Bidcorp: a world class international foodservice presence.

Leadership review

Chief executive's report

A world of opportunity

It is possible to take a world view dominated by geo-political risk and financial exposure. Risks certainly have to be addressed and mitigated. But if you consider nothing but danger, you succumb to the biggest risk of all… doing nothing when there is work to be done and opportunities to pursue.

At Bidcorp we take a positive view and see a world of opportunity. Dangers exist, but the group has the capacity to manage them, thanks to our broad geographical spread, closeness to individual markets and the experience of local teams.

Difficulties may arise in the short term, but experience tells us that our teams have the knowledge and talent to successfully address these challenges. We adapt and can be extremely flexible in the application of our basic business model. In the long run, growth will be achieved if you work hard, stay close to customers and listen to what the market has to tell you.

Of course, perceptions of enhanced risk affect not only sentiment but valuations. This creates potential for acquisitive growth at attractive prices and helps explain our record for superior results even in times of adversity.

Positive perspective

Bidcorp's positive mindset was apparent in a year when we widened our exposure to China and several other countries.

America and China may engage in acrimonious exchanges, but the Chinese population continues to grow and these families must eat. At the same time, income levels are rising in Asia, opening up greater menu choice.

Opportunity for market-share growth is clearly apparent. For example, China imports 4,6 million metric tonnes of meat a year. Bidcorp currently accounts for 0,01% of this business by volume and value. Clearly, we have a lot of growing to do in this category and many others.

We have a well-developed Chinese base with operations in 28 cities. Work is well advanced to widen the network by creating a presence in another two cities. In the past year, we acquired Hong Kong-based Linson Global Seafood Trading, strengthening our presence in an important food category, as well as Jilin Food Service in mainland China.

In addition, we entered the Vietnam market in a joint venture with a local business, Dai Thuan. Vietnam is an interesting market. Economic growth has been rapid in recent years and looks set to continue. We prefer to investigate potential from the inside rather than stay on the outside looking in.

Growth takes time

This mindset explains numerous forays into supposedly risky markets. Some years ago, we entered South America via Chile and subsequently established a presence in Brazil. At the time, the political and economic conditions were challenging and have remained so, but these businesses have demonstrated their resilience and an appetite for solid growth.

Bidcorp resilience in the face of uncertainty is also evident in the Middle East and Turkey. Again, we focus on the potential and witness continued progress. Build good businesses and assemble energetic teams. You then have the capacity to ride out temporary difficulties created by a turn in the economy or shifts in the political situation.

We are gradually building scale in this region and can report encouraging progress by new initiatives in Bahrain and Jordan.

Eastern Europe also provides compelling evidence that market engagement is often preferable to market avoidance. Many of these countries have sizeable populations that are eager to achieve higher living standards and aspire to a lifestyle that includes regular eating out with family and friends. For a foodservice business alert for new opportunities, this looked like a solid foundation on which to grow, and so it has proved.

It has taken a little time – growth often does – but our businesses in the Czech Republic, Slovakia and Poland have become consistent contributors. We have also invested some time (and money) in the Baltics, where a solid base is now taking shape.

We will continue to take a long view and look for opportunities rather than problems.

Brexit

Our philosophy of focusing on the things you can control applies in developed as well as developing markets.

In the UK, the country's planned exit from the European Union has dominated the headlines for more than two years. Initial predictions were that the economy would stall or go into reverse. Instead we have seen two years of steady growth; nothing spectacular but much better than many commentators expected.

Now the media noise is all about a messy 'divorce' and the possibility that no deal will be struck by British and European negotiators.

We prefer to focus on the certainties and they include the fact that the UK has a growing population of 65,6 million. Life expectancy is going up. Healthy eating is an established trend, as is out-of-home eating. From our perspective, the fundamentals look good.

Our job is to continue to build a vibrant foodservice operation in the UK that will make the most of these opportunities – with or without a messy Brexit. Our British businesses are in good shape and I am confident they are resilient and resourceful enough to continue on the growth path.

Food safety

Risk not only attaches to specific geographies. Public health risks are even more fundamental for a business like ours.

In the review period, the South African authorities reported that more than 200 people had died in what is believed to be the world's worst listeria outbreak.

Listeriosis is one of the most serious of foodborne diseases and in 2018 cases were reported as far afield as the UK, Europe and Australia. In view of heightened food safety risks, our food testing protocols, systems and recall procedures were re-examined and strengthened.

Within the Crown Food Group (CFG) in South Africa, the listeriosis crisis had material effects as some ingredient sales fell sharply for a time. CFG's sister company, Bidfood South Africa, was impacted to a lesser extent.

Listeria is one of many diseases that poses a food safety risk. These risks have always existed and in all probability will never be totally eliminated.

Bidcorp actively mitigates these risks by scrupulously applying rigorous quality and food safety controls while building food safety awareness into our organisational culture.

We step up preventive measures and safeguards immediately any outbreak of foodborne disease is notified. Instant reaction is complemented by a proactive policy of staying permanently on guard, rather than waiting for specific cases to occur.

We not only focus on internal processes and procedures to minimise risk. Among our criteria for the selection of food suppliers is their commitment to the highest quality and safety standards.

Experience tells us that, once aroused, food safety concerns are contagious. The public becomes defensive about affected brands, products and specific companies. As health concerns rise, consumers may avoid entire categories of food, affecting volumes across all industry players.

Given appropriate remedial action – in South Africa and elsewhere – we believe public confidence will be restored over time. We therefore expect our CFG volumes to recover in the coming months.

Legacy issues and balance

Increased focus on foodservice, with special emphasis on freetrade, is rapidly turning into a worldwide success story for Bidcorp. However, redirecting and refocusing a business also creates challenges, especially for an acquisitive group that purchases international businesses in highly fragmented industries.

Legacy issues are one such challenge.

Clearly, some activities in some national markets may be non-core and on occasion can consume an inordinate amount of management time while distracting leadership teams from the high-growth areas of the business.

This situation arises in many geographies. Resolution may be swift and pain free or may take time. For example, the historical bias in Singapore toward commodity trading activities took some time to correct, but the business has gone from strength to strength since foodservice excellence became its core focus.

A current priority is portfolio rebalancing at many Asian businesses as the traditionally heavy weighting of dairy products can result in undue risk. This is work in progress, but a good start has been made.

In the UK, the legacy question involved a strong historical commitment to logistics.

We are a foodservice business, not a transport business. We have spent some years putting in place structures that enable us to compete with great success in the foodservice industry while reducing our exposure to low-margin delivery contracts for third parties.

We honour contracts and will not let down our logistics customers. At the same time, we have made no secret of the fact – in the UK and elsewhere – that our focus is on foodservice rather than logistics.

Discontinued business

In the UK, we are committed to the exit of our UK Contract Distribution (CD) business.

We have treated CD as a discontinued operation since the end of calendar 2017 and this year reported its performance separately.

The business has been making losses for some time. What's more, in the review period, it lost a substantial contract, resulting in the closure of a major distribution centre and more than 400 redundancies. We do not like to see people lose jobs and as a responsible employer, we fulfilled our obligations to the affected people.

The remaining UK businesses are in good shape and are well positioned for continued success. The CD exit is the last piece of the puzzle in the rebalancing of UK operations. With these legacy issues contained, we look forward to further successes in a British market that made a big contribution to our bottom line in 2018.

ESG framework

As an international foodservice enterprise, we are acutely aware of our environmental, social and governance (ESG) responsibilities. Bidcorp touches countless lives. It is our job to ensure this interaction is mutually beneficial.

Doing no harm is a good start. It is much better to go further by doing well by all stakeholders and the communities in which you conduct business.

We operate successfully in some of the world's most rigorously regulated jurisdictions. Compliance with sometimes complex regulations imposes a cost, but failure to meet these obligations can incur even higher costs in the form of reputational damage. We therefore take all our obligations seriously.

The commitment goes beyond regulatory compliance. Wholehearted involvement is often apparent, notably the effort to reduce, reuse and recycle on the environmental front.

Knock-on benefits also tend to accrue as our operations are increasingly characterised by collaboration, including the sharing of world best-practice in an ESG context. In this way, we ensure teams operate to the highest standards, even in countries where regulations have yet to catch up with the demands made in some advanced economies.

An ESG yardstick not only applies operationally. It also shapes strategic thinking. This is understandable as international experience suggests acceptable financial outcomes are unlikely without acceptable ESG outcomes.

Our deepest sympathy

It is with the deepest regret that we report one fatality in the review period. This involved a contractor in South Africa and we extend our sympathies to his family. The incident serves as a reminder that even when rigorous health and safety measures are in place it is imperative to ensure all guidelines are strictly observed by those on the job.

Ongoing progress

Revolution is rare at Bidcorp. We prefer evolution. We do what works for us and then build further momentum by reinforcing success.

Ecommerce has become a key differentiator. We are not a technology company. We use technology as a means of staying close to customers. We don't just take and fulfil orders across an e-platform, we identify needs and meet them.

Our online platform leads the local markets. We are not complacent about these successes. To ensure our IP continues to give us competitive advantage we commit to constant enhancement.

In many markets, more than half our sales are digitally driven. In other markets, these platforms have only recently been scoped or are in the process of being rolled out. This creates opportunities for sharing knowledge and systems. This shortens implementation periods and helps local teams avoid costly missteps.

We remain a decentralised business and local managers are trusted to optimise local opportunities, but we see collaboration in more and more areas in which it makes sense to share experience, cut costs and save time.

This not only happens with technology. We see increasing cooperation in the development of own brands and product sourcing. Knowledge is also being shared in new categories where we see high growth potential, but where our experience is limited.

Fresh produce, for example, is a speciality niche with special demands. The meat category is another area with unique demands. These areas tend to be much more volatile than traditional foodservice lines. Prices can change in a few hours. Supply and inventory issues also create challenges.

In 2018, we gathered invaluable experience in this exciting part of the business. Progress is being made, but the learning curve is steep, as teams in several markets, including the UK and Australia, can confirm.

Today's learnings plant the seeds of tomorrow's growth, and the potential is substantial.

Divisional performance

Australasia performed strongly. Both Australia and New Zealand set records as the region maintained its position as the group's leading contributor. Australia achieved commendable results in a year of transformation as three of the biggest metropolitan branches went through major changes. New Zealand grew in a sluggish market. Infrastructure investment continued.

United Kingdom businesses did well. Foodservice achieved excellent results as new trading depots bedded down. Customer migration to the latest version of the UK ecommerce platform, "Bidfood Direct" progressed. Fresh faced challenges as the meat business moved to new purpose-built facilities. PCL continues to be challenging and non-core.

Europe was the standout performer as economies generally continued to grow. Netherlands finished strongly and Belgium achieved record results. DAC Italy did well, including a small contribution from the new acquisition, D&D. Iberia continues to develop momentum. New acquisitions Frustock (in Portugal) and Sáenz Horeca made their first contribution. Czech Republic and Slovakia performed excellently. Newcomer Germany recorded a small loss, but Poland did well again. Baltics showed further improvement.

Emerging Markets delivered mixed results. South African operations performed well, despite the listeria challenge. Greater China and Hong Kong were under pressure, largely from the consequences of the world dairy crisis. Improvement continued in Singapore. Brazil performed commendably in tough economic conditions and Chile did well. Middle East achieved second-half gains as a regional recovery plan took hold. In Turkey, newly purchased Efe contributed to momentum.

Appreciation

I salute Bidcorp people – all 26 448 of them – for an outstanding effort in markets around the world. Economies were not always buoyant, but our staff and their managers made the most of growth opportunities and recorded highly satisfactory results. I'm proud to lead this wonderful team.

I also thank customers and suppliers for their continued support. Our business is increasingly characterised by a spirit of partnership. Without our customers and suppliers our sustained growth would not be possible.

I am also indebted to our new non-executive chairman, Stephen Koseff and our board of directors for their wisdom and strategic direction.

On a personal note, I would like to record my heartfelt and sincere appreciation of the work and contribution of outgoing chairman, Brian Joffe. He has a record of exceptional achievement as entrepreneur and business leader. He had a profound influence on my career over the past 28 years, and that of many others. He remains on our board as a director, for which we are all grateful.

Going forward

Essentially, we expect more of the same in the year ahead. This means more growth on the 2018 pattern, with more own-brand development, more success from foodservice and freetrade focus and more gains through responsive online systems.

Organic growth will be the principal driver. We also look for stronger contributions from recently acquired businesses as we integrate them into our group and secure synergies.

Growth through bolt-on acquisitions is an enduring theme at Bidcorp and we will continue to investigate new opportunities and perhaps some new territories.

Major strategic acquisitions are not on the immediate horizon, though we have the resources to pursue them vigorously, if opportunities present themselves.

On the issue of possible penetration of entirely new regions we should state that in the immediate term we see little opportunity in North America. Current US valuations are extremely high and we see no reason to pay a premium and dilute returns for representation in this market when prospects are so bright in so many others.

For example, Australasia's future looks exciting. Australia's population has just hit 25 million and growth prospects are enticing. New Zealand has to contend with a tight labour market (in common with many low-unemployment environments) and cost pressures may mount over there, but we have built strong momentum and are confident we can maintain it.

In Emerging Markets some volatility may be experienced, but prospects overall are good. All our South African businesses are performing well and in the Middle East our teams are establishing a strong base. In South America, we continue to build scale and the customer base and are well positioned in both Chile and Brazil.

In Asia, the Singapore business is now seeing the benefit of strategic refocus. Greater China may face challenges in the short term, but a firm base is in place and our businesses are well able to absorb competitive pressure while optimising new opportunities.

In Europe, economic conditions are expected to remain broadly supportive and we are well placed to derive benefit from our investments in new systems and modern infrastructure. We're excited about prospects in markets from Belgium to the Baltics. Momentum continues to build in Italy. In four years, the DAC business has more than doubled in size and in 2018 the operation doubled its export sales to other Bidcorp companies. Spain and Germany pose some short-term challenges, but these are new markets for us. Building sustainable momentum will take time, but long-term potential is exciting.

The UK offers further opportunities. UK Foodservice is making strong headway and is well positioned to continue on the growth trajectory. UK Fresh is bouncing back after a challenging year.

We don't expect the outside world to be predictable, but the Bidcorp world often is. We have a proven approach and we plan to stick to it.

In 2019, we will be working hard, while sticking close to customers and exploring new categories and some new activities, in basic manufacturing, processing and exports, and perhaps exploring some new national markets as well.

We see a world of opportunities and plan to pursue them.

Bernard Berson
Chief executive