At first glance, many investors would be forgiven for concluding that Cranswick was a rather uninspiring business, especially given the current excitement in other areas of the equity market.
Cranswick earns almost all of its revenues in the UK, from end markets that generally exhibit relatively slow growth and that are, by nature, restrictive in terms of profitability potential. However, there are arguments to be made that this business, from which the majority of readers will indirectly buy products on a weekly basis, is one that warrants a closer look.
The origins of the business lie in rural East Yorkshire when, in 1972, a group of pig farmers joined forces to establish a mill producing pig feed. Fast forward to the present, Cranswick still grows and mills animal feed but this is now a small cog in a vastly different business.
Cranswick’s traditional business now is the supply of fresh pork (26% of revenue) and chicken (17% of revenue) into major UK supermarkets. Cranswick is well established in fresh pork as the UK’s largest processor but has a considerably smaller presence in fresh chicken, having only entered this market in 2016. According to AHDB (Agriculture and Horticulture Development Board), UK pork consumption has been slowly declining for some time, and whilst chicken consumption has been growing, this has been gradual. Cranswick’s impressive growth in these segments is therefore attributable to the capture of market share from competitors and there are several reasons as to why this has been possible. The first is the relative level of vertical integration throughout the rearing system: all chickens and c.55% of pigs are bred in-house versus the general industry norm of external sourcing. This not only enhances traceability but also reduces exposure to the element of market price volatility derived from supply and demand imbalances. On top of this, management has been able to utilise a robust balance sheet to build and maintain a best-in-class asset base of farms and processing facilities with welfare and hygiene front of mind. This level of relative operational excellence contrasts with competitors which have historically exhibited poor profitability and as a result have low quality, underinvested asset bases.
Cranswick’s impressive growth in these segments is attributable to the capture of market share from competitors.
At c.7% market share this strategy undoubtedly has a growth runway in chicken — provided Cranswick can successfully expand capacity at its Eye facility in Suffolk. In pork however, supermarkets may start to feel uncomfortable with supplier concentration beyond current levels of c.30%.
The contracts Cranswick holds with supermarkets for the most part in the fresh pork and chicken parts of the business are quite unusual in that they are cost-of-production based. The price paid per unit is considerate of the cost-of-production (variable) with an agreed margin (fixed) added on top. In times of high inflation, such as in 2022/23 where grain and energy prices were impacted by Russia’s invasion of Ukraine, profitability is protected. However, in times of cost deflation supermarkets reasonably seek to push prices lower. Ranging between 6-7%, margins therefore are stable with somewhat of a floor and ceiling present, revenue growth however is vulnerable to headwinds from negative price contributions in times of cost deflation. Typically, it would be reasonable to expect consumer staples companies to raise prices during periods of cost inflation and hold them otherwise.
Cranswick also produces a variety of gourmet (17% of revenue) and convenience (39% of revenue) products including premium bacon and sausages, Mediterranean charcuterie and antipasti, cooked meats and slow-cooked meats such as pulled pork and ribs. Such product ranges diversify revenue by product type and increase addressable market into growthier areas. Built both in-house and through acquisitions, for the most part, this value-add part of the business makes sense, however, it is difficult not to question if portfolio synergies exist between traditional products and olives, hummus or antipasti.
More recently the business moved into pet food, with the reward of a supply contract from Pets at Home. Utilising and squeezing value out of what would otherwise be waste products from other parts of the business fits nicely into the vertically integrated model. And, whilst currently only a small part of the business, pet food is a growing market which adds further space to grow into.
Cranswick’s management is likeable from an investor standpoint. They are straight-talking and good executors, unwilling to do too much at once in terms of investment projects. Despite continually investing in the business and its asset base over the years, return on capital employed (ROCE) has consistently exceeded a mid-teens percentage which points to good capital allocation.
