What's holding back Welsh businesses? - Part 2

First published on WalesBusiness.org by Rhys David, Economic Commentator and Author

In the second part of Rhys David's article, he continues to ask: What’s holding our companies back from becoming bigger?

It would, of course, matter less if Welsh businesses were active in acquiring businesses across the border and further afield. One or two, such as Wynnstay and Leekes, have been, but the majority are not. Our long and porous border is more non-return valve than two-way pipeline.

It is, it must be conceded, not just a Welsh problem. A similar case could be made about the drift into overseas ownership of businesses that most people would imagine were quintessentially British, from Lucozade to Lea & Perrins. What has been happening in Wales is in many ways the British experience writ small, and part of a process – consolidation across business sectors - that has been happening since the beginning of capitalism, but which has accelerated enormously in recent years under the impact of globalisation and its enabling handmaid, technology.

The food industry offers one example of this process at its extreme so it is perhaps worth examining the drivers there, especially as food is one of the areas in which Wales would like to believe it has a strong future.

At the primary growing level, output is increasingly coming under the control of giant groups such as the big grain producers and traders, Cargill and Archer Daniels in the US and Europe’s Louis Dreyfus; a big chunk of the global food processing that follows is handled by a small number of multinationals such as Nestle, Unilever, General Mills, Nissin and Danone; and it is increasingly sold by national supermarket oligopolies led in their different territories by Tesco, Walmart, Carrefour and Aldi. 

All these groups like talking with similarly-sized organisations. The supermarkets want to deal with giant processors as big as themselves for most of their requirements so unless producers in Wales and elsewhere are part of bigger food manufacturing groups they will be confined to the “local produce” racks at the end of an aisle deep inside the store.

This is why Rachel’s Dairy, Brecon Carreg and other Welsh waters, (Ty Nant, Princes Gate) and meat processors, such as Oriel Jones a’i Fab among others, have ended up in big corporate hands and why it is so difficult to build scale and remain independent. (It is possible to stay local as the example of West Country-based Yeo Valley Farms, a rival yogurt supplier to Rachel’s Dairy, shows, but it requires a lot of determination and support).

This effect is apparent even with apparently huge brands if their owners see no other way of taking them outside their domestic market. HP Sauce, a British institution, but largely unknown outside the UK, is now owned by Kraft-Heinz, the world’s fifth biggest food and beverage company, and HP production has been incorporated into a much bigger plant in the Netherlands, as attempts are made to take it to a wider world consume base. 

This illustrates another dilemma, especially where it is the brand rather than the business itself which is the acquirer’s target. If provenance is not important (as it is in some cases, such as Scotch whisky) economies of scale will usually demand a shift to other bigger, more central locations as part of a rationalisation process.

And for reasons of distribution, as we frequently see within the EU, this will usually mean the countries of central Europe or eastern Europe, or close to huge container ports, such as Rotterdam and Hamburg, and to Continent-wide road and rail networks. Peripheral areas will invariably lose out, as we may yet see when the key decisions in the projected Tata Steel-Thyssen-Krupp steel merger are made.

The trend towards scale operations is occurring not just in the food industry, however. Companies big, medium-sized and small, across manufacturing and services now search for businesses engaged in similar activities, and which appear to have developed a successful strategy or interesting new products and innovations.

This is often done as an alternative to carrying out expensive internal development work. The pharmaceutical industry has taken this further than most, slimming down product portfolios, closing or moving operations and seeking out university spin-outs and other start-ups for new drug discoveries rather than risk spending large amounts of time and money on research that may prove fruitless.

Rhys David is a former senior journalist with the Financial Times , and has written widely on industry and regional economic issues (www.clippings.me/rhysdavid). He was for six years assistant director of the Institute of Welsh Affairs where he is an Honorary Fellow. He is the author of Tell Mum Not to Worry: A Welsh Soldier's War in the Near East 1915-1919 (ISBN 9780993098208).