Material issues and risks Food inflation and deflation Credit risk is constant Margin contraction and commoditisation Technology risk is increasingly significant Innovation drives growth as customers look for value-adds Compliance rigour in a highly regulated industry Climate risk particularly the effect on agricultural yields

Material issues

Food inflation and deflation – modest inflation is generally positive for a trading business, but deflation creates trading risk while high inflation provokes price resistance.

Credit risk is constant – recession and business failures compound the challenge.

Margin contraction and commoditisation – pressure on disposable incomes can result in ‘down-trading’ with knock-on pressures in the restaurant business and the institutional eating sector as packed lunches replace canteen eating.

Technology risk – is increasingly significant, but the sharing of experience with system implementation enables time and cost savings.

Innovation – drives growth as price-sensitive customers look for value-add from range extension, diversification and smarter business practice.

Compliance rigour – food is a highly regulated industry, but constant investment in best practice creates competitive advantage.

Climate risk – specific risks include cold, rainy summers in central Europe as this affects ice-cream sales, but climate’s general effects on agricultural yields can also contribute to food inflation or deflation.

The modern food system, from agriculture and food production through to distribution and waste, often has a detrimental effect on the environment and in some instances a healthy lifestyle. Shifting consumer preferences are placing pressure on the industry to reduce impacts including a range of greenhouse gas emissions, loss of biodiversity, reduction in soil quality, use of chemicals harmful to the environment and human beings, high water consumption and unsustainable packaging.

Safety, health and wellbeing of our people is a focus area. In our South African businesses there is a specific emphasis on the management of HIV/Aids.

International overview

Economic growth slowed in some markets while recession was experienced by others. Trading conditions worsened and all teams were challenged to achieve growth in the face of economic headwinds.

Business failures have become a feature of several markets, notably in the restaurant sector in South Africa. In the UK, the third largest foodservice group went into receivership in the review period while consolidation is widely forecast in the Netherlands, where local commentators believe the four largest players in the foodservice sector will be reduced to three in the coming year.

Though China’s rate of growth slowed, solid growth was maintained, creating expectations of a ‘soft landing’ by the economy. Flagging resource demand from China may have knock-on effects in Australia where the buoyant mining sector has helped to ensure net growth.

Europe faced continued economic woes and growth dipped in southern Africa.

Food inflation slowed and in some cases food deflation threatened.

The only exception was the South African market where food inflation remained high, creating pressure for price savings and smart solutions from both business customers and end-users.

In all markets, customers have become extremely cost conscious.

Financial performance

Overall performance was satisfactory as continued growth was achieved in sometimes unfavourable conditions.

Revenue rose by 18,6% to R70,8 billion (2011: R59,6 billion) while trading profit rose to R2,2 billion (2011: R2,0 billion). Acquisitions occurred in Australia, New Zealand, Chile and the Benelux countries, but the primary driver of performance was organic growth, aided by the weakening of the South African rand exchange rate.

Infrastructure development continued and capital expenditure rose to R777,6 million (2011: R716,0 million). Cost efficiencies were sought at all businesses and margin management was a key focus area for all teams.

At 42,5% ROFE was slightly down (2011: 47,9%) while margins tightened to 3,1% (2011: 3,4%).

Operational and market trends

Adverse economic conditions did not lead to any reversal in the long-term trend to out-of-home eating. Frequency of out-of-home eating experiences may dip and families may sometimes curtail their restaurant spend, but eating out remains a standard feature of the lifestyle in all markets.

In a price-sensitive environment the challenge, common to all our businesses, is to add value by building a reputation for quality, reliability and innovation. Market-share growth and margin management were fostered by range extension, range differentiation and new product introductions that anticipated the lifestyle needs of the consumer.

Simultaneously, technology was deployed to simplify ordering processes, promote efficiencies and enable savings through better routing and consolidation of orders at the customer’s business.

Strategic innovation

To capture economies of scale, a centralised sourcing operation was established, Bidvest Procurement Company (BPC). Early experience at BPC was highly encouraging. The new business is centred in Hong Kong and Shanghai, but will ultimately be responsible for procurement across Asia.

A new smartphone application was rolled out in Australia, New Zealand and the UK that enables customers to place an order via a handheld device. Close watch is maintained on handheld scanning technology for ordering goods in the supermarket or from a restaurant menu.

Focused attention was given at all businesses to ensure greater collaboration and the sharing of best practice.

Regions

Bidvest Australia and Bidvest New Zealand are mature businesses that continue to achieve significant growth through innovation and diversification. New Zealand again put in a pleasing performance while diversifying the product offering. The new areas of focus are prepared vegetables and butchery. Strong momentum was maintained despite a slowing economy.

Bidvest Australia has achieved sustained growth over several years and is now the largest of our global businesses. It has maximised the opportunities presented by Australia’s two-speed economy (with fast growth in the resource sector) and is well placed to derive advantage from the growth of its Fresh operations. Challenges relate to pressures in its hospitality and logistics (QSR) divisions.

Greater China continues to offer significant opportunities for sustained long-term growth. Hong Kong put in another solid performance and expansion began into China’s second-tier cities – the metropolitan areas seen as engines of continued growth now the base has been established by the first-tier cities of Beijing, Shanghai, Guangzhou, and Shenzhen. Strong growth continues in second-tier cities as many investors are attracted by their lower labour costs.

In Asian markets, the aspirational aspects of Western-style eating remain a strong factor influencing food fashion and demand.

Singapore entered a transitional phase. The business was historically a commodity trading operation, with strong focus on poultry. The limitations of this model have become increasingly evident as performance is often determined by demand for food commodities and currency movements. Activities are being refocused to turn the Singapore operation into a fully fledged foodservice business.

The strategy creates closer alignment with the future aspirations of the island economy as Singapore plans to become a major tourist destination with a first rate tourist and hotel infrastructure. New management with a strong foodservice grounding has been appointed.

Once Singapore’s transition is complete, all Asian businesses will operate on a common foodservice platform.

In the UK, the 3663 wholesale business showed significant improvement, despite difficult trading conditions and the loss of a major catering account. Loss of this contract freed up capacity and motivated teams to secure new business. Seafood Holdings progressed well in its first full year as a Bidvest company. Customers cut the frequency of deliveries and order size. The collapse of salmon prices was also negative, but the team showed pleasing resilience and grew the customer-base. The UK logistics business turned last year’s loss into a modest profit.

Netherlands operations were impacted by tender losses and margin compression, especially in the institutional market. Efficiencies will be delivered by the adoption of a new enterprise resource planning (ERP) system, but this process will not be finalised until the new period. Results were flat in Belgium, though several small bolt-on acquisitions were completed.

Results in Czech Republic were impacted by poor summer weather and low ice-cream sales. The business acquired the assets of a bankrupt Slovakian ice-cream maker, giving greater bulk to operations in Slovakia and enhancing growth prospects. Poland is positioned to benefit from sustained infrastructure investment. A recently acquired foodservice business in Lithuania made a small loss, but strong long-term growth prospects are evident across the Baltic States.

Operations in the Middle East continued on the growth path and investment was committed to the development of a new distribution facility in Abu Dhabi.

To date, our only exposure to South America is Santiago-based Deli Meals. We have a controlling interest in this small Chilean company, enabling us to learn more about the foodservice industry in this new Bidvest geography. Acquisition opportunities were investigated in Brazil, but were not pursued.

In South Africa, trading challenges were compounded by food inflation that was above general inflation, intense competitive activity and margin pressure. Exchange rate fluctuations presented challenges.

Investment was maintained in new infrastructure, information technology, branch modernisation and human capital development. New senior management was appointed at Speciality, the retail-focused food brands distributor, and the Ingredients businesses continued to strengthen the technical sales and product development functions. Product innovation and range extensions underpinned sales growth.

Technology

Until recently, Foodservice was a labour-intensive activity with little reliance on advanced technology. Today, technology drives procurement, stock-holding and distribution efficiencies while tracking trends. E-commerce provides a new channel to market and creates competitive advantage.

The importance of reliable IT systems was underscored in the UK. Changeover to a new ERP system at 3663 First for Foodservice was accomplished with little disruption, enabling the business to compete effectively in the technology space.

The changeover highlighted the effectiveness of Group-wide leverage as the UK benefited from the learnings of sister-companies in other markets. This enabled the business to move faster along the learning-curve, saving costs and cutting timeframes.

Societal issues

Food safety, energy and fuel efficiency and environmental management remain critical concerns. Experience across our businesses confirms that good environmental and societal practice is good business practice. Most businesses have sustainability committees in place that are guiding and monitoring implementation efforts.

Many businesses leverage off a national footprint while fostering the local sourcing of produce to contain ‘food miles’. Bidvest Foodservice invests constantly in modern infrastructure. As a result, our refrigeration facilities use ozone-friendly refrigerants. Recycling initiatives are undertaken by many businesses while some champion the use of sustainable packaging.

Energy-efficient lighting and air-conditioning systems are increasingly adopted. Our vehicle fleets include hybrid and electric vehicles and use vehicle tracking systems to ensure fuel efficiency. Continual vehicle fleet upgrades help us contain our carbon footprint while driver training focuses on driving for maximum fuel efficiency.

About a quarter of the electricity used by the division is from renewable resources, due to 3663’s efforts. Water consumption increased by 3,9% to 659 351 kilolitres (2011: 634 301).

Teams take pride in their positioning as environmentally friendly operators and share information with suppliers and customers. We do not source products from suppliers known to use child labour. We endorse fair labour practice and support responsible marine stewardship and local growers who meet our quality requirements.

Quality standards are rigorous to ensure food safety is never compromised.

Many customers demand competitive prices and good environmental and business practice. We have to achieve the optimum balance while engaging in constant communication with our customers to highlight the benefit of doing business with a socially responsible supplier.

Legislation that imposes new responsibilities on the food and foodservice industry is not regarded as a threat. Less well-resourced competitors may find some legislative demands onerous. We prefer to be proactive. We invest in modern systems and embrace best industry practice. Often, this means our systems are compliant ahead of the introduction of new regulations.

Foodservices businesses support and get directly involved in a large number of community projects.

Talent dependence

Bidvest Foodservice is a talent-driven business. As leaders in many markets, we attract talented recruits and in 2012 invested R25,1 million in training to further develop our people (2011: R24,6 million).

Talent determines promotion, not gender. Women hold senior positions in businesses in Australia, New Zealand, the UK, the Netherlands, Belgium, Hong Kong, Singapore, South Africa and China. Many middle management positions are held by women. We believe the trend to stronger female representation in leadership roles will continue.

The division’s average resignation rate decreased to 7,1% from a high last year of 14,2%. The absentee rate also dropped to 2,9% from 3,1% last year.

Future

Future planning for both the immediate and long term is dominated by our strategy of extending the brand proposition beyond price considerations through range extension and the diversification of our product and service offering. Growth into butchery products and short-life produce will continue as consistent quality rather than price is the key factor underpinning these elements of the Foodservice basket.

Technology investment will be maintained to ensure we continually develop new customer touch-points. E-commerce channels will be further developed as will new barcode applications linked to mobile devices such as the iPad, iPhone and Android.

Technology can change behaviour. The challenge for Bidvest Foodservice is to foster behavioural change that will benefit both our business and the businesses of our customers. Experience to date, specifically in Australia and New Zealand, indicates that customer retention can be further cemented by technology-driven sourcing. Needs can often be anticipated through data mining and predictive analytics, enabling effective loyalty programmes to be developed. Building stronger, deeper customer relationships across a wider basket of products is central to future strategy.

The price-sensitive customer is here to stay and margin pressures may persist. Cost efficiencies will continue to be sought by all businesses. Credit risk is a continuing source of concern and debtors management remains a priority.

Procurement efficiencies on the BPC model are already a focus area. Learnings will be shared with all national markets. Collaboration and cooperation by business units will be stepped up wherever possible without detracting from local autonomy or the freedom of local managers to pursue opportunities in their respective markets.

Growth prospects are especially evident in Asian territories, but opportunities will also be pursued in developed markets by our mature businesses. Our businesses are well resourced and well led while our teams are well trained and highly motivated. This creates a platform for innovation-driven growth in all our markets, even in the face of difficult economic conditions.

Industry casualties have occurred in several markets as a result of the unfavourable economic climate. Indications are that these pressures will continue for some time, creating opportunities for synergistic acquisitions. Scrutiny of South American markets will continue. Acquisition opportunities in developed markets will not be neglected.

Bidvest Foodservice projects continued growth in all markets, with the South African business expected to deliver a sizeable increase on the back of a return to historical levels of profitability. In original currency, our European businesses are expected to grow in the single-digit range, and hopefully Asia Pacific can continue to deliver low teen growth.

	3663’s sustainability successes are celebrated at the Green Business Awards 2011 3663 has been successful with a series of honours at this year’s prestigious Green Business Awards. These awards celebrate excellence in green practice, strategy and products. We look for the most innovative and effective initiatives for achieving environmental sustainability and implementing smart business practice. What makes these achievements even more significant is that we are not just hospitality industry awards, we are open to all UK businesses with competition from some of the biggest UK companies such as Marks & Spencer, Tarmac and Thames Water to name just a few. 3663 were the proud winners of the Partnership Award in conjunction with ISS Facility Services Healthcare. This award recognises how we have worked together to reduce deliveries to ISS sites by 84%, a staggering 33 147 fewer deliveries per year with a saving of 96 tonnes of CO2. But we did not stop there, also achieving highly commended in the same category for their partnership with Elior. This Partnership Award is a great example of our company mission in action, demonstrating how we work together with customers and deliver what is important for our mutual success. Other carbon-reducing strategies celebrated at this year’s awards include 3663’s waste oil recycling scheme, as well as the launch of the first electric vehicle, for which we achieved highly commended in the Green Business Award for Transport. To top off our success, we were highly commended in the main overall category for the prestigious Green Business of the Year Award – a truly outstanding accolade and great recognition of the company’s on-going commitment and effort in all of our sustainable activities.