Churchill China – a heritage buy

Churchill China is one of the world’s leading manufacturers of high-quality ceramic tableware with a history going back to 1795. While its trade may be synonymous with England’s industrial history, it is increasingly selling its wares into international markets, with almost half of revenue coming from overseas last year. Although it has a long-established domestic market presence, its ‘performance ceramics’ are now used in establishments in over 70 countries worldwide. Its expanding distribution network serves customers including pubs, restaurant and hotel chains, sports and conference venues, gyms, colleges and contract caterers. And it’s exploiting a fast-growing market. According to figures from Statista, the retail value of the global hotel industry alone will grow from $347bn (£270bn) to $554bn from 2010 to 2018, a compound annual growth rate of 6 per cent.

With this degree of international exposure, you might think that the severing of ties with the European Union (EU) could have a detrimental effect on trading, particularly if that entails withdrawal from the single market. But according to the company, the duties on ceramic products under existing World Trade Organization arrangements – regarded as the backstop position should talks with the EU break down – amount to just 6 per cent.

In the meantime, post-Organisation currency weakness is providing a boost to exports given non-sterling costs account for only about a fifth of the total. So with sterling having lost 13 per cent of its value against the dollar since the referendum and 16 per cent against the euro, the competitiveness of Churchill’s products on world markets has increased. The devaluation of sterling has also bumped up the potter’s reported numbers through favourable exchange rates, although another Brexit-related effect, a sharp contraction in gilt yields off the back of the Bank of England's increased hawkishness, meant that Churchill's retirement benefit obligations increased by £4.8m to £8.7m over the course of 2016.

While the UK remains part of the EU, the group’s ability to sell into mainland European markets has been aided by trade measures undertaken by the bloc to limit the dumping of imports from China. It’s difficult enough competing with China on a unit cost basis on a level playing field; quite another when the People’s Republic is selling into international markets at artificially low prices.

One way to deal with the threat of cheap foreign imports is to move up the value chain – and that’s exactly what Churchill China has been doing. An intensifying focus on product innovation and a shift towards value-added ranges means that they’re steadily increasing as a proportion of revenue. Over time these higher-margin lines should bolster unit profitability, although the transition obviously entails initial up-front costs. Last year, the group doubled its capital expenditure on manufacturing and operations to £2.3m, installing additional capacity and improving the production process.