Two corporate finance specialists sat down with Sarah Devine to discuss diversification and alternative funding for companies in Scotland's flourishing food and drink sector
The food and drink industry is one of Scotland’s most valuable, adding about £14 billion to the country’s economy each year, and with the number of companies in the sector growing, it seems Scotland is on track to achieve its target of doubling that annual figure by 2030.
But to ensure such firms continue to set up shop, expand and, ultimately, thrive throughout the country, many are looking to alternative and more innovative ways to generate funding.
For businesses at any stage to achieve this in an ever-changing regulatory environment, with significant economic and political pressures, it is no longer a case of simply turning to the banks for a loan.
Will McIntosh, corporate partner at Brodies, Scotland’s largest law firm, points to the whisky industry as a good example.
According to the Scottish Government, whisky accounts for 20 per cent of all UK food and drink exports and, after a 150-year success story, the global demand for Scotland’s national drink is far from diminishing.
As more and more whisky products launch, producers at all stages are being canny about how they generate funding as quickly as they possibly can.
“Investors are really looking for revenue-generating assets, or assets that can support the repayment profile for their loans, or be closer to producing some sort of return for investors,” explains McIntosh.
“The time scale involved in the construction of a new distillery, and maturation of the spirit, means that returns only really start kicking in ten years or so down the line, when you have valuable stock you can trade or bottle for sale.”
This is one driver, he says, behind the recent production trend for new whisky distillers releasing gins and other spirits –
these do not require storage and maturation in the way that Scotch whisky does.
Industry trade association Scotland Food and Drink predicts that gin sales will surpass whisky by next year. And it is certainly a sign of the degree of creative thinking undertaken by the spirit industry to generate early revenue.
McIntosh adds that this practice has benefitted from – and is perhaps in part driven by – the proliferation of artisan gins that have been popping up all over Scotland.
“In a sense, people have to think imaginatively and creatively in terms of what the investors are looking for, but also what to do to produce cash in the interim,” adds McIntosh.
“Visitor centres, tours and merchandise sales are other ways of generating early cash and supporting the model.”
And it is not just drinks producers who are diversifying. Mackie’s at Taypack, a joint venture between Aberdeenshire ice cream manufacturer Mackie’s of Scotland and Perthshire’s Taylors Food Group, recently launched an air-popped, whole vegetable snack range, Wholesums.
And it is not their first nibble at this area of the market; the two companies originally came together to launch Mackie’s Crisps ten years ago. McIntosh explains: “In other words, they diversified their income source for ultimately the same product and now they are looking to diversify again to produce healthy snacks.
“They were already an established business, but they are now diversifying their revenue stream.”
In the last five years, the food and drink team at Brodies, which helps companies at all stages of development work with investors and structure deals suitable to their business plans, has seen more and more players targeting luxury and premium sectors.
“If you sit outside one of those boxes it is more of a challenge, and that is where the likes of crowdfunding comes in, or diversifying your offering to appeal to investors,” maintains McIntosh.
While there is support in the form of grants and match-funding available, crowdfunding has become a hugely popular method of attracting investment as an alternative to mainstream sources.
Ellon-based BrewDog is perhaps the most notable, having closed a record round of crowdfunding which brought in £26.2 million from 50,000 investors in its latest investment drive, Equity for Punks V, at the end of last year.
Edinburgh-based Diet Chef has also used crowdfunding to its advantage, through the online lending-based platform LendingCrowd.
The firm financed an exit for early-stage investors by raising the sum of £1.5m in six weeks, with loans over five years.
Thanks to the creation of these online resources – including Crowdcube, Kickstarter and Funding Circle – the crowdfunding process has become easily accessible in recent years.
Its main attraction is its ability to tap into under-utilised sources of capital, benefiting those businesses which might otherwise struggle in finding funding from traditional sources.
As the name suggests, crowdfunding aims to attract small amounts of money from a large number of people and can take a variety of forms.
Those that are donation-based may see donors receive nothing but a good feeling for their investment.
Reward-based crowdfunding is highly popular among smaller businesses, and this form usually involves investors receiving a one-off product or service in return for their cash.
Crowdfunding methods that are loan-based involve money loans offered in return for an interest rate, while those that are equity-based see crowdfunders offering shares in the company which it is hoped will generate a profit when the business is sold.
David Lightbody, a corporate partner at Brodies, explains: “Going back to Will’s point on the economics of whisky production, the sale of private
cask fillings – effectively the forward selling of future matured stock – could be considered a form of crowdfunding that has been commonplace in the industry for a long time.
“But what we have seen in the last five or ten years is a revolution of the online platform capability to connect large numbers of investors with businesses that need capital, broadening the availability of crowdfunding to all business types at any stage.
“There was previously a perception that crowdfunding was the preserve of high-tech start ups. However we are seeing clients in all sectors – from renewables to engineering, to hospitality, food and drink – considering it as a source of funding. That includes some very well-established businesses with expansion plans or specific projects in mind.
“Crowdfunding has also benefitted from fairly flat returns that retail investors are seeing, certainly on bank deposits and other types of run-of-the mill investments. People who might not consider direct investments in private companies are looking to diversify and invest in a small way in things that interest them and might generate a bigger return.”
And there is often more than just a financial aspect for crowdfunding businesses.
Lightbody explains that the innovative investment method is often a way to create a “buzz” around a product, service or brand, and this excitement can establish and encourage a loyal customer base and “word-of-mouth” promoters.
He highlights the app-based challenger bank Monzo as a prime example of this – it now has two million users, after launching in 2015, and a value of £2bn.
The London-based online lender took just three hours to reach a crowdfunding target of £20m last December, with more than 35,000 members investing.
“We are also seeing projects that are community-focused,” adds Lightbody. “There are a number that have been set up to encourage local employment, and crowdfunding is seen not just as a way to fund a project, but also to engage people and make the whole thing a success.”
Of course, there are certain pitfalls that businesses seeking investment need to be aware of before embarking on a crowdfunding round.
A key issue is ensuring that the right business structure is in place, particularly if a venture plans to seek more funding in such a fashion.
McIntosh stresses: “If you complete a crowdfunding round, you can end up with a very broad and disparate group of funders. It is a question of thinking these things through in advance, always having the next steps for your business and its funding in mind.
“Otherwise, if you are doing follow-on funding with larger amounts of money, once you’ve got your initial proposition off the ground, it will create some tension and there may be significant restructuring requirements.”
Owner-managed companies that engage in crowdfunding also need to be comfortable with the greater scrutiny they will face from new investors – even if the risks and dependencies have been flagged sufficiently at the start of the process.
McIntosh and Lightbody stress the need for companies to make sure that investor relations are also secure, and encourage an ongoing sense of communication and co-operation to avoid an “us and them approach”.
Lightbody adds: “On the flip side of that, if you look at the success stories in crowdfunding, that’s been the biggest strength of the business – the building of that relationship, and building a really loyal and dedicated customer base that will follow and support you financially and promote your product for free, effectively.”
In terms of realising returns for investors, Brodies has a positive outlook on investment throughout Scotland’s food and drink sector, notably in tourism and hospitality where the law firm is witnessing a number of multinational companies and private equity houses consolidating high-quality assets.
“When it comes to the premium assets, so much money is being raised globally and so there are a lot of investors chasing premium assets,” says McIntosh.
“If you can hit that space, you stand a really good chance of selling out well and realising an exit for you and your shareholders.”
Lightbody adds: “With the industry’s drive – supported by Scotland Food and Drink and other organisations – to cement the country’s position as a global food and drink destination, there is a huge amount of momentum behind this. That is something that is always attractive to investors – domestic and overseas.”
For more information, visit brodies.com/business-sectors/food-drink