THE BIG DEBATE: Distributors probe buyouts and finances

Commercial Kitchen 2018 was the setting for the ‘Big Questions for Kitchen Houses’ panel debate.

Catering Insight hosted the ‘Big Questions for Kitchen Houses’ panel debate at this year’s Commercial Kitchen show, which focused on the current catering equipment distributor landscape, including mergers and acquisitions and how to avoid financial trouble. What follows is an edited version of the discussion.

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On the panel

Mark Kendall, director, Inox Equip, and chairman, CEDA
Anna McNamara, MD, Catering Equipment Solutions (Peterborough)
Cathy Wilcox, MD, WilcoxBurchmore, and southern chair, CEDA
Jack Sharkey, MD, Vision Commercial Kitchens, and immediate past chair, CEDA

With more buyouts and mergers of kitchen houses making the headlines, can you see further consolidation ahead?

JS: I think it’s inevitable. Our sector has seen a huge amount of professionalism over the last 10 years. If you wind the clock back to 10-15 years ago, the larger distributors were probably sitting around the £4-6m turnover mark. Now we are starting to see them starting to grow quite significantly, and that has started to attract external investors. Added to that, there are quality management teams within the organisations starting to look at opportunities where they can sort out those businesses and really extract more value out of the market.

AM: I agree, I think there are opportunities to be purchased in lots of different ways. A lot of kitchen houses have been buying up engineering firms and consolidating the engineering side of things, and I think we’ll see more.

Inox Equip’s Mark Kendall and WilcoxBurchmore’s Cathy Wilcox discussed distributor consolidation and whether there was room for smaller companies in this market.

MK: Generally our market is growing, especially from a CEDA point of view, our members are seeing increased sales. It is a lot easier to grow their businesses via acquisition than organic growth. Because in our industry we have a shortage of quality people coming through from universities and colleges, we tend to grow our own, but also attract more people via the acquisition route.

CW: I don’t think there will be more takeovers. The major player that swept the carpet from everybody’s feet has itself been bought out. I think we are going to see a lot more entrants coming in and setting up design and kitchen houses. It is quite an easy market to enter as a kitchen house. It’s an exciting phase for everybody here.

How can smaller, independent distributors continue to survive if there are more ‘big fish’ in the market?

CW: I think we only have to look at the marketplace in general for retail food sales and see that the boutique operators are the ones who are surviving and really doing well. I feel this translates extremely well into our marketplace. There is always room for the small operator because the customer is king, and who recognises that more than the small kitchen house who can personally manage and exceed that client’s expectations? Our marketplace isn’t just driven by price. When you are having a new kitchen or a new restaurant, the most important thing is confidence that the person you’re buying from can deliver within time, within budget and without any errors, and that’s why I feel the small kitchen house will succeed.

MK: There’s a place for everyone in the market. It’s about adding that point of difference, confidence, quality and just providing that sense of comfort really to our clients and end users. As the smaller or lower turnover distributor gets busier then it just grows and grows, and we’ve all started from one computer and two people in an office up to 10-15 people. So you go with your client base.

AM: Also with a smaller distributor you’ve got consistency. Generally they are owner operated and you’ve got that key person in that business, as well as the staff turnover being considerably lower with smaller companies than it is with bigger companies. Throughout a project you’ll see the same people rather than being passed around to lots of other people. So there are definitely benefits to going with a smaller company than there are with the bigger companies.

JS: Commercial kitchens are incredibly complex technical things to build. I think the smaller kitchen houses are focused on their training, education and knowledge, that’s what they’ll bring to the party. And clients will see that. So I think that’s how they differentiate themselves, making sure that they are educated, they are knowledgeable and more so than the larger organisations. Because inevitably in the larger companies it’s harder to distil that knowledge down to everybody in that organisation.

Can you see larger kitchen houses buying out manufacturers and suppliers or vice versa to offer a cradle to grave catering equipment service?

MK: No, I think the principles are conflicted. I see the point of some of the larger manufacturers buying up individual distributors and trying to tag into that line of the bespoke design service. But from my point of view and also many of the CEDA members, we have an unbiased approach to specification, to design. It’s about knowledge. Being shackled to a manufacturer isn’t giving best value to the marketplace.

CES (Peterborough)’s Anna McNamara feels if distributors buy out manufacturers, it would leave them shackled to that brand.

AM: It’s a much bigger beast to manage. It comes down to the personal side of things and being shackled is not a good thing for the client because they are going to be led into that particular manufacturer’s products rather than looking at the open market and what’s best for them and the equipment that they need.

JS: I think it’s horses for courses – Middleby have tried it in the US, I’m not sure how that’s going for them. I think in certain market sectors around the world it may well work where the manufacturer acquires a distributor. Will that work in the UK? I’m not so sure. If it did happen I think they’d keep it under the radar, because they’d alienate a lot of their customer base, ie, distributors. I think there are arguments for ‘super dealers’, but to buy brands and market those brands, is has to be in the right marketplace. If you are a specialist design house advising a client for a particular need, you need to be able to offer your clients a range of products that is suitable for them with the right application.

CW: I think there are places for them and I think it has been shown to be successful in other countries where they’ve gone in and worked with a brand actually developing lines of equipment that perhaps they didn’t do previously to enable them to supply completely across the board. Would it work here? I don’t know. I think we’ve had the luxury of being able to supply the right equipment that we choose for our clients. The only way I could see it working is if there was a distributor that perhaps supplied a big operator and decided to do all one particular brand.

Do you think more distributors will launch wholesale equipment arms to offer products to fellow dealers?

AM: Whether it’s going to be a trend or not, I think we’ll wait and see. It’s always been one of those contentious things within the marketplace so it does kind of step on distributors’ toes somewhat. I do think that as distributors we have to work with some of those companies as they come in, especially if they’ve got particular brands they are distributing. With the new GDPR rules hopefully we’ll be a little bit safer with those companies not poaching our customers, as some of the bigger ones like to.

MK: The wholesale market has been here for 30 years and it’s not going away. There are more and more jumping onto that bandwagon, but it’s about providing difference. We constantly get clients who’ve been on the internet searching for equipment, but how does it go into a scheme, who installs it and gives training on it? That’s the issue we find on a daily basis, so do we steer away from some of those brands because of it? Probably. We are looking for partnerships from the market. At the end of the day we are all in this to make money. The more partnership and collective working we can do with the rest of the industry, the better it will be for all of us.

CW: We are not box shifters. We are here to provide a design solution and we want to work with people to give them value for money. I think that sector of the market is getting almost to its optimum level, because again it’s ostensibly quite easy to get into, but people are working at dangerously low margins and it does make you wonder how they can sustain the service and the ability to market themselves, because they have got to shift a lot of kit to be able to make enough money.

JS: I’m not sure. Wholesale is here at the minute; there are some companies that have entered into that market supplying some of the smaller distributors and design houses. I think that will always continue, there’s a market there for it. How much room there is in that market for those companies I’m not sure. But it does then beg the question, what are they doing with their normal business?

Some big name distributors have recently found themselves in trouble – do you think there will be more instances?

JS: There but for the grace of god go any one of us. Any one of us can get caught out with a client going bust on us or on cash flow issues. In terms of the ethical side of it, that’s really for the government to address and say what should and should not be done. If people want to take advantage of the rules and regulations within the legislation they are entitled to do so, providing they are not breaking the law. The bit that you have to question is how those organisations sometimes have been run leading up to that demise.

AM: No-one can predict what’s going to happen, whether the big or the little boys are going to go. I think there are certain things that you can do, such as minimising your risks by ensuring your debts and making sure that you credit check everybody. Management-wise there are opportunities to deal with things, but you never know whether there is going to be a downturn. On the ethical side of things, we all know fairly well in advance if there’s going to be an issue coming along, and you should deal with that by putting your clients and suppliers in the picture beforehand. Don’t leave them in a position where they are at maximum risk. That’s what’s happened in the marketplace, not with everybody, but I think it’s highly unethical and those businesses in particular should be dealt with in a different way than the ones that simply can’t avoid it.

MK: Over the years, Inox has had some hard times where unfortunately we’ve had to make redundancies and engage with our supply chain and clients and work through it. It could happen to any one of us, and as our businesses grow and we are taking on larger clients, if they decide they’re not going to pay, then I challenge anyone to try and recover from that. From the ethical point of view, as directors of businesses we all have a responsibility to our clients, the Inland Revenue and our staff. Sometimes it appears that some of that hasn’t been recognised by some of the companies that have gone out of business over the last 4-5 years.

CW: I don’t know if it can be prevented. Even in the short space of time WilcoxBurchmore has been going we have had a couple of hard knocks but we’ve always been quite strict on our financial policies. We pay on the nose every time. So if there was a problem we would always get in touch with our suppliers. We’ve all seen the phoenix rising from the ashes and people going out of business one day and starting the next. I personally think this is absolutely horrific and how they can live with themselves I really don’t know. I hope the suppliers look after the companies who have always paid them. Watch this space though, as CEDA is looking at a way of providing insurance where it can back up the projects that CEDA members do.

Do you feel that margin erosion is prevalent?

CW: The way that we maintain our margin is by looking at added value that we can give in terms of expanding the offer that we are able to give our clients. When we do turnkey projects we’ll do the whole thing. So we do charge accordingly for project management, things over and above the basic equipment which can only give you a certain margin and a certain profit. That way, it raises our overall margin.

MK: If a project is going out to tender then it’s technically a bit of a bun-fight to see who wants to win it at a certain margin. For our bespoke design works it’s about selling features and benefits. You know our industry sells margin, we need to sell features and benefits. From a CEDA point of view we have 105 members who are unique in what they deliver to their client base, and I think we should celebrate how good we are.

AM: We are offering a service and not just a one piece of equipment. The danger is that consumers buy off the internet, and we’ve all experienced ordering something that doesn’t quite do the job. That’s where the customer wins with companies that can do the whole project, cover everything and ensure that the equipment that they are buying is right for what they are doing. It is all about added value and guiding those clients through the whole process. It is an industry fraught with issues, you need lots of different disciplines, and having somebody to guide you through that is ultimately going to save you money.

Vision’s Jack Sharkey advised fellow dealers to be transparent in their value-added charges to end users.

JS: There has been an element of margin erosion over the last 4 or 5 years, that has been driven in part by internet sales. But we have ended up with a stabilisation in the margin because we have got greater transparency: project management. We’re offering skills, knowledge and expertise, right at the beginning of the project. That has to be paid for. So be upfront, be open with the clients and explain what it is you are charging for, whether that’s initial advice, the conceptual stage, project management, procurement, consolidation, installation or after-sales service. All those have a value added to them, and you can separate it out.

Authors

One Comment;

  1. David Burnett said:

    Much sense spoken here from a respected panel who know the industry. Good reading and I hope it continues to be the case that there is room for all, big and small. Those players who have recently been making jaw-dropping acquisitions, trying to trample over the small-fry, will need to continue feeding the monsters they are creating. It will only take a relatively small shift in the way the market prefers to buy it’s equipment to, potentially, have a big effect on their turnovers. The Government’s currently shambolic management of Brexit and uncertainty around ‘deal-or-no-deal’ is hugely denting business confidence – it’s bound to result in a large number of projects and expansions being shelved in the restaurant and catering sector. How many of these big mergers were heavily reliant on continued growth in spending? Bubbles tend to burst

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