Mergers and acquisitions are paving the way for growth in the food and drink sector, according to a new report from accountancy and business advisory firm BDO LLP in the South East.
With revenues of £95.4bn, food and drink is the single largest manufacturing sector in the UK, which was buoyed by a 7% growth in deal volume for M&A activity in 2014.
Kevin Cook, partner and head of manufacturing at BDO LLP in the South East, believes transactional activity will play a large part in the year ahead, as food and drink firm’s battle for growth in both domestic and international markets.
He explained: “In an effort to compete with stores such as Aldi and Lidl, there are considerable discounting efforts from the big four supermarkets. Combine this with savvy shoppers who continue to be driven by price and transparency, and you can see how mounting pressure is being put on manufacturers and processors to produce quality products at a lower cost.
“These businesses are being squeezed in the middle and organic growth is a challenge. With improving debt markets and a trend of increasing valuation multiples, the sector is ripe for M&A activity and we’re seeing many boardrooms putting it back on the agenda.”
He added: “As the big four supermarkets review supplier relationships, we would also anticipate more consolidation specifically in the mid-market as companies look to create operational efficiencies.”
BDO’s Food and Drink Report 2015 describes how any changes to government tax strategy could increase the cost of production and hinder new product development.
The industry invested more than £425m in new product development (NPD) last year, which translated to over 16,000 new products. However, demand for more choice is one of the biggest challenges facing manufacturers.
Kevin adds: “The supermarket price wars mean that consumer shopping patterns aren’t likely to change; they’ll still search for the best deal. In order to continue pushing NPD, incentives in relation to innovation should remain at the forefront of government tax strategy irrespective of the shape of the next government post-election.”