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A SHINING STAR OF CONVENIENCE FOOD
Corporate Business Review
CORPORATE MARKETING STRATEGY
Author: Thien Tran
January 2015| Iss.No:2
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Executive Summary
Greenmore is a leading convenient food business with an annual turnover of
approximately £1.3 billion (Greencore, 2014). The company has a strong market
position and clear strategy in approaching consumers, expanding product portfolio and
managing finance efficiently. Hence, whilst UK and the US food retail environment
overall remain challenging, Greencore proved annually strong business performance
with revenue increased by 6.4% to £1,273.5million and the like for like revenue growth
in convenience foods of 8.4% in 2014 (Greencore, 2014). Together with increased
revenue, the company’s operating profit was up by 11.4%, equivalent to £ 82.9 million,
leading to a 30 basis points increase in operating margin compared to previous year.
Despite the increase in capital expenditure, the group delivered a strong performance on
cash generation with a decrease by £20.7 million to £ 212.1 million in 2014. The most
striking point is the growth in earning per share with 13.6% growing up as opposed to
previous year. Due to changes in consumers shopping habit, the growth of food to go
(FTG) demand in UK market, and a huge investment in business facilities in the US and
UK, it is expected to see further progress of Greencore in the next few years.
Introduction
The world’s food retail industry has had positive changes since the severe economic
crisis in 2008. As reported by Market Line (2014), this sector had total revenue of
$5,564.3 billion in 2013, representing a compound annual growth rate of 4.8% between
2009 and 2013. With the emergence of convenience store and changes in consumer
shopping habit, the market has become playground for dozen of new product categories
in which the most remarkable is convenience food. To meet the increasing demand of
consumers, companies all over the world have endeavored to expand their product
portfolio and penetrated into new markets to gain market share. However, to survive in
such a cut throat competition, besides supplying right products to right customers, it
also requires an efficient management in terms of finance and business strategy. Among
these companies, Greencore emerges as a shining star in convenience food industry with
a strong business performance in the US and UK market. This report will aim to analyze
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global food retail industry as a whole, but mainly focus on evaluating business
performance of Greencore in detail.
Convenience Food Industry
After recovering from severe economic crisis in 2008, the global food retail industry
comprising food products, both packaged and unpackaged as well as beverage has
recently shown a healthy growth rate, especially in emerging countries. As reported by
Market Line (2014), the global food retail industry had total revenue of $5,564.3 billion
in 2013, representing a compound annual growth rate of 4.8% between 2009 and 2013.
The performance of this industry is forecasted to accelerate, with an anticipated CAGR
of 5.3% for the five-year period 2013 - 2018, which is expected to drive the industry to a
value of $7,215.1 billion by the end of 2018 (see figure 1)
Figure 1: The global food retail industry from 2013-2018 (Source: Market Line, June 2014)
In Europe, the food industry sector is one of the largest and most important
manufacturing sectors with almost 310,000 companies, contributing to 14.5% of total
manufacturing turnover, equivalent to €917 billion for the EU-27 in 2014 (Europa,
2015). Among these countries, Germany accounts for the largest portion of food retail
industry with 29%, followed by France and UK with 23% and 19% respectively
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(Marketline, 2014). In UK, the food retail industry turnover is on an upward trend,
growing from £152.2 billion in 2010 to £174.5 billion in 2014, but year-over-year growth
rate has shown a downturn since economic crisis in 2008 (IGD UK, 2015) (see figure 2).
Figure 2: Turnover of retail food industry 2004 – 2014 (Source: IGD, July 3rd, 2014)
According to Borbia (2014), UK food retail market is considered very mature, and, thus
growth in the retail sectors is unlikely to outstrip that of the wider economy. In recently
years, as reported by Kantar (2013), this market has emerged the FTG trend, that
estimated to be worth £6.5 billion (See figure 3).
Figure 3: The US and UK food to go by channel and category (Source: Greencore report, 2014)
Size of UK Food Retail Market
5
40%
20%
20%
15%
5%
Greencore's Percentage of Run Rate Revenue
UK Food to go
UK Prepared Meals
UK Grocery
US Food To Go
Ingredients&Property
In 2014, additionally, this market experienced a
strong growth, especially chilled food to go market
and sandwich market with 9.5% and 9.8%
respectively compared to previous year. The UK
convenience market also indicates an increase of
new convenient stores to 6,319 stores in 2014, and is
projected to grow by 8% in 2017 (see figure 4). This
opens up a good opportunity for convenience foods
in this country. Showing the same pattern with UK,
additionally, the US chilled prepared foods market is
estimated to be worth $36 billion with a domination of prepared salad ($12 billion),
chilled entrees ($11 billion) and sandwiches ($6 billion) (see figure 3).
Greencore - A Shining Star of Convenience Food Market
Operated in UK and the US with 22 convenience food facilities, Greencore is considered
as a leading convenient food business with an annual turnover of approximately £1.3
billion in 2014. The company had an excellent year with strong revenue growth,
improved margin and return on capital, strengthened customer relationships, a refined
strategy and significant organizational and cultural development. As is shown in the
figure 3, the brand’s product portfolio is constituted of ingredient & property and
convenience foods which include food to go, accounting for 40% of total revenue;
followed by UK prepared meals (20%), UK Grocery (20%) and US food to go (15%).
Figure 5: Greencore revenue by categories (Source: Greencore report, November 2014)
Figure 4: UK convenience store
(Source: Greencore, Nov. 2014)
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Sales Growth
In 2014, the company delivered positive result
when total revenue increased by 6.4% to
£1,273.5 million, in which convenience food
category was up by 7.5% to £1,213.4 million.
On a like for like basis, revenue was 8.4%
ahead with the UK market up by 7.5% and the
US market up by 15.3%. In UK, Greencore’s
convenience food growth rate is seven times
and almost three times higher than UK food
market and UK chilled convenient food
respectively (see figure 6). This performance
was considerably driven by a growth of food to
go categories with 15.3% as opposed to 9.5% of market growth, and the investment in
significant re-launch activity with several key customers and net business wins. In May
2014, the business announced a significant business win and major investment in the
Northampton facility (Greencore, 2015).
Unlike convenience food, however, ingredients & property division accounting for 5% of
total revenue did not show the same pattern with a record of 9.7% decline in revenue on
a constant currency basis, as the result of low commodity price in edible oils and lower
volumes in the molasses feed business.
Operating Profit and Operating Margin
Last year was considered as another successful year of
Greencore in every aspect, especially financial
management. As shown in financial statement,
Greencore’s operating profit notably went up by 11.4%
to £82.9 million in 2014, while operating margin stood
at 6.5% compared to 6.2% in 2013 (see figure 8). When
it comes to convenience food, the operating profit
increased by 11.8% to £80.7million, whereas
Figure 6: Greencore UK Convenience Perfomance (Source: Greencore Report, November 2014)
Figure 7: Convenience food operating profit (Source: Greencore Report, Nov.2014)
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operating margin indicated an upward trend to 6.7% compared to 6.4% in 2013 (See
figure 7). This was driven by the strong growth in revenue and improvements in some of
the lower margin parts of the UK portfolio. When comparing between YoY revenue and
operating profit, it can be seen that Greencore is a blue chip company as these figures
reveal a constant growth, meaning that the company does not only become bigger and
bigger, but also improve its operation to be better and better.
Figure 8: Greencore financial highlights of 2014 (Source Greencore report, Jan.2015)
Cash Flow, Net Debt and ROIC
According to Greencore statistics, convenience food in UK and the US has speeded up
rapidly in recently years due to changes in consumers shopping habit and new
penetration to this category. Hence, the company set up strong places in advance by
maximizing free cash flow to facility investment in UK and the US market. In 2014, the
company continued to lay the foundation for growth by commencing a significant
capacity investment program which enables the company to enhance competitive
advantage as opposed to competitors. In the UK, Greencore invested £30m in the
Northampton food to go facility, whereas in the US it built a national food to go business
of real scale. To facilitate this, it undertook a significant and complex program of
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development. During last year, the company undertook a £7m capacity investment in
the Jacksonville facility to manufacture frozen food to go products for a key customer.
Also, this organization acquired Lettieri’s, a leading manufacturer of frozen food to go,
and constructed a new facility in Rhode Island at a cost of approximately £20m. Despite
of these huge investments, Greencore showed its feasibility and efficiency in utilizing
capitals, demonstrated by an increase in ROIC to 13.7% in 2013 compared to 12.7% in
previous year.
Figure 9: Greencore cash flow statement (Source: Greencore Report, Nov. 2014)
As a matter of fact, one of crucial factors to
evaluate the company’s heath status is to look at
free cash flow and debt. Despite the increase in
capital expenditure, the Group again delivered a
strong performance on cash generation.
As can be seen in figure 9, net cash inflow from
operating activities was £84.7million compared
to £65.8million in 2013(see figure 9); meanwhile
net debt decreased by £20.7 million to £212.1
Figure 10: Greencore Net Debt YoY ( Source: Greencore Report, Nov.2014)
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million (see figure 10). Especially, net debt (EBITDA) leverage stands comfortably below
2.0 times as a result (Greencore Financial Report, 2014). This performance was driven
by strong free cash flow conversion and lower exceptional cash spend partly offset by
higher capital expenditure. It indicates that Greencore was successful in managing and
improving expense and cash flow efficiently.
Adjusted EPS and Dividend
Not only does Greencore has a strong sale
growth, the company is also one of the few
companies maintains a stable growth rate
of YoY earnings per share and dividend.
In 2014, the company’s adjusted earnings
of £63.7m were 15.6% or £8.6m above
prior year, meanwhile adjusted earnings
per share of 15.9 pence were 13.6% ahead
of 2013 (see figure 11). More importantly, the company delighted shareholders with a
final dividend of 3.25 pence per share, which resulted in a total dividend for the year of
5.45 pence per share, representing an increase in dividend per share of 13.5%, in line
with the growth in adjusted earnings per share.
Given the continuing new business
success of Greencore, in the US and UK,
the share price is by far higher than
European food and beverage industry in
general. In 2014, successful investment
projects significantly boosted the
company’s price share three fold higher
than previous year. With these
satisfactory business results, Greencore
does not only gain investors’ trust, but also attracts the attention of press and media that
contributes to consolidating the company’s reputation.
Figure 11: Greencore Adjusted EPS ( Source: Greencore Report, Nov.2014)
Figure 12: Greencore share price versus F&B (Source: Goodbody, Nov.2014)
Adjusted earnings per share
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Food to Go – The Key of Success
The success of Greencore does not only
represent in financial results, but also in its
business strategies towards market
opportunities and consumers shopping habit
changes. According to Greencore market
research, consumers in food industry
continue to seek value of money, more
convenient solutions, increase focus on
fresher and healthier options, and demand
more snacking during the day. Also, the
world’s retail industry has recently shown
changes in physical format among leading
retail channels. In UK, the number of convenience store is estimated to increase to 7,385
stores much higher than total number of hypermarkets and supermarkets in the next
two years (see figure 13). The emergence of convenience stores and slow growth rate of
supermarket channels has opened up opportunities for FTG market. This type of
product is purchased in multiple channels including: coffee shops, multiple grocers,
independence markets, forecourts, high street, convenience, travels, discounters and
even food services. Incorporated food purchased and consumed out of home where
there is an option to take away, the UK FTG market is worth approximately £20 billion
and estimated to growth by 5% on a yearly basis (Greencore, 2014).
Representing over 40% of total Group revenue, FTG comprising sandwiches, sushi, and
salads, is considered as the key focus of Greencore. According to Greencome’s CEO Gary
Kennedy, the Group’s strong revenue and earnings performance were driven by this
category; especially the sandwiches category and the broader chilled FTG market
experienced strong growths in 2014 with the 9.8% and 9.5% ahead respectively. With
market shares ranging between 21% and 37%, FTG’s product lines significantly
contributed to maintaining market leader position of Greencore in UK year over year
(See figure 14). As reported in the company’s financial statement, FTG business
Figure 13: Format of convenience channel in UK (Source: Greencore, Nov.2014)
Physical format for leading grocers
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outperformed the market with revenue growth of 15.3% driven by investment in
significant relaunch activities with several key consumers and net business wins.
Figure 14: Greencore’s FTG market share and position
(Source: Nielsen 52 w/e 29 March 2014)
Conclusion
Greencore is one of the few companies generating satisfactory business performances in
every aspect. The company did make a strong like for like growth through new customer
wins and enhancing share in existing customers. In addition, this organization showed a
margin enhancement, delivered through leveraging scale and recovery of input cost
inflation. More importantly, through cash generation and tight capital management
despite M&A activity, Greencore notably achieved leverage reduction. Last but not least,
the company’s development plans showed satisfactory results with a ROIC progression
that delivered through strong operating profit performance together with tight and
clever management of investment. In conclusion, it is no doubt that Greencore is a
shining star of convenience food industry in UK.
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