Business context and trading conditions

Volatility and great disparity in trading conditions across international markets were key characteristics in a challenging year. Food inflation was high at various periods for commodities like grain and wheat, but significant food deflation was apparent in some other categories.

The world’s changing balance of economic power was also material to market performance. Suppliers of primary products like Australia and New Zealand achieved a measure of recovery as demand for resources remained high in China and other Asian countries. Minerals from Australia found a ready market, as did agricultural goods from New Zealand. The net effect was to put money in the pockets of Australian and New Zealand workers and support domestic demand.

Asia’s tourism market continued to develop, driven by Asian tourists. Australia’s effective marketing to Asian tourists helped soften the impact of declining Western tourist numbers. Hotel sectors like those in South Africa are still dependent on tourist inflows from Europe and North America. This creates a strategic challenge as hotel occupancies may remain depressed for some time, with knock-on effects for foodservice suppliers.

Asia Pacific markets able to draw advantage from a new wave of short-haul tourists from mainland China and elsewhere in Asia may have better prospects.

Asian investment in tourist infrastructure supports continued growth in tourism numbers. For Bidvest Foodservice this creates opportunities for volume gains into the hotel channel. Singapore and Macau have established major casino resorts.

The Macau experience highlights shifts in regional spending power. The port city’s gaming revenues surpassed those of Las Vegas five years ago. This year those revenues are expected to be five times those of the American ‘benchmark’. In the first four months of 2011, the Macau authorities tracked 6,4 million tourist arrivals, with 3,6 million from mainland China. The numbers are 10% up on the same period last year.

Statistics from other markets are less encouraging.

The UK foodservice market is declining in real terms. Recent research indicates meal numbers and food purchases are down year on year. Consumers are looking for value, a trend that is sure to continue as UK public sector cutbacks take their toll. Western Europe and parts of Central Europe faced continuing pressure as a result of low growth, low consumer and business confidence, consumer belt-tightening and government spending cuts.

South Africa faced similar challenges as indebted consumers downtraded, unemployment remained high and trading conditions remained tough in all areas of operation – supplies to the food industry, hotels, caterers, retailers and restaurants.

Diversification across dissimilar markets in various regions helps to balance market risk and contributed to continued overall growth.

In areas of the world where little or no growth has become the norm, large companies increasingly look to leverage their market power by seeking the lowest possible prices, resulting in continued pressure on margins.

In the UK, 3663 Wholesale will part with a major customer in the second half of the new period because lower margins and lower volumes made the contract unviable. Our UK business decided not to compete for the contract as even lower margins were in prospect.

The long-term effect of such leverage will be industry casualties followed by a gradual return to more acceptable margins. We have the resources to withstand these challenges and will continue to make business-like decisions to ensure profit rather than loss.

These risks are managed by continued focus on new business gains to create a sustainable, balanced customer mix.

Another method of risk management is to become the partner of our customers, thereby creating relationships that are not solely based on price. For example, 3663 Wholesale has stepped up its collaboration with customers.

A focus area across Bidvest Foodservice is e-commerce. Major gains have been made by the Australian and New Zealand businesses. Sister companies are now looking to replicate these successes. In the UK, 3663 Wholesale is trialling an e-commerce trading site, creating an opportunity for strategic growth as we foresee wider adoption of the e-commerce model in the British foodservice market.

A new margin management and pricing tool is also being rolled out in the UK. It has been developed in partnership with a world leader in business-to-business pricing software. The tool will be used by both the sales force and margin analysts. The 3663 Wholesale sales force is now fully e-enabled.

Product innovation is a feature of all markets and a key driver of market-share growth. In Asia, the need for constant innovation is showcased by strategic trends. A major development is the growing appeal of Western cuisine – a positive trend for our businesses.

However, it is evident that upwardly mobile Asian consumers do not embrace Western food offerings without modification. Global fast food chains have penetrated Eastern markets, but often make numerous menu changes to do so. It is a continuing challenge to find the optimum mix of food offerings that will feed this ‘Western’ trend while appealing to Asian palates.

Performance

Performance was mixed, with a satisfactory result overall, driven largely by continued growth of our Asia Pacific businesses.

At R59,6 billion (2010: R58,4 billion), revenue was up 2,2%. Trading profit fell 0,7% to R2,0 billion.

Strong performances were put in by Australia, New Zealand and our Asian operations. European and South African performances were below expectations, but all teams achieved efficiency gains.

Returns on funds employed (ROFE) increased to 47,9%. However, trading margins came under mounting pressure.

People

Employee engagement

At 17 880, our headcount was largely stable. Bidvest Foodservices comprises prestigious companies with an excellent reputation and there is a high rate of employee satisfaction reflected in the annual satisfaction surveys conducted by many companies.

Bidvest Foodservice companies are all equal opportunity employers and do not discriminate on the basis of race or gender. They offer employment to any candidate with the appropriate skills and willingness to work. (Al Diyafa is an exception, bound by Saudi law to permit only male employees.) Our companies generally maintain a level of remuneration above the industry sector standard.

Every Foodservice subdivision reports on staff turnover and retrenchments, and while there was some variation among companies, there were no notable negative trends. A low level of retrenchments has continued to occur in some companies since the economic downturn and as a result of acquisitions and restructuring in South Africa. Bidvest New Zealand has proved remarkably resilient to both the economic crisis and two earthquakes, and recorded zero retrenchments. Numbers of employees at Bidvest Europe companies have generally risen this year.

The extent of unionisation varies by company and region, but is often high. Bidvest companies engage regularly with unions and maintain positive working relationships. In Europe and Asia Pacific there were no industrial actions, but one South African company experienced limited strikes in one province as a result of a fall in staff numbers in the process of rationalisation.

Training and skills

All Bidvest Foodservice companies have ongoing commitments to continually train their employees. Training comprises both on-the-job training and dedicated classes, with some divisions such as Bidvest Australia having their own Academy, offering a wide range of courses to eligible staff.

In South Africa, skills development continues to be a critical challenge. Investment in training enables Bidvest Foodservice SA to promote talent from within, address succession planning and improve employment equity. The division has ongoing programmes to develop staff at all levels.

At Bidvest Europe, 3663 Wholesale offered more than 10 000 person days of training. More than 520 person days focused on the environment. Health and safety Rigorous health and safety controls are in place at Bidvest Foodservice companies, with a focus on training to create and maintain a safe working environment. Many companies have dedicated safety teams and have developed safety plans to improve performance. In general, accident and injury rates have decreased. There were no fatalities to report at any Bidvest Foodservice companies.

Environment

Environmental initiatives are in place at all Foodservice companies. In Europe, these are a priority as environmental responsibility tops the public and political agenda, putting pressure on the food industry.

Systems are in place at most operations to monitor environmental performance, measuring energy and fuel usage and recycling.

While some companies already have environmental policies, others such as Bidvest Foodservice SA and Angliss Hong Kong are currently developing formal policies including targets and performance indicators.

We continue to investigate ways of reducing electricity usage and carbon footprint. An increasing number of energy-efficiency installations, including efficient lighting, account for significant savings.

Companies across the division are installing refrigeration and freezer units with a more environmentally friendly cooling agent. Most companies are also working to reduce fuel use by updating fleets with more efficient vehicles and developing more effective routing.

Operations involved with seafood participate in relevant schemes such as the South African Sustainable Seafood Initiative and Marine Stewardship Council (MSC) certification, and educate customers about seafood sustainability.

Product responsibility

Bidvest Foodservice takes food safety very seriously and our companies have an excellent reputation in this regard. Customer health and safety are paramount. Most companies comply with the international Hazard Analysis and Critical Control Points (HACCP) standard and many with ISO 9001:2008. Dedicated quality assurance and HACCP-trained employees ensure food quality and safety standards are met. Key customers conduct periodic food quality audits.

Fair and accurate product labelling is an increasing concern in our markets all over the world. As a high-quality supplier of reputable brands, Bidvest Foodservice is well positioned to lead by example. For the most part, our Foodservice companies only handle products prior to distribution. Although we acknowledge our responsibility as part of the supply chain, the onus for labelling falls mostly on our suppliers, with whom we actively engage to ensure compliance with regulations.

In South Africa, the new Consumer Protection Act (CPA) came into force in March 2011 as the latest manifestation of a trend toward more stringent regulation of food safety. The CPA places greater demands on us in terms of labelling standards, choice of suppliers and supply chain integrity. Foodservice SA companies have started to achieve stringent British Retail Council (BRC)certification in some facilities and will be rolling this out.

In addition to food safety, we ensure we manage data responsibly through careful IT management. This includes the security of customer data and customer privacy.

Some companies also carry out customer satisfaction surveys and for the most part companies track complaints and have procedures for dealing with them swiftly and effectively.

Future

Market risk rose at the start of our new financial year. Growth may remain low in the UK and Europe. Austerity measures and efforts to cut national deficits may also affect the rate of Asian growth, with knock-on effects for countries like Australia, New Zealand and South Africa that supply commodities to Asia.

Signals are mixed. Some signs of an uptick in consumer spending are evident in certain markets, but uncertainty remains. Our businesses are well-resourced, however, and are strongly cash generative. All teams have shown resilience in tough trading conditions.

Our UK operations were impacted by abnormal expenses, but have continued to invest in new product offerings and better systems while achieving acquisitive growth. We believe solid sales gains can be achieved and plan to grow both revenue and trading profit.

Our Benelux businesses also face intense competitive pressures, but expect to achieve renewed growth, as do our operations in Central Europe. Our base in the Middle East remains small, but continued gains are forecast.

Bidvest Foodservice SA faces similar trading challenges to our businesses in Europe, but has maintained its investment in technology and warehouse management systems. Efficiency gains are coming through. After two difficult years, a gradual but sustained recovery in revenue and trading profit is expected.

Asia Pacific will remain the engine of growth in the coming year. Bidvest Australia has achieved a leadership position in its national market and has shown itself capable of sustained gains on the back of product and operational innovation. New Zealand has also built strong momentum, widened its base and looks forward to continued growth.

Singapore has achieved good growth, along with Hong Kong and our businesses on the Chinese mainland. Though challenges will continue, we also look forward to continued real trading profit growth – in Asia Pacific and across Bidvest Foodservice as a whole.