Northern Foods is getting used to spending long hours at the negotiating table. Just months after snubbing M&S over its revised Italian ready meals contract, the company has struck a 10-year deal to supply British Airways with 13 million aeroplane meals per year, starting in April 2010.
The figures are impressive and with own-label manufacturers being driven into a corner by the retailers, the rationale behind finding new routes to market seems sound enough. But can foodservice ever be more than a side project for retail-oriented suppliers and should specialist providers feel threatened?
Northern replaces Gate Gourmet as supplier to BA's short-haul flights from Heathrow. It will provide the airline with a mixture of ready meals, sandwiches and salads from its existing factories, while logistics firm DHL will assemble the trays and handle the transfer to aircraft.
Spreading the risk
The company is looking to replace the business lost earlier this year when it scrapped a £45m-a-year contract to supply Marks & Spencer, its biggest customer, with Italian ready meals due to a disagreement over new terms. In a retail market characterised by ever-fiercer price competition, spreading its risk as wide as possible seems a logical step, especially given the pressure on own-label margins.
"We said at the half-year results that we were looking at exploring new channels beyond retail," says a Northern spokesman. "The new contract will help to further diversify our business."
Spare capacity
Experts are divided over the move. Greg Lawless, retail analyst at Blue Oar Securities believes the BA deal is "sensible" given the spare capacity in the Northern business now the M&S contract had ended. " I'm sure it'll bring a potentially higher quality threshold to BA short-haul in-flight meals," he says.
Other experts, however, believe there are limitations to what retail-oriented suppliers can achieve in the foodservice arena. "Northern is an expert in ready meals," says one foodservice executive. "My guess is that the BA contract demands a high volume, limited number of drops at Heathrow, which is quite unusual in our industry."
He questions whether Northern will be able to expand its foodservice ambitions much beyond airline food. "If you asked me could a retail-oriented business supply pub food, the answer's absolutely not because that's a distribution rather than a manufacturing problem. In foodservice, you have to provide to thousands of outlets every day. You need an entirely different infrastructure. Retail suppliers don't have the strategic capabilities."
Northern's move does, however, follow a trend . Birds Eye significantly raised its profile in catering sectors such as pubs, restaurants and hotels by setting up a dedicated foodservice division last month.
Lee Foods, Glendale Foods and Musgrave are among a number of own-label businesses that have either entered or significantly boosted their presence in foodservice in recent times, while major own-label player, Finsbury Food Group, says it is keeping its eye on the sector and is not ruling out a move into foodservice in the longer term.
Small-run inefficiencies
Foodservice provision presents a number of hurdles for retail-oriented suppliers to overcome.
There are the operational challenges for a start. The smaller runs demanded by foodservice can make production complicated, in particular the process of recalibrating machines. If small runs mess up a high-volume long-running retail line, the resultant downtime leads to inefficiencies that are costly for the whole factory. "That's one of the dangers of having a diverse customer base," says Clive Black, head of research at Shore Capital.
Black also points out that foodservice lends itself more to frozen than fresh and chilled - where Northern's core strengths lie - due to the distribution requirements and longer storage times.
Neil Pinder, development director of Greencore, agrees that foodservice can be just as challenging as retail. Greencore ventured into the foodservice arena eight years ago, supplying frozen food. It has since expanded to provide desserts, sandwiches, Yorkshire puddings and hot steamed puddings to a range of core food businesses and airlines, with foodservice accounting for £40m of the company's turnover.
"The idea you can take a retail product and give it to a foodservice operator doesn't work," he says. "You have to adapt your culture and your way of thinking. Some products require bespoke development, portion and pack size. The turnaround and lead times are different. Foodservice quite often demands a quick turnaround, it doesn't go through the same date process. Plus suppliers have to hit menu deadlines.
"You can't just take what you do every day and apply it to foodservice. You have to build trust and I think there's scepticism around retail suppliers coming into foodservice."
A first step
Northern's move into foodservice isn't a surprise, says one senior food analyst, but the fact a major operator like BA chose it above foodservice specialists as a supplier is. Catering companies or service providers are normally wary of getting into bed with suppliers with a retail-based customer base, he says.
"If a supplier needs to favour one customer over another for whatever reason - who are they going to short?" he explains. "I'll bet it's not going to be one of the big multiples."
Manufacturers thinking of dabbling in foodservice provision should not view it as a soft touch, says Black, who suggests the market will be just as tough in terms of margins. And customers will not accept being treated as lower priority just because they account for a small percentage of a supplier's volume, he adds.
A toe in the water
Food manufacturers should not read too much into the Northern Foods and BA agreement, says Black. "In terms of how important foodservice will be [to Northern], I think we should be measured in our response at this stage," he says. "The contract doesn't start until 2010. It's a toe in the water and it's an interesting step. For it to be meaningful, there has to be a lot more activity."
Northern Foods also adopts a cautious tone. "This is a first step for us," says the spokesman. "We need to get the contract up and running. We have core skills in food and DHL has core skills in logistics. It's a good partnership and combination." He does confirm, however, that Northern is "pursuing a number of opportunities" in foodservice and "investing £500,000 in the first half year in projects to develop the business in new related areas".
Rival manufacturers will be watching with interest to see whether the relationship takes off.
The figures are impressive and with own-label manufacturers being driven into a corner by the retailers, the rationale behind finding new routes to market seems sound enough. But can foodservice ever be more than a side project for retail-oriented suppliers and should specialist providers feel threatened?
Northern replaces Gate Gourmet as supplier to BA's short-haul flights from Heathrow. It will provide the airline with a mixture of ready meals, sandwiches and salads from its existing factories, while logistics firm DHL will assemble the trays and handle the transfer to aircraft.
Spreading the risk
The company is looking to replace the business lost earlier this year when it scrapped a £45m-a-year contract to supply Marks & Spencer, its biggest customer, with Italian ready meals due to a disagreement over new terms. In a retail market characterised by ever-fiercer price competition, spreading its risk as wide as possible seems a logical step, especially given the pressure on own-label margins.
"We said at the half-year results that we were looking at exploring new channels beyond retail," says a Northern spokesman. "The new contract will help to further diversify our business."
Spare capacity
Experts are divided over the move. Greg Lawless, retail analyst at Blue Oar Securities believes the BA deal is "sensible" given the spare capacity in the Northern business now the M&S contract had ended. " I'm sure it'll bring a potentially higher quality threshold to BA short-haul in-flight meals," he says.
Other experts, however, believe there are limitations to what retail-oriented suppliers can achieve in the foodservice arena. "Northern is an expert in ready meals," says one foodservice executive. "My guess is that the BA contract demands a high volume, limited number of drops at Heathrow, which is quite unusual in our industry."
He questions whether Northern will be able to expand its foodservice ambitions much beyond airline food. "If you asked me could a retail-oriented business supply pub food, the answer's absolutely not because that's a distribution rather than a manufacturing problem. In foodservice, you have to provide to thousands of outlets every day. You need an entirely different infrastructure. Retail suppliers don't have the strategic capabilities."
Northern's move does, however, follow a trend . Birds Eye significantly raised its profile in catering sectors such as pubs, restaurants and hotels by setting up a dedicated foodservice division last month.
Lee Foods, Glendale Foods and Musgrave are among a number of own-label businesses that have either entered or significantly boosted their presence in foodservice in recent times, while major own-label player, Finsbury Food Group, says it is keeping its eye on the sector and is not ruling out a move into foodservice in the longer term.
Small-run inefficiencies
Foodservice provision presents a number of hurdles for retail-oriented suppliers to overcome.
There are the operational challenges for a start. The smaller runs demanded by foodservice can make production complicated, in particular the process of recalibrating machines. If small runs mess up a high-volume long-running retail line, the resultant downtime leads to inefficiencies that are costly for the whole factory. "That's one of the dangers of having a diverse customer base," says Clive Black, head of research at Shore Capital.
Black also points out that foodservice lends itself more to frozen than fresh and chilled - where Northern's core strengths lie - due to the distribution requirements and longer storage times.
Neil Pinder, development director of Greencore, agrees that foodservice can be just as challenging as retail. Greencore ventured into the foodservice arena eight years ago, supplying frozen food. It has since expanded to provide desserts, sandwiches, Yorkshire puddings and hot steamed puddings to a range of core food businesses and airlines, with foodservice accounting for £40m of the company's turnover.
"The idea you can take a retail product and give it to a foodservice operator doesn't work," he says. "You have to adapt your culture and your way of thinking. Some products require bespoke development, portion and pack size. The turnaround and lead times are different. Foodservice quite often demands a quick turnaround, it doesn't go through the same date process. Plus suppliers have to hit menu deadlines.
"You can't just take what you do every day and apply it to foodservice. You have to build trust and I think there's scepticism around retail suppliers coming into foodservice."
A first step
Northern's move into foodservice isn't a surprise, says one senior food analyst, but the fact a major operator like BA chose it above foodservice specialists as a supplier is. Catering companies or service providers are normally wary of getting into bed with suppliers with a retail-based customer base, he says.
"If a supplier needs to favour one customer over another for whatever reason - who are they going to short?" he explains. "I'll bet it's not going to be one of the big multiples."
Manufacturers thinking of dabbling in foodservice provision should not view it as a soft touch, says Black, who suggests the market will be just as tough in terms of margins. And customers will not accept being treated as lower priority just because they account for a small percentage of a supplier's volume, he adds.
A toe in the water
Food manufacturers should not read too much into the Northern Foods and BA agreement, says Black. "In terms of how important foodservice will be [to Northern], I think we should be measured in our response at this stage," he says. "The contract doesn't start until 2010. It's a toe in the water and it's an interesting step. For it to be meaningful, there has to be a lot more activity."
Northern Foods also adopts a cautious tone. "This is a first step for us," says the spokesman. "We need to get the contract up and running. We have core skills in food and DHL has core skills in logistics. It's a good partnership and combination." He does confirm, however, that Northern is "pursuing a number of opportunities" in foodservice and "investing £500,000 in the first half year in projects to develop the business in new related areas".
Rival manufacturers will be watching with interest to see whether the relationship takes off.
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