Why the world should wake up to what Conviviality is achieving in UK and global trading
By Richard Siddle
News this week that Conviviality, the UK’s biggest drinks and wine importer and distributor, has returned an eye-watering 147% increase in pre-tax profits and 85% jump in sales for the year to April 30, 2017, should water the lips of wine producers around the world.
Whilst it might, at the same time, bring some of Conviviality’s closest competitors out in a cold sweat, it will certainly make serious global wine producers and wineries sit up and take notice.
What is particularly interesting is that it appears, at least initially, to have succeeded in bringing together lots of moving parts of the business in a very short period of time.
In less than two years it has integrated two of the UK’s top five drinks distributors in to the business. Matthew Clark was first in the autumn of 2015, followed by Bibendum PLB in May 2017.
Those combined deals moved Conviviality in to the premier league of drinks retailing having previously been very much in the middle road with its existing Bargain Booze and Wine Rack retail chains.
A business that is now turning over more than £1.5 billion in sales.
Meaning it is both a highly powerful and influential figure in all the main channels of the UK drinks industry. From multiple grocers and specialist drinks retailers, thanks mainly to PLB, through to mainstream bars, pubs and hotels, driven by Matthew Clark, and then the premium on-trade with Bibendum.
Throw in events management, logistics and research and development divisions, then Conviviality is fighting on all fronts.
The impact those deals have had on the company’s bottom line are there for all to seen and will certainly get the heart rates up of chief executives of other wine distributors and importers around the world.
We have heard, read and seen a lot of consolidation in the drinks industry over the last five years, but none of the deals have had such an apparent immediate positive impact as Conviviality.
Particularly on the distribution side of the global wine trade and the buying power it now gives the combined Conviviality business when negotiating trading terms with the biggest wine suppliers around the world.
It will certainly encourage, if not fast track, similar deals to take place between major distributors as companies simply need to scale up to compete. They are also looking for good role models to follow which is why wine producers, retailers and importers alike should be looking closely at what Conviviality is up to...and how.
Let’s just look at those top line numbers again:
- End of year figures to April 30 showed an increase in sales of 85% to £1,560m (compared to FY16: £841m). That’s nearly a doubling in revenue.
- This was backed up by a 147% increase in profits before tax.
- Adjusted EBITDA was up 102% to £60.9m (FY16: £30.2m).
Driving out costs
But it is the cost savings and synergies it can now make through centralised buying and other similar initiatives that is going to have rival firms and its peers scrutinising every aspect of its figures.
The Matthew Clark and Bibendum PLB acquisitions, combined with distribution and wine buying savings, means it is on course to drive £16.5m synergies in FY19 and FY20 on the back of £6m in 2017 and £13.2m in FY20.
It hopes to make a further saving of £1m by consolidating and retendering inbound freight and a further £500,000 by increasing its UK bottling. Exclusive supplier agreements will provide another £500,000 in savings.
Many global wine businesses would do well to look at the small print of how Conviviality is looking to both invest to drive sales, but take steps to take costs out of the business.
Group buying will clearly help it take duplication and processes out of the business. As well as attract bigger wine and drinks businesses drawn in by the sheer scale of what Conviviality can offer in all the major on and on-trade drinks channels.
But what is interesting is how it is using long term trading agreements with its suppliers to help smooth out the big swings in currency.
It is also able to use its strong position across the industry to, in its words, “reduce proposed supplier increases”.
Its end of year figures also show what impact different external factors are having on its costs and margins. They show that:
* The rate of sterling makes up 50% of the cost of good sold.
- Duty accounts for 41%.
- Foreign currency accounts for 9%.
Which shows how much the real cost of business comes down far more to the rate of duty in the UK than the swings in foreign currency.
Profit levels?
That said its profit levels are coming from a low base and at £22.5m now are up from £9.1m at the end of 2016 financial year. But considering it is now turning over £1.56 billion in sales it must be looking at a higher basic profit figure. This is an area its competitors will draw some light comfort from and keep its shareholders calling for more profit growth now that its acquisitions have bedded in.
People first strategy
The word on the floor is that Conviviality has been true to its word in largely, leaving all aspects of the business to operate autonomously.
Yes, it has central buying where it is appropriate, but the divisions are still kept physically and emotionally apart allowing senior managers, many with a number of years service in different areas of the business, to still keep control of important budgets and large portfolios. Such deals are as much about managing internal egos as they are delivering bottom line performance.
It will be fascinating to see where Conviviality goes from here and which other major wine distributors have the ability, and the strength, to go with them.