Ready, steady grow

With the general economic gloom claiming high-profile victims in almost every area of business, it's easy to blame the wider slump for factory closures in the food industry. But announcements in the ready meals sector over recent months are as much to do with the specific dynamics of the ready meals market as they are with the wider recession.

Ready meals closures include Bakkavör Group's Saxon Valley Foods in Biggleswade and its two Mariner Foods facilities in Grimsby. Meanwhile Greencore has closed one of the ready meals factories on its Kiveton site and Northern Foods has mothballed its Fenland Foods facility in Grantham after failing to negotiate an acceptable contract with the site's main customer, Marks & Spencer.

While the short-term economic squeeze has undoubtedly exacerbated the situation, longer-term trends and overcapacity are major underlying reasons for the rush to rationalise.

"There's been overcapacity for a while. This problem hasn't arrived overnight," says Nicola Mallard, food analyst with Investec. "The ready meals market hasn't shown good growth for a couple of years. It enjoyed very steep growth for between five and 10 years and now it's just plateaued."

It's all a far cry from the buoyant market of two years ago. "In 2007, the UK chilled and frozen ready meal sector had a market value of £2.2bn. The chilled sector accounted for the majority of this revenue, generating a turnover of £1.6bn throughout the year," says Datamonitor consumer markets analyst, Michael Hughes. "Furthermore, the chilled sector also recorded a strong compound annual growth rate (CAGR) of 6.0% over the period 2002-2007 (compared to the 2.2% CAGR recorded in the frozen sector over the five year period)."

Renaissance in frozen​

Since then, however, the frozen sector has been gaining ground fast, according to Brian Young, director general of the British Frozen Food Federation. "Two years ago the ready meals market was declining in value by 7.3% in frozen. As at November 2 [2008], it's now growing in value by 2.7%, so we've seen a huge turnaround in favour of frozen."

This is, in part, a result of budget-conscious shoppers opting for frozen options rather than paying more for chilled. But it's also due to a concerted effort to woo consumers back.

"Birds Eye, for example, has released its range of 'good mood' foods in an attempt to show that frozen food is not necessarily unhealthy or of inferior quality. Indeed, marketing has promoted the concept of how freezing actually locks in the 'natural goodness' of food," says Hughes. "As price savvy consumers look to save money, they may turn to frozen ready meals more frequently in the short-term future - especially if manufacturers can convince them that freezing does not affect the quality of healthiness of the food."

At the same time, the chilled sector is being squeezed from the top end by consumer demand for uncooked, self-assembly prepared food. "There's a move into raw products where the consumer is more involved in the cooking process," says Mallard. She adds that the challenge for ready meals manufacturers is that other players are using this shift in demand to eat into their market: "The companies that did the traditional ready meals aren't necessarily doing the new products. Some of the fresh prepared food firms such as the salad companies have been more involved."

With pressure being exerted from both sides, the chilled sector was almost bound to contract, leading inevitably to the rationalisation of production capacity.

"In terms of capacity, the market is down about 3% year-on-year till the end of September. Across the market there are manufacturers who are feeling the squeeze," says Andrew Hanson of Northern Foods. But he adds that Northern Foods' operations have continued to expand, in spite of its closure of Fenland Foods. "Our own ready meals actually grew by 4.5% within that period."

Recovery for chilled?​

Northern Foods expects the sector-wide squeeze to continue until next year, after which the chilled market will return to growth. In fact, the firm is so confident that it is already planning a major overhaul of the outdated facilities at Fenland Foods in preparation for a new lease of life when the market recovers. "We intend to reopen Fenland as a state-of-the-art ready meals facility in 2010-2011 and we're talking to potential customers at the moment," says Hanson.

Bakkavor is also bullish about the prospects for its remaining ready meals operations, following the closures in Biggleswade and Grimsby. "Our ready meals business is now starting to recover and further actions are being implemented to accelerate the pace of this recovery. This strategic focus on our ready meals operations has provided us with the opportunity to strengthen our position in the UK ready meals market through market share gains," says a spokesman. "These share gains have established the Group as the UK market leader in this core market and our ready meals business has already started to return to sales growth."

Bakkavor's ready meals business continues to be overshadowed by developments in other parts of the Group, however. For example, last year saw the closure of its fresh pasta facility in Scunthorpe while its Birmingham dips and dressings factory shut as production shifted to its Welcome Foods site in Nottingham. Most recently, Bakkavor announced a reorganisation of its three whole and processed produce facilities in Kirton, Holbeach and Spalding, that could affect 300 to 400 jobs.

The Group's Icelandic connections have also raised eyebrows in view of the country's banking collapse, but Bakkavör says its businesses in the UK should not be significantly affected. "We recognise that the turmoil of the international financial markets, coupled with the news-flow regarding Iceland has prompted speculation about the impact on Bakkavör," says the spokesman. "The Group does not have any business operations in Iceland and as a consequence the Company's day-to-day trading activities are not affected by the economic situation in that country. The vast majority of the company's funding comes from major European banks with whom Bakkavör continues to have strong relationships. Less than 10% of the Group's committed banking arrangements are with Icelandic banks."

What isn't clear is whether the ready meals closures announced so far by all the different players are enough to stabilise the situation. Many believe there will be more casualties before the rationalisation process is complete.

"Everybody has been doing their bit but no one has suggested that that's it and the market is back in balance. It depends on the consumer reaction over the next year," says Mallard.

Similarly, a spokesman for Greencore told Food Manufacture: "There is probably still a need for further consolidation in the market. We're seeing all the players taking steps." This echoes the view of chief executive Patrick Coveney at Greencore's preliminary results meeting in November: "You may see some modest further removals of capacity in the ready meals area and we'll just have to see how that plays out."

There is also the possibility that some of the surviving production facilities will change hands as parent companies adopt different strategies to get them through the current financial difficulties. "The jury's out frankly. We could see some significant changes of ownership in the next year or so, but what degree of rationalisation that will prompt is difficult to say," says Mallard.

She believes that even if one of the major players pulls out of chilled ready meals, for instance, their production facilities might continue to operate under new ownership - provided they can attract a buyer in the current financial climate. "Own-label businesses raise difficulties for buyers, because they have no relationship with the consumer. You've got to get agreement for the transfer from the customers within the unit, so retailers can have a big influence."

UK consumers are more closely wedded to convenience foods than anyone else in Europe. For example, a 2008 Datamonitor consumer survey found that 12% of British citizens prepare at least one main meal every day in the microwave. With that in mind, it seems likely that the sector will return to familiar sunny forecasts once the market is properly balanced again. But with the wider financial storm still raging, it's a difficult time to make predictions. "The key change drivers will be consumption patterns among consumers, coupled with the financial situation," says Mallard.

KEY Contacts Bakkavor 01775 761111British Frozen Food Federation 01400 283090 Datamonitor 020 7675 7000 Greencore 01925 825196 Investec 020 7597 2000 Northern Foods 0113 390 0110