Never has there been such a challenging time for businesses in the bakery manufacturing sector. The landscape has been transformed significantly over the past decade or more by a whole range of interconnected factors: global economic trends, particularly energy and transportation costs; the growth of giant supermarkets, but also of bespoke farmers’ markets; increasingly complex supply chains for food businesses, caterers and manufacturers; and, of course, the rise of the Fairtrade market and other changing food habits of the British public. More recently the credit crunch, and the recession that followed, have added further pressures on businesses.
If the UK baking industry is to unlock the potential for growth, then it is not just a matter of businesses controlling costs and scrambling for what funding is out there; a more collaborative approach may be the best route to accelerate and facilitate the innovation that can both reduce costs and open up new markets. In fact, collaboration has always been present in the food and drink sector whether it’s as milk co-operatives or distribution joint ventures in the drinks industry. After the recession, the continued pressures of the economic climate mean that effective partnering will be vital to secure the development of new products and new markets.
Ways of working together
Collaboration can be achieved in many different ways and bespoke partnering arrangements can be developed, according to the specific needs of the parties involved. Large companies with big budgets, for instance, might work with small bakers to develop or market niche products, such as cupcakes or savoury pies; or small producers specialising in such product lines could collaborate together, sharing costs and market research, to allow faster and more cost-effective development, improved distribution, and wider market penetration. In such cases, three obvious structures or vehicles stand out as ideal for profit-generating initiatives.
Firstly, there is simple contractual collaboration working with another party or more through a contractual framework to take a project forward. Contracts need to be as watertight as possible. But the failure of one party to perform is a key issue that has to be addressed. Also, if the project requires grant or bank funding, a formal collaboration agreement is likely to be needed to access further capital.
Secondly, there is the joint venture. A separate joint venture vehicle, usually a limited company, is created to develop and commercialise a product or carry out new business activity. At the end of 2010, Finsbury Food Group entered into a joint venture deal with Genius Foods, a gluten-free bread company, with whom it already had an existing working relationship. New gluten-free products are being introduced and sold under the Genius brand. The deal shows how a joint venture can be used to open up opportunities in an emerging/growing market.
In this case the joint venture also incorporates an option, granted by Finsbury, for Genius to buy the business and assets of Finsbury’s United Central Bakeries (UCB) and Livwell subsidiaries, which produce Finsbury’s gluten-free products, for a consideration of £21m, at any point within 12 months from December 2010. In the event of the option being exercised, the profit of the subsidiaries will no longer accrue to Finsbury, which will use the proceeds of the sale to repay debt amongst other things. Genius would also transfer the non-gluten-free parts of the business back to Finsbury.
If your business is considering a joint venture with a collaborator, you will need to address some key issues up front: not least what each party will contribute to the company; the stake each party will receive in the company; how the company will be funded; how the joint venture company will be managed; and whether it will give the desired tax result for the partners.
A third option is the partnership, which gives the advantage of separate personality, but is tax-transparent, with the tax on any profits being paid by the relevant partners rather than the partnership itself. The same issues arise for a partnership as for a joint venture company, but in addition, the partnership agreement needs to cover the share of the profits and losses that each partner will bear and when the profits will be distributed.
With increasing economic, financial and social pressures, partnering, collaboration or joint ventures are likely to be the way forward for bakery businesses, particularly small producers and SMEs that sometimes supply local parts of the country or defined segments of the market. Those businesses wishing to collaborate must consider as early as possible how they will approach and resolve significant issues, such as: the precise role of each in the collaboration; who manages the project; how they communicate with each other and third parties; and how decisions are taken.
Address possible difficulties
While the collaboration should be viewed in the most positive and optimistic light, it is also crucial that you address early on the consequences of a possible termination of the collaboration or a default, and consider what dispute resolution mechanisms you might use. Getting good legal advice at the outset can allow agreement on the most appropriate form of collaboration to be reached more quickly and ensure the commercial interests of all parties are properly protected.
l Catherine Feechan is a partner in the corporate team at law firm Brodies LLP, working closely with the food and drink sector.
Bakery partnerships in action
A classic case of successful partnership building is London Bread & Cake Co (LBC), which has formed partnerships with three companies, writes Andrew Williams. All work out of LBC’s premises, with the latter charging for rent and management fees. Partnerships are agreed for purchasing ingredients, distribution, inter-company product sales and expertise. Because they are companies with complementary products, there are numerous financial synergies: all companies have increased sales by about 12% and reduced costs by nearly 8%.
"All of this is significant in these challenging times," says MD David Hall. "LBC believes in developing partnerships, even at a friendly level, by helping each other during power failures, fire, raw material shortages, even introducing sales enquiries to competitors if theirs is a better financial fit for a new supplier product."
In fact, it extended the theme further when it shared a stand at the IFE food show recently with Marriages Flour, to promote "vertical relationships with suppliers and customers". It is also purchasing packaging in container quantities, selling to "friendly" local bakeries, and hopes to expand this to other services, such as engineering and technical support.
However, it is worth urging caution if going down the partnering route; five years ago, LBC entered into a partnership with European Bakeries (EB), which was later declared bankrupt. "Yes, it would be true to say there was a ’partnership’ it was informal with a view to working together to go ’formal’ at a later date," explains Hall. "We were working on dual purchasing, combined distribution and sales and shared business strategy and various personnel were assisting the other company. Unfortunately EB proved to be financially unviable, as shown by its bankruptcy a few months later."