he food and agri sector can look forward to increased merger and acquisition activity, growing populations and favourable legal changes. But it must innovate and pre-emptively manage risks to take advantage of these changes. By Jon Miller, Partner at JLT Specialty
The food industry is big business. It is the largest sector in UK manufacturing, with a turnover of £92 billion and gross value added (GVA) of £24 billion, according to the Office of National Statistics. Add agriculture, wholesalers, catering and retail and the entire industry contributed 7.2 per cent of total national GVA in 2012, totalling £97.1 billion.
Given its size and range, keeping in touch with the developments and issues facing the sector is vital. A sample of just three industry events JLT Specialty has been involved in gives a taste of the challenges and opportunities ahead.
Managing M&A risks
JLT Specialty’s ‘Room 101’ events have focused on recent mergers and acquisitions (M&A) activity in the food sector and risks associated with such transactions. M&A activity finally picked up in the fourth quarter of 2013 after being subdued for most of the year, according to Grant Thornton. That trend is likely to stick as economic growth continues in 2014. This is good news for the food industry as growing activity is a sign that confidence is returning, as private equity firms are eager to invest into the sector while distressed M&A deals have reduced. But this confidence might be misplaced if insurance and risk management are not properly considered. For buyers, reviewing the adequacy of a target’s insurance programme can help identify inadequate policy terms, gaps in cover and uninsured risks.
Identifying risks that are not adequately mitigated or transferred enables buyers to avoid significant unanticipated costs postcompletion and strengthens their hands in negotiation over deal pricing and terms. Insurance costs can be dwarfed by the capital expenditure required to upgrade buildings or equipment to ensure cover can
continue to be secured. Large losses caused by the combination of composite panels and cooking processes have made many insurers wary and risk-averse.
For sellers, ensuring adequate cover and risk mitigation, pre-completion, enables them to head off any of these issues in the duediligence phase, preventing any unwelcome renegotiation surprises from potential buyers.
Feeding a growing population
June’s open day at food research leaders Campden BRI also pointed to growth in the food sector – but on a longer-term basis. The day’s lecture came from Dr Mehmood Khan, Executive Vice-President and Chief Scientific Officer of PepsiCo Global Research and Development. His message was one of innovation. Charged with a billion-dollar annual research and development budget, fresh thinking was central to PepsiCo, he said. It has helped the company to continue to grow and diversify, so that only a fifth of the company’s near-$70 billion turnover now comes from drinks, while one in five people on the planet consume a PepsiCo product every day.
Innovation will be increasingly central to the sector as a whole, Dr Khan pointed out, given that the global population is expected to rise from 7.1 billion people to over 9 billion by 2050. More mouths to feed is a tremendous opportunity for food manufacturers, but it also increases risks and puts pressure on food and agriculture companies to innovate to increase productivity. Changing processes, changing supply chains and new product development are major causes of product contamination and recall. Closer working relationships between the insurance world and companies such as Campden BRI, with its skills in food analysis and testing, is likely to prove central to tackling this challenge.
Tackling health and safety
The last two decades have seen significant improvements in health and safety in food manufacturing, with the number of accidents more than halving. Yet there is significant focus on behaviour and culture to improve things further, says Joanna Hancock, Health and Safety and Projects Manager at the British Frozen Food Federation (BFFF). “It’s a key area for our members.”
BFFF’s seminar on the subject this July shared best practice and increased understanding of risks as diverse as preventing Legionnaires’ disease and tackling
fire risks to working at height and driver safety. JLT Specialty provided an overview of the Ministry of Justice reforms to civil litigation funding, which showed that the individual cost of claims under the new fixed costs regime is significantly less than before, and that the new regime has resulted in shorter, stricter timescales.
These changes shouldn’t affect the advice for food businesses: they must implement systems to properly investigate and record accidents – at the time, not just when a case materialises. Doing so not only discourages frivolous claims, but reassures those involved in genuine accidents that the company takes such incidents seriously, hopefully enabling that company to avoid court altogether.
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For further information, please contact Jon Miller, Partner, Head of Regional Food & Agri Practice on +44 (0)121 626 7806