Might an incoming CEO at Greencore be tempted to take the convenience food supplier into a pure-play food-to-go business with non-core asset disposals?
That’s a proposition put forward by Roland French, an analyst at wealth management group Davy in Dublin, as long-time Greencore chief executive Patrick Coveney prepares to leave next March to become CEO of travel foodservice firm SSP Group.
For the time being, the first test will be finding a candidate of the calibre of Coveney, who is well respected internally at Dublin-based Greencore and in the financial community after almost 14 years at the helm. “A tough act to follow” is how Martin Deboo, an analyst at US investment bank Jefferies, greeted his departure.
On face value, the enormity of Coveney’s departure might be evident in the 10% slide in the share price on the London bourse today (26 November), but the stock was reportedly down amid a broader sell-off linked to a new Covid variant in South Africa.
It’s Covid where Coveney has steered the ship through a tumultuous 23 months or so, when demand across the UK and Ireland for the firm’s private-label convenience and food-to-go foods waned as government-induced lockdowns curtailed worker traffic and closed foodservice establishments. But just as the company gets its head above water, with volumes returning to pandemic levels, a new variant could pose a challenge for the incoming CEO if it becomes of wider concern.
In another sense, it’s fortuitous for Greencore that Coveney will maintain a hold on the rudder to guide a course through the busy festive season but the new year will bring plenty of challenges for his successor. Not least, the widely accepted prospect that runaway input costs and precipitous inflation will stretch well into next year, compounded by supply chain pressures and a labour crisis, factors affecting the whole food industry and others.
Coveney’s legacy reaches beyond Covid of course, notably divesting peripheral assets to focus resources beyond chilled sandwiches into hot variants, salads, ready meals, sushi and plant-based. But Greencore also has a presence in centre aisle retail with products such as soups, sauces and quiches. He was also behind the arguably controversial exit from the US business in 2018 but has since instigated acquisitions too, with UK chilled-snack maker Freshtime and parts of the defunct Adelie Foods Group.
But what might change under a new CEO? French at Davy Group suggests capital could be raised from a potential sale of the soups, sauces and quiche components to transform Greencore into a pure-play food-to-go provider, replete with funds in hand to cement that position through M&A.
“There are clearly grocery assets that are more central aisle, the more difficult categories that are lower margin, lower returning,” French says. “So what will be interesting to see is whether the CEO takes a different view on those assets.
“The question will be around the edges. Do they potentially become a pure-play UK convenience player insofar as disposing of those assets and potentially recycle it into bolt-on deals? Is there a realisation around those non-food-to-go go assets that potentially could be recycled into higher growth, higher margin, kind of perimeter store product assets?”
However, those categories have been “beneficial” to Greencore during the pandemic, French adds, which could pose a consideration for Coveney’s successor if the South Africa Covid variant becomes an issue, with the UK already imposing incoming travel restrictions as a precaution.
“Those assets and businesses were very helpful through Covid insofar as they were cash generative, and clearly there was demand for centre aisle products through the lockdown. In hindsight, owning those assets was beneficial to Greencore,” French notes.
Deboo at Jefferies wrote some commendable comments of Coveney’s record, with cautious undertones for the winter season the outgoing CEO will still have to traverse.
“We think he will be a tough act to follow, with any successor facing the challenge of rebuilding a sustainable growth model at Greencore post-Covid. Meanwhile, a winter of potential supply chain discontent in the UK remains to be navigated.
“His signal achievement, in our view, has been to pioneer the concept of long-term strategic partnerships with UK food retailers based on sole-supply agreements, reflecting, we think, his deep understanding of supply chain economics – something that has enabled Greencore to build a business of real value in the UK.”
Nevertheless, Deboo made reference to the US debacle, where Coveney expanded Greencore’s present in 2016 with the acquisition of Peacock Foods before initiating an overhaul in 2018 and exiting the market completely later the same year.
“Expansion into the US on his watch, now unwound, was not rated a success by the market,” Deboo wrote.
French was more sanguine, suggesting Coveney should have stayed the course.
“The question marks are more around international,” French says, referring to the saga. “There was capital put on the ground and they had to effectively walk away from it. But arguably, they should have held on to the asset to see how it played out.”
Looking ahead, the Davy analyst says the outlook for Covid come March remains uncertain, while the incoming CEO will have to contend with continuing to rebuild volumes and margins.
The status of events will become more evident when Greencore publishes its fourth quarter and annual results next Tuesday, with French also around noting food-to-go volumes are expected to be “broadly back to where they were pre-pandemic, which is a better place to be as a new CEO”.
Coveney has also trodden most of the water on inflation and negotiations with retailers around pricing, French suggests, in what he says has been a “really tricky environment” for food companies also around stock and labour availability.
“What Patrick did over the last couple of quarters is interesting insofar as the customer conversations today and the past few months have been about including those additional labour costs into pricing. We understand that certain customers, but not all customers, have accepted to take labour inflation through pricing.
“The other stream of work that he would have completed was effectively extending the duration of some of the major contracts. I think he’s definitely pulled the right levers in advance of the new CEO coming in. I think if the new CEO was coming in this time last year, it would be a much tougher environment.”
In terms of the potential candidate to fill Coveney’s boots, it perhaps needs to be someone with similar experience against the UK and Irish foodservice “backdrop”, French says. “It’d be difficult to fill them like for like, but that said, clearly there’s a big talent pool out there.”