Conviviality still has room to grow

True, recent half-year results, reported in January, spooked investors as underlying cash profit margins slipped from 3.0 per cent to 2.8 per cent. However, some of this was simply down to Conviviality's success at winning more work on large national accounts, which sacrifice price for volume benefits. This was a key reason given for a 0.3 per cent slip in gross margins to 12.5 per cent, but so too was investment to win market share.

Perhaps a more salient concern for investors came from a £5.5m increase in operating costs given hoped-for savings from the integration of recent acquisitions. But not only was the margin contraction previously flagged, it is also expected to be temporary.

In the wake of acquiring wine wholesaler Bibendum and national beverages wholesaler Matthew Clark, the group is winning more and more customers. The group is also investing to cope with this increased demand. However, in order to maintain service levels over busy parts of the year, the timing of some major back-office integration was pushed back. Importantly, though, the company still expects to make big efficiency savings and thinks it will make up the lost ground during the second half. 

There are some clear signs the strategy is working: first-half sales grew by a healthy 9 per cent overall, and by 7.9 per cent on a like-for-like basis. So even with the margin slip, on an adjusted basis cash profits grew by 1.7 per cent to £23.3m. Meanwhile, the number of regional accounts continues to grow too, moving from 115 at the end of October 2016 to 189 by the end of October 2017.

Chief executive Diana Hunter thinks the benefit of the ongoing shift in the business won’t be fully visible at the bottom line until 2019, but says the momentary margin contraction is “the last thing” investors should be worried about. An overhaul of back-end distribution systems and software should drive through future efficiencies, as should a recent organisational reshuffle, which has made the company’s leadership team more streamlined. In the meantime, the company is still achieving above-market growth, outperforming the wider trade distribution market by 6.5 per cent and off-trade distribution by 1.9 per cent. What’s more, several customers are now deciding to enter long-term contracts, with two of the group’s largest clients recently signing such agreements, improving the predictability of future earnings.

We shouldn’t ignore Conviviality’s thriving retail business either. That division opened 22 new stores in the first half, and managed to grow total sales by 10 per cent. This translated into a 2.3 per cent underlying sales improvement excluding tobacco. The recent Tesco (TSCO) and Booker merger is considered a positive change for Conviviality, helping promote its differentiated position in the off-licence convenience retail market. Both customer service feedback and net promoter scores are said to be ahead of group competitors too.