In November Gardner Merchant bought Tillery Valley Foods, supplier of chef-prepared chilled and frozen meals to more than 100 NHS hospitals and 25 local authorities. The industry's knee-jerk reaction was to ask why. A contract caterer buying a food supplier, surely this was going further back in the food supply chain? Or was the motive to gain back-door access to the lucrative NHS market? Caterer puts these questions and others to Vince Pearson, managing director of Gardner Merchant Healthcare, and Chris Bradshaw, managing director of Tillery Valley Foods.
Why has Gardner Merchant bought Tillery Valley Foods?
Pearson: There are strategic reasons in the healthcare market. There is a growing need for delivered meals.
What are these strategic reasons?
Pearson: First, there is the quality of the product. You have a controlled environment here and can get a constant product. In the UK, hospitals are huge. Food can be great when it leaves the kitchen but cold when it reaches the patient. With cook-chill and cook-freeze, if it is heated near the point of consumption, it makes a huge difference.
Second is the environment that hospitals are working in today. Kitchens are getting old. They need to be replaced, and that involves capital. Delivered meals make the economics more attractive to hospital managers.
Third, the traditional on-site methods involve considerable labour which has become problematic with TUPE regulations. This means that labour is potentially more expensive than pre-TUPE and the quality may be variable.
Bradshaw: Two further reasons for the potential growth are, first, that the NHS core business is care. Capital spend for the core business is tight enough, for non-core aspects like catering it is almost non-existent. Second, very often the kitchen is in a key part of the hospital, using up space that could be ward space.
It has been said that Gardner Merchant has done this to gain access to the NHS through the back door. How many hospitals or care contracts do you currently supply, and what is your response to this accusation?
Pearson: We have about 260 healthcare locations in the UK. This is not Gardner Merchant by the back door. The NHS was not the critical factor in the decision to buy. We saw enough growth in the delivered meals market for us to make an offer in its own right.
We want to develop a "both/and" situation. We will develop joint offers that customers may or may not wish to buy. Tillery Valley Foods is going to be an independent arm with independent offers. Of course Gardner Merchant will look for opportunities to supply some of those contracts. There is some anticipation we can do a good deal on those offers, but the customers must want those deals. It will be driven by the customer. We are not going to force it down their throats. Gardner Merchant wishes Tillery Valley Foods's business with other contractors to grow, as well.
Isn't this Gardner Merchant going backwards in the food chain and diverging from its core business?
Pearson: Ten to 15 years ago we could have said we were contract caterers. Today's reality is that we are very much more than that. If you were going to accuse us of moving away from our core business, that should apply to the domestic services we offer, like housekeeping.
Today's customers want us to deliver an integration of services and benefits in terms of quality and value. We saw growth in delivered meals and saw the need for greater consistency of product and quality in the business.
Gardner Merchant already has central production in leisure businesses such as Ring & Brymer and Town and County. It is going back somewhat in the chain but, initially in healthcare and later on in other markets, we see opportunities for growth.
This is food production and catering, which is what Gardner Merchant has always been about. It is simply a question of where you do the food production and what the quality levels are.
How much did you pay for Tillery Valley Foods? How is it being financed?
Pearson: We paid a fair market price. It was an unforced merger, neither of us had to do this deal. We are funding this acquisition through loan notes over a five-year period.
Does this signal a move by Gardner Merchant to acquire other properties such as this?
Pearson: The bulk of GM growth will be organic growth. There will be strategic acquisitions from time to time, but our strategy is not to grow through acquisitions alone.
What is the turnover of Tillery Valley?
Bradshaw: Turnover for this year is expected to be around £11.4m (last year £9.3m). Expected profit for this year should be £2.5m (up from £1.8m last year). We have grown about 25% per year. Capacity here at Abertillery is about 400,000 meals a week, or £20m turnover a year, and we expect to reach that level before the millennium.
How do Tillery Valley Foods' current customers feel about this?
Bradshaw: Our customers are very comfortable with the situation, and other contractors are happy to go on bidding with us for new contracts.
Will there be any redundancies or integration with Gardner Merchant?
Pearson: No. This is a business run from here with all the skills and staff here. This is already a success and will continue to operate as usual.
What is the forecast for growth in the NHS market?
Bradshaw: The prepared food market for staff and patients is worth £250m. Of this, conventional catering on site accounts for 79%. Cook-chill by the NHS is 12%, cook-freeze by the NHS is 1%. Many of these units are closing down. In the old Oxford region, three of the four central processing units have closed or will do so soon. External companies providing cook-chill or cook-freeze account for 8%, of which we have 3-4%. We think delivered meals will grow from their current 21% to over 50% of all NHS meals in 10 years' time.
What are the cost benefits for hospitals using delivered food?
Bradshaw: We work 24 hours a day and use the equipment all the time - we are not producing 30 steak and kidney pies, but 500. The economies of scale on every level are greater. For example, in a conventional hospital you can spend as much on labour as on food ingredients themselves. We buy the best quality ingredients but spend half as much on labour.
Within the NHS there are now private finance initiatives building hospitals. Is this where you see further room for growth in the delivered meals market?
Bradshaw: I do not know of a PFI project that includes a traditional kitchen. Capital once cost the NHS nothing. If a hospital wanted a new kitchen, it had one. Now you pay, out of revenue budget, 6% return on capital and probably 11-12% depreciation. That change has focused the minds of NHS managers. They can have a £5m production unit that produces 40,000 meals a week, or our kitchen which does 220,000 meals a week that also cost us £5m.
What is the future development for Tillery Valley Foods?
Bradshaw: Once we have reached maximum production here by the turn of the century we will look to other areas of the country for a possible new site.