace fascia, and claims to be adding 10 retailers a week from independents and disgruntled members of rival symbols. Palmak, its buying alliance with Makro, is another focus. “This is a good time for collaboration,” says CEO Chris Etherington. “It’s about the good guys getting together and helping each other out.”

P&H also continues to look for efficiency savings, installing the UK’s first automated tobacco-picking machine in its Medway depot. “You can never afford to sit back and think everything’s fine because it never is,” says Etherington. Going forward, he accepts consolidation is inevitable, and he draws parallels with developments in the pharmaceutical industry over the past 20 years, having worked for Unicare prior to P&H. “When I joined in 1991, there were 216 wholesalers in UK. When I left in 2003 there were seven. That’s what happens.”

He also believes family-owned companies may be best placed to weather the economic storm because unlike public companies the pressure is not as intense to keep churning out a hearty profit and pay hefty dividends.

“If you run your own business and you’re taking your salary out of it, and your car, if you have to go a year [without] when you’re making a bit less profit, you can do it,” says Etherington. “Some of the smaller guys could well do that. If you’re covering your overheads, you’re fine. It’s a very different kettle of fish if you’re a listed company. You can’t do that because you’ve got external shareholders asking: ‘what’s going on’?

For the next 12 months Etherington rules P&H out of acquisitions. “In difficult times P&H bought distressed wholesalers but we’re not looking at the moment. We’ve got a very good infrastructure already.”

Wilson is similarly dismissive. With the company gearing up to challenge Matthew Clark and WaverleyTBS, he will be focusing on growing the existing business, he insists. But with the appointment of former Whitbread and Interbrew executive Stewart Gilliland as a new non-executive director, there is speculation that Booker is planning a more game-changing acquisition on the on-trade side, with both Waverley TBS and Matthew Clark tipped.

A City source suggests combining an on-trade alcoholic drinks operation would enable Booker to challenge Brakes and 3663. Says one wholesaler rival: “Charles Wilson has the cash and the cachet. And he is the master of surprises. The more logical step is to buy Waverley. Wilson would need to be 100%-committed to buy Matthew Clark, particularly given its interest in pub chains. This would be a huge undertaking, financial and operational.”

In the meantime, rival Bestway is ruling nothing out. “If someone is willing to consider disposal, they know our details,” says Choudrey. “I have a wish list of locations, so Bestway would be in all major cities. I’d love to say I’ll make tens of acquisitions in 2011 but I don’t know if I’ll make any.”

The most tantalising acquisition target of all is Makro. With losses worsening to £44.7m, rivals are questioning whether parent Metro Group is ready to wash its hands. “I’d be sacked by the board for a performance like that,” laughs Choudrey. “But Metro is far bigger than us. It probably doesn’t matter so much for them.”

But while Metro has pledged to continue to support a turnaround, another wholesaler points out that Metro quit Morocco last year, “which was the first time it exited a market”.

Any deal for Makro would radically change the wholesaler landscape in the UK. But if Baird and others are right, there are any number of radical possibilities boiling away in the lobster pot.

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