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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

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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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