The big squeeze

Tuesday 06 December 2022


In collaboration with our long-standing partners The Grocer, we’re delighted to share our annual Food and Drink Top 150 report

  • Despite having to adapt to Brexit, the Covid-19 pandemic and increased sustainability pressures in recent years, the UK food and drink industry has shown good resilience and exited 2021 in relatively good health
  • 2022 and 23 bring with it new challenges with unprecedented inflation and the associated cost of living crisis – players who are thoughtful in their moves stand to gain competitive advantage and step-change their share position

2021 was a largely positive year for the UK’s leading suppliers, with both sales and margins increasing compared to 2020.

Overall growth jumped from 1.1% to 4.1%, well ahead of inflation. While some of this represents a rebound in those industries most hit by Covid-19, every major category ended 2021 at a higher level than 2019.

Surprisingly, international sales also helped fuel sales growth for top 150 with sales growth of 9.4% vs. -1.2% decline in 2020. This was in spite of the fact that 2021 was the first full year of Brexit trade regulations being in place, which led to a significant decline in trade with the EU. Many of the 150 with international sales growth were businesses that have established operations outside of the UK (and indeed outside of Europe) – for example Hilton in Australia / New Zealand or Fever-tree in the US – so were less impacted by the trading dynamics of Brexit.

Aggregate operating margins, all stepped forwards increasing by 0.3ppts to 6.2% last year, their highest level since 2017. This resilience has helped them close in on the long-term average of 6.4%, a key milestone for the industry.

Among the businesses that enjoyed a strong 12 months are Charlie Bigham’s, capitalising on consumer shift from restaurants and takeaways to quality meals at home, with a 29.6% sales growth, on top of 16% in 2020. The premium ready meals player has also benefited from strong brand positioning in an own-label driven category, with a £3m TV ad campaign featuring Richard Osman.

Ferrero also posted its second consecutive year of strong growth, despite difficult conditions for impulse confectionery. Having invested heavily in the UK in recent years, the company have improved its portfolio mix by moving away from less profitable retail stores to invest in grocery channel growth. Their operating margins grew by 0.8ppts, helped by the acquisition and pulling together of Fox’s and Burton’s biscuits.

Sustainability was another area we saw the industry perform well in, with 70% of companies reporting a reduction in carbon intensity (CO2 emissions per £m of revenue). While consumer willingness to pay for sustainability may be questioned, in the face of increased energy prices / fuel costs, these investments and improvements simply make good business sense.

In general, the Top 150 demonstrated impressive resilience once more in 2021.

There were hopes for calmer waters after the pandemic’s enormous disruption to consumer habits but soaring inflation and interest rates created more volatility, presenting fresh challenges to a market that’s having to constantly adapt to survive. In that context, there is an expectation that margins have been under pressure this year and will be under even more so next year (in spite of big price hikes this year).

Nilpesh Patel, Partner at OC&C Strategy Consultants, comments: “We expect margins to take a hit for consumer goods players. We are already seeing varying abilities to pass through prices, where those who have more pass-through models, such as own label or commodity-based players, may be able to protect margins to some extent, while branded players will have to negotiate hard to maintain price rises in line with inflation.”

Will Hayllar, Global Managing Partner at OC&C, adds: “In some ways people may have been putting off difficult decisions, but that’s very real now. You can clearly see it in the acceleration of the discounters, but all retailers are looking at their assortments to ensure they’re offering value.”

The intensifying squeeze on incomes is likely to have an uneven impact across consumers, as the top two quintiles remain largely unaffected. Premium sectors have stayed more resilient, and could remain an attractive space to play in, along with cheaper, own-label players.

Some mid-tier brands, however, are under pressure from own-brand products and aren’t seeing more affluent customers trade down, therefore are likely to be hardest hit over the next year. Success is expected to come down to strength of brand, with mainstream players needing to clarify and justify their position to consumers. This creates a particularly hostile environment for challenger companies, who will need laser-sharp focus on hitting trends along with financial discipline to succeed.

While the impending recession is predicted to heighten the gap between winners and losers, there are opportunities for suppliers to ‘win’ in this environment through differentiation and offering customers perceived value.

If you would like to discuss any of the themes or our findings we'd be delighted to talk.

OC&C contacts: 

Nilpesh Patel

Will Hayllar

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