If there is one sector that has yet to truly feel the effects of an improving global economy it is the fast-moving consumer food and drinks industry.
Since the recession, margins have been eroding and sales growth has become harder to find, even in the emerging markets which once enjoyed meteoric sales performances.
Research from OC&C Consultants shows that the sales growth of the top 50 fast-moving consumer goods companies has halved for the second year running, slowing from 2.9% in 2013 to 1.7% last year.
This is the second-lowest level in the past decade and has resulted in Coca-Cola slipping from fifth to seventh place in the rankings of the top FMCG companies, losing ground to Brazilian meat company JBS and drinks group AB Inbev.
Unpredictable exchange rates have played a significant role in the low growth figures. Falling exchange rates for emerging-market currencies such as the Russian rouble, down by 17.2% last year, and the Argentine peso, down by 32.8% last year, accompanied by the appreciation of the US dollar, was enough to cancel out the positive organic sales performance of most firms.
However, volatile exchange rates only partially explain the lacklustre sales growth. Bankers and analysts refer to “institutional sluggishness” among big consumer groups, which is preventing them from responding effectively to greater competition from smaller “disruptive” brands, resulting in lost sales and market share.
The outcome of this dynamic is that the trend for consolidation in the food and drinks sector is only going to continue. Big companies will look to merge with large rivals in a bid to increase scale and reduce costs as well as seek to snap up smaller, more agile rivals in an attempt to grow sales.
This continued M&A activity will also increasingly affect Britain’s food and drink industry, which few are aware is actually the country’s biggest manufacturing sector, generating turnover of £92bn pa. The sector as a whole employs more than 400,000 people and occupies tens of millions of sq ft of industrial, office and retail floorspace.
The continued success of food and drink manufacturers in Britain is vital both for the country’s manufacturing industry and the high street.
For example, Italy’s Ferrero Rocher’s £112m deal to buy Thorntons chocolate has potentially prevented another high street retail casualty.
Thorntons endured a torrid period in the aftermath of the recession as it battled to downsize its bloated over-rented store estate and improve sales and profits.
Akeel Sachak, global head of consumer at Rothschild, which is advising Ferrero Rocher, told me: “If Thorntons had died and gone to heaven, it would not have done better than being sold to Ferrero.”
He said this was Ferrero Rocher’s first branded acquisition in its long history and he was sure that in five years Thorntons would be “a much bigger and more relevant brand than it is today”.
Ferrero Rocher has also committed to keep Thornton’s manufacturing facility in Alfreton, Derbyshire.
Similar motivations to improve the operational performance of historic brands are also driving mega-deals in the sector.
In March, Warren Buffett and a private equity group backed by three Brazilian billionaires combined Heinz, the maker of baked beans, with Kraft Foods, its US rival, in a $100bn (£64bn) transaction.
The deal came only two years after the veteran investor’s Berkshire Hathaway and Brazil’s 3G Capital first teamed up to carry out a $28bn takeover of Heinz, which at the time was the world’s largest takeover of a food company.
Mondelez International, the owner of the Cadbury brand, is also mulling plans to separate its soft cheese and grocery division, which includes the Philadelphia spread brand, to focus on its faster growing snacks and confectionery arm.
And bankers specialising in consumer mergers and acquisitions say that this is only the start of consolidation in the food and drink sector, with one forecasting a “shedload” of deals on the horizon.
Deirdre Hipwell is mergers & acquisitions correspondent at The Times
