The UK’s food and drinks sector is the country’s largest manufacturing industry by turnover, valued at £104.4 billion*, a powerhouse that surpasses both the automotive and aerospace sectors combined.
* Great Britain Department for Business & Trade
The drinks industry, encompassing its producers and entire supply chain, represents a dynamic sector that has recently faced unprecedented challenges. From global disruptions and local logistics issues to rocketing costs and shifting consumer trends, and most recently the impact of the Budget with the increase of national insurance, capital gain and inheritance tax.
Businesses operating in the industry need to find optimum ways to boost efficiency, control costs and respond to customer demands imposing new trends and requesting more sustainable products and a carbon neutral supply chain.
Rising costs + Budget impact = shrinking margins
While drinks manufacturers and their suppliers have managed to pass rising energy and raw material costs to consumers over the past 18 months, helping to stabilise cash flow, margins have narrowed in 2024.
These factors combined with the recent Budget changes are having an impact on EBITDA, as they involved:
- an increase in employer’s national insurance, which will hit businesses’ profit levels and ultimately reduce their valuations;
- a raise in capital gains tax which will result in lower after-tax proceeds from a transaction.
However, not everything is doom and gloom. There is a stable appetite of investors and corporates in the drinks industry attracted to innovative products and unique offerings.
Nevertheless, business owners need to carefully plan the sale or investment process to maximise profitability and avoid surprises.
The relevance of the drinks industry in consumer goods
Consumer goods remains the most sought-after manufacturing sector for investors in Europe, with the UK food and drinks industry perennially attracting capital, as we explained in our Moore Kingston Smith Manufacturing report H1 2024.
Investors and Hollywood’s appetite in the sector
Investors are keen on innovative and unique businesses in the drinks sector. The demand for acquisitions by corporate and private equity investors remains strong, underscored by high-quality products and cutting-edge technology at all stages of development.
This trend is showcased in recent acquisitions, such as:
- Wrexham Lager Beer Co Ltd, the oldest lager brewery still existing in Great Britain established in Wales in 1882, by Hollywood actors Ryan Reynolds and Rob McElhenney;
- Shandy Shack, pioneering mid-strength abv beer by SHS Drinks;
- Ginmeister brands by Pinkster Drinks Company;
- ICB (Intercontinental Brands), known for Cactus Jack, Veroni Amaretto, Rozél Vodka, and Bella Apertini by Kliro Capital Partners.
Mergers and acquisitions (M&A) transactions in the sector aren’t limited to alcoholic drinks:
- Fonthill Spring Water and Decantae Mineral Water by the premium bottled water Ty Nant;
- Clearly Drinks by Supreme, the vapes supplier, for £15 million;
- Dairy Arla Foods Ingredients is getting closer to acquiring Volac’s Whey Nutrition, as the transaction has recently been approved by the UK’s Competition and Markets Authority.
The supply chain to the drinks industry is also generating deals:
- Moody Direct, one of the UK’s leading suppliers of process and packaging solutions to the dairy, food, beverage, chemical and pharmaceutical industries was acquired recently by AxFlow UK, providers of pumps, valves, mixers and heat exchangers and part of the Axel Johnson AB group with operations across 26 European countries.
The Moore Kingston Smith view on the market
In an industry known for high levels of collaboration and consolidation, the ability to respond to these challenges can also drive growth and profitability. The good news is that the UK food and drinks industry is the most attractive in the manufacturing sector for investors, private equity firms and corporates in Europe with a clear appetite for unique businesses.
The challenges of the drinks industry and its supply chain are multi-faceted and demand agility and innovation. M&A offers a strategic pathway to navigate current issues, presenting opportunities to enhance operational efficiency, diversify supply chains for more sustainable operations, and adapt to shifting market and consumer trends with premium and low alcohol products on the rise. It can also accelerate digital transformation with the early adoption of AI to reduce costs and increase profitability and EBITDA.
We offer a personalised, partner-led and fuss-free approach. If you would like to discuss your business’s current situation and future growth plans, please get in touch to receive expert and honest advice.
To contact Marc Fecher, Corporate Finance Partner at Moore Kingston Smith click here
