sectorupdate - JLT Specialty

sectorupdate Food fight

FOOD & AGRI

Managing the ‘sugar tax’ and large appetites

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ood and agri companies face busy times thanks to the sugar tax, possible mergers and increasing product recalls. The sugar tax’ on the soft drinks industry – announced in George Osborne’s most recent budget and due to be implemented in 2017 – will affect some manufacturers. Though many companies (eg, Robinsons) saw this coming and have implemented sugar reductions to their products, some manufacturers will need to make further changes to product ingredients. This could impact their customer base, supplies, broader supply chain and capital expenditure on new equipment. Food manufacturers’ capital expenditure on new equipment is often huge, so any extra expenses could place a real strain on margins, as could anticipated drop in demand for certain products.

ENGINEERING & MANUFACTURING

Avoiding pitfalls of a servitisation strategy

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K manufacturers lead the world in servitisation – the transition from mainly selling products to using services as the basis of their competitive strategy. This trend is likely to carry on as customer needs continue to evolve and become more value-centric. However, servitisation is not just about business model innovation. It is also about organisational transformation.

16 whiteboard Spring 2016

The retail market in recent years has undergone significant change. The rise in discount retailers such as Aldi and Lidl has accompanied the growth in smaller retail food outlets (eg, Tesco Express) and the relative decline of the large supermarket. Though UK online retail is proportionally larger than anywhere else in the world, there’s still a lot of growth potential. Amazon’s recently announced tie-up with Morrison’s will add competition to an already marginthin space. Other retailers may well find themselves needing to make further efficiency improvements and investments in their online capabilities – with this potentially impacting their supply chains, and exacerbating supermarket price wars.

There is also a lot of capital within larger food businesses themselves, who may also look to make acquisitions. Food and agri companies should also take note of merger and acquisition (M&A) activity within the insurance industry, such as the £3.47 billion takeover of Amlin by Mitsui Sumitomo Insurance (a big player in food risk and insurance) in 2015. Insurance industry M&A has yet to materially impact the food and agri sector, but if two or more food-specialist insurers merge, rates could increase. For more information, please contact Jon Miller on +44 (0)121 626 7806 or [email protected]

Large appetites Meanwhile, acquisitions within the food and agri sector are likely to continue, as investors’ appetite remains high. Private equity remains interested, especially in high-growth branded businesses, such as healthy living and sustainable foods.

Change in motion First, there are significant cultural and corporate challenges. Defining the organisational structure required to support your delivery of products and services can be especially challenging. A shift of corporate mindset is also necessary to take on services – not just with your own business but also among customers and suppliers. Second, providing services requires a long-term business strategy that must be aligned with your general business operations. Have you, for instance, considered the warranty and insurance implications for your business? Third, there are upfront costs to consider – for example, for maintenance and repair services. Often a service centre needs to be set up and technicians need to be available to

repair and maintain the customers’ broken or faulty products. Consequently the nature and availability of your workforce may well need to change. Fourth, cross-company integration is key. The sale of services must be integrated companywide, as the production process and related services will span several departments. Any disconnect between production and services can therefore have serious repercussions. Fifth, it’s critical that your IT systems can support and keep up with a more service-centric business model. Your IT systems will probably have been built/ installed when your business was far more product-centric, so ask yourself: is it still fit for purpose? For more information, please contact Paul Goodman on +44 (0)118 945 0101 or [email protected]