Wholesale Sector Overview

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WITH THE right infrastructure in place, wholesalers and cash and carry operators can boost their fortunes by increasing their meat portfolio. Sales of fresh and chilled produce are providing welcome news to a sector that has struggled recently from tough competition from the supermarket chains.

Businesses can also stave off competition from the multiples and gain better margins by embracing certain growth categories, such as produce focused solely on quality or health. Pricing and pro?tability remain tough issues for wholesalers, but it is clear that meat is a very viable commodity.

THE WHOLESALE sector includes a wide variety of businesses, ranging from small wholesale butchers such as those operating out of Smithfield Market in London, to Weddel Swift with its 20 UK-wide depots. There are also massive cash and carry operations which include fresh meat products in their mix - such as Booker with its 173 depots.

A new report from IGD, UK Grocery Wholesaling: A Strategic Guide, gives some illuminating insights into the meat wholesale industry overall, and highlights the fact that while the sector struggles on many levels, many of its star performers come from the world of fresh and chilled meat products.

The grocery wholesaling market showed minimal growth in 2005, climbing by only 0.6% to £16.8bn - the lowest annual increase for a decade, says IGD.

"The slowing growth in 2005 was consistent with the general slowdown in retail spending during the year," it says. "Trading remains especially difficult for wholesalers owing to the progressive erosion of its key customer base in the inde-pendent retail sector."

Further contributing factors to the sector's dip include rising interest rates, utility and fuel prices, and the impact of a decrease in sales of soft drinks and snacks because of a general drive nationwide towards more healthy eating. "Structured to be a low-margin business, grocery wholesalers are particularly sensitive to rising operating costs, even more so in the current low-inflation environment, when selling prices are rising more slowly and are unable to compensate for the trend," insists IGD.

Small store retailers account for 69% of grocery wholesaling business, says the report, followed by food service at 10%. Other customers, including multiples and varied businesses, make up the rest. In the cash and carry sector, food service customers' share of sales rose to 16%. The four key customer groups expected to register growth in 2006 are convenience stores, forecourt stores, and the food service sub-categories of pubs, restaurants and canteens.

The report notes that grocery wholesalers now require a double margin: the goods they sell - low margin and thus vulnerable to retail price competition - plus rising operating costs.

Other key issues identified by the report included the targeting of smaller customers and suppliers, varied IT capabilities and promotional activities. "Promotional activity has become an increasingly prevalent feature of trading through the wholesale channel, especially as in an ever more price-focused retail market, the differential between wholesale and major multiple retail pricing has been progressively eroded," it says.

Wholesalers are primarily business-to-business sellers but: "Focus on the consumer has become more important to wholesalers as a means of achieving improved terms and investment from suppliers."

The cash and carry sector took a harder knock than the delivery specialists last year, with the sector declining by 1.8% to £9.33bn, while a boost of 4.9% to £7.55bn was noted in delivered operations. A bad year for Booker made a significant contribution to the disappointing cash and carry sector figures, with its sales falling from £3.7bn in 2000 to £3.2bn last year.

Looking at overall sales by category, 'chilled and fresh' and 'frozen' only account for 5% and 2% respectively. However, the frozen category grabbed the highest annual growth rate of all food and non-food sales, at 4.8%, while chilled and fresh trade rose by 2%.

"One of the biggest opportunities across food and grocery continues to be the significant growth of the chilled and fresh categories boosted by extensive innovation in product development and packaging," says the report. Wholesalers and their retail customers "under-trade" significantly in these categories, which offer a rapidly growing market and better margins and, more importantly, opportunity for meat producers and processors.

Deterring factors can be additional costs and resources to handle fresh produce; risk of wastage with short shelf life; in-store space shortage; a lack of branding "especially in areas such as ready meals"; and thus over-dependence on costly own label development.

Participation in the chilled and fresh categories is growing among symbol groups, however, according to the report, and "traditional cash and carry operators such as Booker and Bestway are also seeking to build their chilled and fresh offer".

It adds: "A key concern in the development of these categories is making the offer as retailer-friendly as possible, through initiatives such as the introduction of smaller cases to help minimise waste, and pre-packed fresh produce with effective presentations."

The report divides grocery wholesaling in the UK into the categories of cash and carry and delivered operations. Sub-categories include 'trade focus' (Booker, Bestway) and 'broader focus' (Makro, Costco) within cash and carries. Dedicated symbol suppliers (Spar, Londis) and ?exible distributors (Palmer and Harvey McLane) are sub-divisions within the delivered operations.

"The low-cost structure of cash and carry enables a clearer focus on price and value, while delivered operators have a greater element of service," says the report. "In addition, cash and carry operators are able to carry more extensive ranges, attracting a wider customer base, while the more restricted ranges of delivered wholesalers are focused solely on retail customers," it adds.

Symbol group operators are notable for the breadth of their offer which enables them to service the fuller range of modern convenience retailing, including chilled and fresh foods. Collectively, the top five wholesalers account for over 60% of the total market, with delivered business Palmer and Harvey McLane claiming the number one spot, followed by four cash and carry operations: Booker, Bestway, Makro and Costco.

Smaller, regionally-focused wholesalers account largely for the other 40%. A 2006 review of the top 30 wholesalers - by the Journal's sister publication, The Grocer - also features food service wholesalers, and ranks Brake Bros at number three behind Palmer and Harvey McLane and Booker. 3663 First for Food service is rated fifth behind Bestway Holdings.

PROFITABILITY

Across the board, tough conditions prevail, with traders facing product shortage, rising costs and tight margins. "There is continued pressure," says Scottish Association of Meat Wholesalers (SAMW) executive manager Alistair Donaldson. "You just have to look at company accounts. Overall, net returns are not high. And then there are the added rising costs, such as utilities.

"There's not a lot of slack to absorb these things. And then there's price pressure at the retail end - the chance to get it back is limited."

Greater transparency along the meat chain would certainly improve the situation, says Donaldson. Multiple retailers have made strides in this direction, with their producer clubs improving the exchange of information with customers, keeping profitability in the supply chain. However, the question of supply remains tricky.

Donaldson asks: "Are farmers making enough profit? If they decide to cut back production, we could lose critical mass. There is a supply shortfall already and we need dialogue; without a supply base, there won't be an industry."

Donaldson says such concerns have prompted farmers to push for the Competition Commission to review supply chain issues. With CAP reform and the move to a Single Farm Payment, farmers are paid whether they produce or not. "If there is no profit in it, they could well give it up," he says. "We need to strive to improve across the chain. We could end up generating more imports and get into a self-destructive cycle."

According to Weddel Swift commercial development manager Andy Lea, pricing is "as dear as we've known it - across the board". The wholesaler's range includes fresh quarters and carcase meats, with a full range of primal cuts. It supplies lamb from New Zealand, Australia and England; chicken, turkey, duck and goose; bacon; VacPac beef; offal; cheese; and sundries such as glazes and condiments.

Profitability is "not at an all-time low, but it is difficult to make a profit," says Lea. And shortage of product is certainly a contributing factor. "Foot and mouth disease in South America has had a slight effect," he says. Coupled with UK shortages, "it's a vicious circle and a bit of a struggle".

Weddel Swift has seen "massive consolidation" within its supply base. "Building partnerships with suppliers is the route we've taken," says Lea, and warns: "If anything, things are going to get worse, with supplies dwindling."

The good news is that orders for top produce are increasing. "We're seeing growth at the quality end of the market; people prepared to pay that bit extra," says Lea. Largely comprised of butchers' shops and caterers, Weddel Swift's customer base has had to withstand an assault from the multilples.

"We obviously had a massive hammering from them, but that's done now," says Lea. "Customers trust butchers and appreciate face-to-face contact. We're over it and moving on. A lot of competition has disappeared, and now we're as strong as ever."

The business registered its vote of confidence in the wholesale trade by opening a new South Wales depot last July, marking its biggest investment in recent years. Foodservice supplier Brakes, meanwhile, reports a similar pattern of rising costs and supplier consolidation.

Brakes supplies frozen, chilled and grocery products to the UK catering industry under its own and supplier branding."Prices are rising everywhere," says Rob McFarlane of the wholesaler's Prime Meats division. "It's always going to be a difficult point, but currently, we believe in dealing with fewer suppliers," he adds. "It means you can work in partnership with them and build relationships if you're dealing with them on a daily basis."

Also making strides in the UK is Irish grocery wholesaler Musgrave Group, which operates Budgens and Londis retail stores in Britain, Supervalu and Centra in Ireland and Northern Ireland, and a chain in Spain.

It ranks ninth in The Grocer's Big 30 Wholesalers list. The group cites its guiding principles as including 'long-term stable relationships based on integrity and mutual benefit'. It aims to 'create exceptional added value from food businesses that are different and better' and 'deliver a superior level of professional expertise and support services that ensure the success and profitability of the group's customers' businesses'.

The success of this strategy is reflected in fresh meat sales through its UK Budgens stores, which have rocketed in recent years, according to the chain. This has been the result of supplier consolidation, a focus on provenance and staff training.

MOVING FORWARD

Meat is identified in the report as a vital development category for wholesalers and cash and carry operators. "The need to provide high levels of quality, above all in fresh produce and meat, is key to the cash and carry offer," it insists. "Booker in particular has sought to address this need with the launch of Chef's Larder Premium, a range focused on quality provenanced cuts of meat, plus a limited range of convenience products to help build menus.

"However, Makro is probably the operator with the best developed, quality-focused range in the sector, including not only meat and fresh produce, but also fish, an extensive selection of cheeses and restaurant-quality products, such as desserts."

Booker lists over 23,000 lines, including grocery, fresh and frozen, alcohol, tobacco and non-food items. Stocked meat products includes Danish bacon and gammon, Blakemans Sausages, Chef's Larder and Tulip sliced meats, Vale of Mowbray pies, Padleys chicken, Continental meats, ready meals and burgers.

The business includes over 2,000 Premier retail outlets, which it claims have 'all the benefits of a national symbol group while retaining the personality and entrepreneurial spirit of the independent retailer'. It launched a new Butchery Services and Range Guide, featuring menu ideas and recipes from Michelin-starred celebrity chef Gordon Ramsay, last September.

"Booker offers more than just delivered wholesale," says head of proposition development Ron Hickey. "We provide a quality butchery service which is dedicated to caterers' needs.

"Booker can source, cut and prepare any meat order to help make customers' lives easier. The recipes focus on the excellent meat offer available to help publicans and restaurateurs achieve exceptional meals.

"Booker works closely with British and Irish meat bodies to ensure our products are of the highest quality," with "exceptionally high standards in feed, care and all of our meat is fully traceable," adds Hickey.

Further, the wholesaler "wants to help with every aspect of a caterer's business - from providing recipes and ingredients to a convenient delivery service and money-saving promotions."

Booker's butchery service features exclusive farm assured British meat and is available in over 160 of its branches. "Our research has shown consumers associate higher quality with locally sourced fresh foods and are prepared to pay a premium for meals made of these ingredients," said a spokeswoman for the chain.

Also among its branded range are Happy Shopper products, featuring 500-plus lines retailed in independent convenience stores, and its Chef's Larder line for the catering sector. The Happy Shopper own label brand aims to be competitively priced and includes chilled ready meals such as cottage pie, sausages and mash and sweet and sour chicken. Chef's Larder includes a fresh meat department specialising in British meat, including Welsh lamb and beef.

Cash and carry operator Makro sells food and non-food products to card carrying customers through 33 UK-wide outlets. Its butcheries offer tailored cuts and ready to cook gourmet meals.

IGD suggests greater emphasis on the catering market will provide opportunities for food service suppliers to Booker. "Likewise, increasing emphasis on chilled and fresh products will open avenues of opportunity for suppliers in these categories, and especially for local supply in fresh produce," it says.

FOCUS ON PROVENANCE

As well as reporting growth in premium lines, meat wholesaler Weddel Swift has also successfully launched a provenance-focused beef and lamb brand, England's Rose. It carries the English Beef and Lamb Executive quality marks.

Weddel Swift also supplies Harmony Farm beef and Farmers Gate bacon, and is planning to launch a number of new brands in the near future. A small quantity of chicken goes into customers' own label.

Beef is the biggest seller for the wholesaler, followed by pork, and then lamb and poultry. Of imported produce, strip loin is its star product."Value added is pretty new to us," says Weddel Swift's Lea. "A Finer range has been introduced into a number of depots featuring products such as smoked salmon and specialist cheese, giving butchers something else to offer and a competitive edge with supermarkets.

"We have seen a degree of success with the range and will launch it in the Portsmouth depot in May."

For SAMW's Donaldson, traceability is paramount. "The effort that's gone into the systems is fundamental as we go back into the export sector," he says. The Scottish industry also hopes to build on recognition of its Protected Geographical Indicator labels for Scottish beef and lamb.

"It has cache both in the home market, where it has great recognition, and aboard, which we need to build on," he says. "It's a crucial part of the marketing mix."

LOCAL SOURCING

IGD claims the UK wholesale sector is ideally positioned as a channel for local sourcing with its regional depots, although the dominance of staple branded products and limited volumes available from local supplies can be problematic. "Nevertheless, in a new initiative Booker is now seeking to exploit sources of fresh produce supply local to individual depots as a means of reducing prices through lower transport costs."

Private label is also identified by IGD as as a sector with further potential. Although it represents only 7% of grocery wholesale business, valued at £1.2bn, it accounts for a quarter of sales among symbol group operators.

"Private label continues to play a central role in the development of chilled and fresh categories. These have the highest level of private label participation across the wholesale sector overall at over 33%," it says.

FOODSERVICE

3663 First for Foodservice supplies ingredients, finished products and equipment to the catering industry. Last year, it participated in a project aimed at improving supply chain efficiencies and returns. Focusing on its Ministry of Defence (MoD) contract, the project was managed by the Food Chain Centre (FCC) and Red Meat Industry Forum (RMIF) through their Value Chain Analysis service.

The project looked at pork legs and loins supplied by Lincolnshire producer Geo Adams and Sons through 3663 to the Defence Catering Group; a £3m contract. Identified improvements included cutting and packing chops directly into plastic bags, replacing the laborious and wasteful practice of cutting loins into 22 pieces and reforming the loin, and reducing fillet pack sizes from 15 to five to reduce waste.

"The MoD is a major customer of the red meat industry," says RMIF Chairman Peter Barr. "Working together with all parts of the supply chain demonstrates there are considerable savings to be made to the benefit of all involved. This is just the tip of the iceberg. RMIF is committed to looking at every aspect of the industry to seek improvements."

A spokeswoman for 3663 said the project had been very worthwhile and would be used as a model for application to its other supply chains.

For Brakes, the biggest foodservice supplier in the wholesale sector, convenience continues to be the key driver of new product development. "We stock the full range you would expect from a catering butcher," says Brakes' McFarlane. "There's a move towards more portion control. Our customers are looking for work to be done outside of the kitchen; anything that saves on labour would cut across the board. Anything that takes pressure off the kitchen saves money for them.

"And with the success of Jamie Oliver's push for fresh ingredients, people are more interested in traceability and health than before," he adds. Brakes claims to be the first major delivered food wholesaler to carry the Red Tractor logo on its British ranges.

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