Outsourcing: is it outdated? Del Monte broker, he say no

Why did it go so wrong for food broker Jenks? And does its collapse pose questions about the viability of outsourcing, asks Ronan Hegarty


When Food Brokers collapsed in February 2005, rival Jenks was one of the many outsourcing firms picking over the bones looking for business.

Now, just over four years later, Jenks has gone the same way – and its business is the subject of a similar feeding frenzy involving rival operators.

Jenks’ failure is understood to be the result of massive debt coupled with spiralling and ultimately crippling costs, but it also poses more fundamental questions about the effectiveness of the wider outsourcing model.

As one of the founder members of the brokerage industry in the UK, Jenks had gone through bumpy patches in the past, but to the outside world things appeared to be on the up and up following the completion of a management buyout in 2003.

Guided by the joint leadership of MDs Ambrose McGinn and Ross Beattie, Jenks secured a massive contract with Del Monte in 2007. Under the deal all sales, logistics, administration and finance roles for Del Monte were transferred to the broker.

At the time it was seen as a blueprint for future sales and marketing deals. Prior to this, the role of the broker was much more limited, focusing mainly on sales and logistics.

The company’s growth prompted a move to a new purpose-built 350,000 sq ft headquarters and distribution centre in Milton Keynes at the start of the year, while in March it tied up a deal with leading US confectionery brand Mike and Ike.

And as recently as April, Beattie told The Grocer Jenks was a 21st-century brand offering a powerful blend of track record and future vision. But while on the surface everything in Jenks’ garden seemed rosy, IT problems at the Milton Keynes depot were causing major disruption to its entire operation.

Industry watchers and Jenks insiders claim the highly leveraged company tried to grow too quickly. As with Food Brokers, which was also severely handicapped by IT problems, the administrators quickly came to the conclusion that the business was not going to be salvageable as a going concern. The company officially stopped trading on 18 May with 120 staff losing their jobs.

So are Jenks’ fortunes a damning indictment of the sector as a whole? David Mellor, MD of RH Amar, which this week picked up Jenks’ jewel in the crown, Del Monte, doesn’t believe so. Many business fundamentals are just the same as any other business in the grocery sector, he argues. Mellor still has confidence in the sector as a whole but maintains that for outsourcing to work, businesses have have a sound financial footing. He also favours a more conservative approach to growth.

This seems all the more crucial when considering the speed of Jenks’ downfall. “If you had asked me six months ago if Jenks was in trouble I’d have said no,” says Mellor. “But if you are asking if there is still a role for outsourcing, then it has to be a resounding yes.”


Measured approach
Other players in the sector are equally optimistic. Denys Shortt, chairman and CEO of DCS Europe, is adamant that Jenks' demise does not signal a deeper problem with the brokerage model.

"Not all distributors are doing badly," he points out. "DCS is growing and is well placed to pick up brands and distribution off the back of the demise of Jenks. We have a strong sustainable business model and work closely with our brand suppliers to achieve our joint goals."

Brokerage, argues Mellor, remains the best route to market for many overseas producers. Importers can pass over the logistics and sales responsibilities to UK companies, which in the main have a more established working relationship with the big retailers.

"We have always taken a sensible approach," says Mellor. "Amar has got critical mass and we don't take rash decisions. It also helps that we are in a better position than most given that any investments we make will be funded through cash reserves rather than debt."

Such a measured approach is vital for any company during the recession, says Mellor. "We are finding that the consistency and stability that a company like ours can offer during these uncertain economic times is essential for our new and existing brand partners," he says.

Mellor does sound one cautious note for the sector however. Most of the brands and produce distributed by outsourcing companies continue to come from outside the UK and, of course, this has resulted in companies suffering as a result of the current weakness of sterling.

Companies have therefore been forced into the invidious position of having to ask the major retailers for price increases.

"With the economic conditions getting tougher and the issue of credit insurance, there is the threat that other companies in the sector could go the same way as Jenks," he admits. "We are not expecting all requests for price increases to be accepted.

"However, if the retailers would rather deal with a company like ours than hundreds of different businesses, then surely the fact that what happened to Jenks could happen again ought to be reflected in negotiations. When an increase is justified they should give it serious consideration."

While other brokers will understandably talk up their sector, there are those in the industry who question the need for such operators.

Graham Stimpson, head of retail at negotiation specialists The Gap Partnership, argues that brand owners are much better placed to handle these negotiations than intermediaries.

"The suppliers that are working closer than ever with retailers are enjoying the most success," he says. "The most innovative suppliers are collaborating on all sorts of supply chain issues with retailers and actually many more are moving away from what the layman would call middle-men."

Stimpson also argues that no-one understands their brands better than the suppliers themselves and they also know the retailers better as well.

Both parties depend on each other completely to make deals a success, but one distributor says this is not always how the arrangement works. As is so often the case, the stumbling block appears to be money.

"My fundamental take on this is that brand owners do not pay distributors enough to exist," says the distributor. "They often get away with the minimum rather than look to pay a sustainable distributor allowance."

While Jenks' failure may not signal the death throes of an entire sector, it certainly sends a warning shot to distributors. Outsourcing doesn't always come easy.