CASE
STUDY

INNOVATION
Innovation in products, packaging and branding provide growth opportunity for the Kelkin brand. Following the very successful development and launch of the Kelkin Granola range of wholesome cereals, Kelkin has extended this offering into a convenient 'on the go' breakfast and snacking format of Granola bars that is now widely available throughout the Irish grocery trade. Granola is high in fibre, which is important for both heart and digestive health. A range of various formulations were tested before the final products were agreed and throughout the development process the Kelkin values of 'good for you' and 'nutrition' were maintained. A key focus was also placed on the choice of packaging where quality of presentation and ease of consumer use were the priority elements as part of our mission 'to make the healthy choice the easy choice for consumers'. All these products are produced in Ireland using only the finest quality ingredients, giving Kelkin consumers in Ireland another reason to feel good about themselves.



SUSTAINABILITY WITHIN DCC FOOD & BEVERAGE IS AIMED AT CREATING LONG TERM SHAREHOLDER VALUE BY GENERATING ECONOMIC, ENVIRONMENTAL AND SOCIAL VALUE.

OPERATING REVIEW -

DCC FOOD & BEVERAGE


DCC FOOD & BEVERAGE IS PRINCIPALLY FOCUSED ON THE DISTRIBUTION OF FOOD AND BEVERAGE PRODUCTS IN IRELAND AND ON RETAIL AND OUTSOURCED CATERING THROUGH A JOINT VENTURE COMPANY.

Markets and Market Position

DCC Food & Beverage's Irish distribution business markets, sells and distributes a range of its own and third party agency brands and provides category management and merchandising services to a broad range of customers including grocery multiples, symbol and independent retailers including pharmacies, offlicenses, hotels, restaurants and cafes.

In Britain, the business markets and sells wines to multiple retailers, wholesale and cash and carry customers.

The majority of DCC Food & Beverage's operations are focused on the Irish grocery market which has shown some contraction over the last number of years due to price deflation and the general economic downturn. As economic conditions remain challenging, consumers continue to search for value and to reduce their discretionary spending both in grocery and out of home. Recent market data has shown that while the average spend per household has remained broadly flat, consumers are engaging in more frequent shopping trips while spending slightly less on each trip they make.

While private label now accounts for approximately 35% of all sales by value, brands continue to be important to the Irish consumer. DCC Food & Beverage continues to develop its own branded offering and company owned brands now account for approximately 36% of total revenue.

DCC Food & Beverage's businesses enjoy a number of leading market positions in the categories in which they operate.

In Ireland, the business is the leading and most comprehensive supplier of healthy foods and beverages, fine foods and vitamins, minerals and supplements ('VMS'), selling owned and agency brands directly to both the grocery and pharmacy sectors. DCC Food & Beverage's healthfood brand, Kelkin, is recognised as the leading brand in the ambient health/'better for you' food sector and offers a healthy choice in many food categories. The Kelkin brand is also a strong and developing brand in the VMS sector.

Also in Ireland, the business is a leading value added distributor of indulgence products in the grocery, impulse and food service sectors with a strong, complementary range of company owned and agency brands, specialising in wine, snacks, hot beverages, home cooking (herbs, spices and colourings), confectionery and soft drinks.

DCC Food & Beverage is a leading distributor of wine in Ireland to both the on and off-trade, providing an extensive portfolio of international wine brands, and is focused on further developing its spirits portfolio and offers its principals the largest ontrade reach in the Irish marketplace.

In Britain, the business is a leading supplier of branded (both company owned and agency) and exclusive retail solutions to the multiple offtrade sector of the UK wine market.

DCC Food & Beverage is also a leading temperature controlled distributor in Ireland. It offers a full range of temperature controlled supply chain solutions (procurement, brand management and selling, warehousing and distribution) to major retailers, manufacturers and food service customers.

Kylemore Services Group (50% owned by DCC) is a leading operator of retail restaurants and contract catering services in Ireland, serving approximately 8 million customer meals annually throughout Ireland.

Strategy and Development

The Group's strategy is to develop DCC Food & Beverage into a leading added value sales, marketing and distribution business, building number 1 or number 2 branded positions in focused segments and delivering an above average return on capital. This will be achieved by building on current positions in the healthfood, indulgence and logistics markets, both organically and through acquisition.

The business will continue to increase its focus on brands, building on the progress that has been made to date with the company owned brands of Kelkin healthy foods and beverages, Robert Roberts coffee and speciality teas and Lemon's confectionery, as well as developing the Goodall's and YR brands. The business will also continue to actively develop its extensive range of third party agency brands across its healthfoods and indulgence categories.

Our wine and spirits business in Ireland will continue to develop its range and grow its market share, particularly in the on-trade sector. The UK wine business remains focused on developing its own range of brands, in particular French Connection and Andrew Peace, along with selected agency brands.

Customers

DCC Food & Beverages' business is primarily based in Ireland, with a modest wine business in Britain which is focused on selling wines to the multiple off-trade and growing a presence in the on trade sector. The ten largest customers accounted for approximately 56% of total revenue in the year ended 31 March 2012.

DCC Food & Beverage's different operating companies each have their own focused sales teams that regularly interact with our customers on developing joint business plans that focus on sales, marketing, category management, advertising, promotions, new product development and product quality.

Suppliers

DCC Food & Beverage deals with a broad base of approximately 1,800 suppliers. The supply base is quite fragmented and the top ten suppliers account for only approximately 28% of total revenues. A key to success in our businesses is remaining close to new trends and developments in the categories in which we operate, and as a result, DCC Food & Beverage remains in constant contact with its supply base to ensure that it brings the best of what is new to its customers.

Our People

DCC Food & Beverage employs management teams with deep category and industry knowledge, combined with strong operational capability. This depth of knowledge is continually enhanced by a focus on product training particularly in wine, hot beverages (coffee and tea) and healthfoods/VMS.

DCC Food & Beverage currently employs 886 people.

Key Risks

DCC Food & Beverage, like all the businesses within the Group faces a number of strategic, operational, compliance and financial risks. The division is made up of a number of consumer focused businesses and further economic downturn and its impact on consumer spending remains a key risk faced by the division. Product quality is central to our success and remains under constant review with focused quality assurance undertaken within each of our businesses.

Sustainability

Sustainability within DCC Food & Beverage is aimed at creating long term shareholder value by generating economic, environmental and social value. During the year the division broadened its sustainability agenda from health and safety and climate change to include product stewardship (local sourcing, packaging, responsible advertising and trends such as fair trade), business ethics and improved communication with employees across the businesses. The welfare of our employees remains very important to DCC Food & Beverage. Unfortunately, there has been an increase in the number of lost time accidents across the division. Management focus has identified areas of weakness in our systems and steps have been taken which we are confident will improve our performance in this area.

Performance for the Year Ended 31 March 2012

DCC Food & Beverage experienced a decline in revenue and operating profit primarily due to the loss of a major contract in the frozen and chilled logistics business in the second half of the year.

The branded distribution activities delivered good growth in operating profit driven by strong growth in company owned brands. The business benefited from the development of its Goodall's and YR brands as well as growth in its Robert Roberts coffee and tea brands. DCC Food & Beverage's healthfood brand, Kelkin, continued to grow, particularly in the areas of cereals and gluten free products, although this was offset by a decline in sales of third party agency brands.

The frozen and chilled logistics business was negatively impacted by the loss of a major contract resulting in a significant decline in operating profit. A major restructuring has been undertaken and this will lead to improvements in competitiveness as the business seeks to win new customers over time.

The Group's joint venture, Kylemore Services Group, delivered a very good result due to a very strong performance in its contract services business. A number of large new customer contracts were won during the year.

Outlook

It is anticipated that operating profit in the year to 31 March 2013 will decline due to the full year impact of the contract loss in the frozen and chilled logistics business.

DCC FOOD & BEVERAGE: KEY FINANCIAL PERFORMANCE INDICATORS


Strategic objective

KPI

Performance
Drive for enhanced operational performance
Revenue growth (constant currency)
Drive for enhanced operational performance
Operating profit growth (constant currency)
Grow operating margin
Operating margin
Deliver superior shareholder returns
Return on capital employed ('ROCE')
Generate cash flows to fund organic and acquisition growth and dividends
Operating cash flow
Deliver superior shareholder returns
10 year operating profit CAGR
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