Kitwave Group PLC (KITW LN)

May 2, 2024

Executive Summary

• Kitwave Group (“Kitwave”) is a consumer staple U.K.-based food distributor that specializes in delivering impulse products, ambient foods, frozen & chilled foods, fresh foods, and alcohol to over 42,000 convenience stores and foodservice providers across the U.K.
• Kitwave is one of the U.K.’s largest food distributors that specializes in servicing “independents,” or mom & pop establishments and small chains including convenience stores and restaurants. In contrast, most of Kitwave’s larger distribution peers focus on high-volume, high-revenue distribution contracts (e.g. 500-location QSR chain) with typical minimum order values of £1,000-2,000+. These larger peers don’t possess the infrastructure nor the desire to compete with Kitwave’s high-frequency, low £100 minimum order value drops in the independent segment of the market.
• Regional and local food distributors, Kitwave’s typical competitors within the independent segment, are unable to consistently provide better quality distribution service to customers than Kitwave. This is because Kitwave’s national scale allows it to earn greater bargaining power than its peers over food manufacturing suppliers, which Kitwave in turn reinvests into providing better service to its customers through a best-in-class 98-99% on-time and in-full delivery rate, more frequent deliveries to customers, lower minimum order values, and greater SKU selection.
• Since FY16 Kitwave has compounded EPS at a +22% CAGR largely through M&A. With over £10bn of Kitwave’s independent retail & convenience and foodservice TAM segments still fragmented, we believe Kitwave has a long runway to continue rolling-up smaller food distributors, particularly in the higher-margin and higher ROIC foodservice segment, and can continue compounding its profits at a +10-20% CAGR over the next 3-5 years. Kitwave should also benefit organically from the industry’s shift away from cash & carry procurement and towards delivered solutions as well as continued LSD-MSD industry growth for convenience stores and restaurants.
• Shares currently trade at NTM 13.1x P/E and NTM 7.9x EV/EBITDA based on our estimates of FY24 results which appear to be substantially lower than food wholesale peer valuations, despite Kitwave’s industry-leading growth rates and ROIC. We believe Kitwave’s shares have room to appreciate from £3.85 today to £7.43 – £9.85 over the next 3-5 years. We also note that Kitwave is the U.K.’s largest pure-play delivered food distributor that is not already owned by a larger parent company which, when considering Kitwave’s large and increasing revenue base, could make Kitwave an attractive future acquisition target.
• CEO Ben Maxted and CFO David Brind have both been Kitwave executives for over 12 years and have together completed and integrated 14 acquisitions demonstrating a terrific M&A track record.

Introduction to Kitwave Group

Kitwave Group is a U.K.-listed small-cap delivered food wholesale business headquartered in Newcastle Upon Tyne, U.K. The company was founded in 1987 by 15% shareholder and former CEO Paul Young as a single-site confectionary wholesaler. Rather than compete on price with the cash & carry store giants, Paul was seeking to do something different. His goal was to offer a delivered food wholesale solution for convenience stores to whom he would sell impulse products with a focus on quality distribution service.

In the 37 years since, Kitwave through organic expansion and acquisitions has grown into a £600+ million revenue stalwart. Kitwave today sources its products from over 300 suppliers, has a network of 30 depots including 8 main depots and 22 satellite depots, operates 550 delivery vehicles, carries over 44,000 product SKUs, serves over 42,000 U.K. customers, and fulfills over 4,800 daily deliveries.

As of February 2024, Kitwave Group stood as the U.K.’s 15-largest food distributor.

(Source: The Grocer)

In short, Kitwave Group is one of the U.K.’s largest food distributors that specializes in servicing “independent” customers, or mom & pop establishments and small local chains, that have food and beverage procurement needs. Kitwave’s primary customers include convenience stores and restaurants. Kitwave’s food distribution operations are entirely delivered, with cash & carry stores being the other common source of wholesale food procurement for these customers.

Our research into Kitwave Group, its industry, and its competitors over the past several months have led us to develop high-conviction in Kitwave as an investment opportunity. In this memo, we will discuss in detail the main industry segments that Kitwave serves, why we believe Kitwave possesses a sustainable competitive advantage within these industries, why we believe the industry’s largest distributors cannot and will not compete within Kitwave’s customer segments, why we think substantial long-term growth is likely for Kitwave, why we believe Kitwave is meaningfully undervalued, and why we believe this investment opportunity exists.

The large majority of Kitwave’s growth has occurred over the past 13 years, when its founder Paul commenced the company’s journey of rolling-up smaller food distributors to bolster the company’s products and capabilities, expand its geographic reach, win new customers, and ultimately grow profits in a way that creates shareholder value. Paul accepted the company’s first private equity partner NVM in 2011 to raise the capital required to pursue this roll-up approach.

It was also during this period in 2011 when current CFO David Brind and CEO Ben Maxted joined the company. Both executives have been heavily involved in the company’s 14 acquisitions over the past 13 years. Together, they have demonstrated an excellent track record of successful M&A, have built the company’s highly proficient frozen & chilled distribution capability from scratch, have exhibited early success in building the company’s foodservice business, and will soon own over 5% of the company’s shares following the receipt of equity incentive awards. Since 2016, its earliest publicly available period of financials, through 2023, Kitwave has compounded its earnings per share at a +22% CAGR.

In 2016, Kitwave transitioned to its second private equity partner Pricoa, and then in May 2021 completed its IPO. The company was actually preparing for an IPO with a target date of April 2020, but the rapid unfolding of COVID and its impact to both equity markets and the company’s operations shelved these plans for a little over a year.

Although the food wholesale industry appears to be boring and low-growth, the industry has presented tremendous winners over the years, largely through M&A. Consolidation is highly common among larger industry participants and, for reasons we will discuss, can be a smart way to add both strategic and economic value when done correctly. Food wholesalers such as Kitwave also operate highly recession-proof businesses with heavy exposure to consumer-staple goods (e.g., crisps, sodas, snack bars, alcohol) and customer segments (e.g., convenience stores and restaurants).

Today, we believe Kitwave represents an opportunity to own a high-quality business earning a 17% return on invested capital, containing a high likelihood of +10-20% annualized growth for the next 3-5 years, and currently trading at a valuation of 12.3x our estimate of FY24 earnings. While this investment likely won’t produce grand-slam returns, we do think this investment in Kitwave offers a strong probability of double-digit investment returns while also carrying a low probability of losing money.

As we lay out in detail in the “Valuation” section, Kitwave’s current valuation reflects a substantial discount to comparable peers across Europe and the U.S. which we believe is unjustified. We believe this opportunity exists for several reasons, including Kitwave’s short-lived tenure as a public company with little coverage and awareness, and the fact that its only publishing sell-side research firm has perpetually underestimated the company’s forward-looking growth prospects to a significant degree and continues to do so, which may be masking the company’s true growth prospects from the public. We believe Kitwave’s share price has room to appreciate from £3.85 today to £7.43 – £9.85 or a +93-156% gain over the next 3-5 years.

Industry Overview

Food wholesaling is a consumer staple industry that has been around for centuries. In modern times, consumers rely on a variety of retailers to purchase their food, and retailers in turn must procure this food in order to sell it to their end customers. This is where the wholesalers, or distributors, step in as the middlemen between the food manufacturers and the retailers. While there are nuances and exceptions to this simplified structure across areas of the ecosystem, by and large this is how the industry operates.

(Source: Medium)

Food manufacturers in the supply chain include well-known global food brands such as Nestle, Coca-Cola, and Mondelez, as well as plenty of lesser-known local and regional brands. Looking past the distributors for a moment, the retail component of the supply chain can be thought of as comprised by two primary groups: (a) grocers of various kinds where food is packaged and sold with the intention of being consumed or prepared elsewhere and not on-site; and (b) foodservice establishments which include restaurants, cafeterias, catering, and any other establishment where the food is consumed or prepared on-site.

For the purpose of concentrating on segments of the retail ecosystem that are most relevant to Kitwave, we will hone in specifically on the convenience store and foodservice industry segments.

Convenience Stores

A convenience store operator relies on two main avenues to procure food: buying goods from a cash & carry or similar wholesale store, or having a delivered wholesaler deliver goods straight to their shop. As of 2023, 64% of all retail & convenience stores in the U.K. procured their food products through delivered service. On average, convenience stores re-stock their shelves 2-3x per week. Given their limited square footage, convenience stores typically have a limited range of products and focus on selling high-margin, branded impulse products to their customers such as soft drinks, crisps, snack bars, tobacco, alcohol, etc.

From a convenience store operator’s point of view, when deciding how to procure their food products and which wholesalers to work with, we have found that there are five main value proposition considerations that matter, in rough order of importance:

1. Delivery (or availability for a cash & carry) of goods on-time, in-full, and undamaged.
2. Selection and consistency of SKUs.
3. Speed and frequency of delivery (e.g. same day, next day, two-day).
4. Minimum order value.
5. Price.

Cash & carry stores generally offer lower prices than delivered wholesalers, which means convenience store operators who are particularly price sensitive may be more likely to opt for a cash & carry solution. Based on our findings, the less successful convenience store operators tend to be more price sensitive and tend to fall into this category. Depending on the convenience store’s needs, a cash & carry store’s SKU selection may also be sufficient.

Delivered wholesalers offer the main advantage to the operator of convenience, where the operator can forego frequent trips to a cash & carry store. These trips contain opportunity cost as the operator must close the store to customers in the meantime, adding a real economic cost of lost customer revenue to consider in addition to any product price differentials between the two procurement sources. This is in addition to vehicle and fuel costs to transport the goods from a cash & carry store.

Delivered wholesalers also offer the benefits of extending days credit which cash & carry stores do not offer, providing data-driven advice to help store managers decide which products and inventory quantities to carry, and eliminating any spoilage risk for frozen & chilled food products. With respect to frozen & chilled products, for instance, if a convenience store operator wishes to sell milk or other dairy, having that product delivered eliminates the risk of the product spoiling in transit from the cash & carry store. Stores often have far less refrigeration and freezer space on premises than room-temperature inventory storage, or anywhere with floor space at their store, which contributes to more frequent replenishment of frozen & chilled products. For these reasons, store operators order frozen & chilled products through delivered distribution at a higher rate than ambient temperature products.

Based on our research, the typical convenience store operator has 4-5 wholesale sources for its store SKUs, and among those sources ~2-3 are specifically for food and beverage. Among those 2-3 distributors, 1 of those is usually a “broadliner” or a reliable distributor with a longstanding relationship with the store who provides good delivery service and wide selection and consistency of SKUs, and who the convenience store relies upon for 30-60% of its food and beverage procurement.

Whether a distributor is a convenience store’s broadline distributor or not, for obvious reasons, a convenience store operator places high value on these qualities of delivering goods on-time, in-full, undamaged, full-basket assortment, timely delivery, frequent delivery flexibility, and consistency of SKU availability. Taken together, these elements are the major components of what is commonly referred in the industry as “service.”

“There are only really two ways you lose customers: bad service or bad product offering where your product goes stale. Other than that, you’re really not going to lose the customer. You might on price, but people are dumb on price for only so long.” – Board Member, Food Distributor

Notwithstanding the importance of service, price is still a priority as well. A convenience store operator is often entrepreneurial for their business and may not always buy the same products from the same high-quality service distributor for every order. For example, a local distributor that might not be known for great service may have a 3-month supply of Mars bars sitting in its warehouse that it wishes to get rid of, and will offer these Mars bars to a local convenience store at a hefty discount to the market price. If a convenience store operator usually purchases its Mars bars from Kitwave, in that scenario the operator might instead begin placing their Mars bars with the local competitor for those 3 months until the supply runs out, and then resume buying those Mars bars from Kitwave again.

Despite this opportunistic behavior, convenience store relationships with broadline distributors tend to be sticky. In our calls with industry experts, it was common to hear of a distributor serving the same convenience store for 30-40 years.

Symbol Groups

One important dynamic to flag within the convenience store segment is the presence of symbol groups, which is a form of convenience store franchising in the U.K. Around 15 years ago, food distribution giants (e.g. Booker, Bestway) and well known franchise brands (e.g. SPAR) began to aggressively recruit convenience stores to join their symbol groups. Today, around 60% of the U.K.’s convenience stores belong to a symbol or franchise group.

Symbol group membership begins when a symbol group approaches a mom & pop convenience store or small chain and offers them the proposition of joining their symbol group. The convenience store receives the benefit of replacing their storefront signage with the symbol group’s name and branding which provides the shop with valuable brand-name recognition. The symbol group might also offer a free POS system and other areas of assistance. In return, the convenience store is required to engage in minimum weekly food distribution spend with that symbol group’s distributor. In some cases, the distribution giant itself operates the symbol group and therefore requires its own distribution to be used, and in other cases the symbol group partners with one or more large-scale distributors if it does not operate its own distribution channel.

From the symbol group owner’s point of view, this cooperation allows them to unlock additional TAM without having to build out the additional infrastructure or the added warehouse complexity to service convenience stores on frequent, low minimum order value terms. The typical terms in these relationships require the convenience stores to place minimum order values of £1,000-2,000+ with their symbol group partner 1x per week. For the symbol group owner or distribution partner, these high-value, low frequency  drop logistics fit within their existing infrastructure and capabilities.

From the convenience store’s point of view, this tradeoff is valuable enough to have attracted 60% of the industry. Those participants spend ~50-60% of their weekly budgets with their symbol group partners. They are also allowed to spend that remaining 40-50% elsewhere, often for inventory that depletes intra-week and for which either they cannot afford to wait for their weekly symbol group partner’s delivery, or for frozen & chilled products which some distributors aren’t proficient in handling and cannot deliver themselves. Distributors such as Kitwave become the delivered solutions for those convenience stores to pick up the slack on that 40-50% of remaining weekly basket spend.

Foodservice Establishments

Foodservice operators, while also having access to cash & carry and similar wholesale stores, tend to rely more heavily on delivered wholesaler solutions than do convenience stores. As of 2023, 83% of all foodservice outlets in the U.K. procured their food products through delivered service. On average, foodservice outlets re-stock their shelves close to daily, and during summer months up to 2-3x per day.

As briefly described earlier, foodservice establishments largely include restaurants, as well as anywhere food is consumed or prepared on-site. School cafeterias, care homes, hotels, and catering are all included as foodservice establishments as well. Pubs and drinking establishments are also classified under the foodservice umbrella and in the U.K. sub-segmented as “on-trade.”

From a foodservice operator’s point of view, when deciding how to procure their food products and which wholesalers to work with, we have found that foodservice operators place a higher emphasis on service and a slightly lower emphasis on price than their convenience store peers, for several reasons:

• Foodservice operators need to have their food products delivered daily or almost daily, and in the summer months up to 2-3x per day for fresh foods. Distributors must therefore be reliable.
• The opportunity cost of a missing or wrong ingredient from a wholesaler are higher for a foodservice operator than for a convenience store because of the higher gross margins earned on prepared meals than on retail food products. For example, if a wholesaler fails to deliver a £0.30 tin of beans, the restaurant in turn cannot sell beans on toast that day for which it charges £3.50 to its customers. Therefore, it is less important to the restaurant’s chef that the tin of beans cost the restaurant £0.30 or £0.32, but rather that it was delivered on-time and in-full by their distributor.
• Foodservice staff are busier than their retail shop counterparts as they are preparing food for the day, and generally have less bandwidth to be as entrepreneurial. As a result, they tend to want to work with fewer distributors, provided those distributors provide reliable, high-quality service.

These foodservice industry dynamics are important, and for reasons we will elaborate upon later, will be beneficial to Kitwave’s future as Kitwave emphasizes the foodservice sector as its primary source of future growth. These foodservice elements favor food distributors who provide high-quality service, and together create high barriers to entry to other food distributors from forming new distribution relationships with food establishments, for the following reasons:

1. Higher Wholesale Margins: Compared to non-foodservice distribution, foodservice distribution on average requires higher frequency, lower value drops for distributors and carries higher expectations, which helps create a pricing premium for the distributors who do possess the capability to provide this high-quality service. Foodservice also lends itself to larger-volume items that are cheaper to produce (e.g. one 10-liter oil drum vs. ten 1-liter oil drums independently packaged for retail). Lastly, foodservice distributors share in the higher margin structure that a foodservice establishment earns, which in turn affords the foodservice establishment the ability to pay the distributor more for their goods.
2. Sticker Customer Relationships: Compared to non-foodservice customers, foodservice customers tend to exhibit higher retention with their distributors. As long as foodservice operators are happy with their service from distribution partners, for the reasons described earlier, there is typically not enough bandwidth nor desire to hop around from distributor to distributor for nickels and dimes.
3. Fewer Distribution Relationships and Higher Wallet Share: Compared to non-foodservice customers, foodservice customers on average maintain fewer distribution relationships, which leads to higher wallet share for their existing distributors. A foodservice establishment also typically has one broadline distributor, one whom they can rely on for service and breadth of products, who consistently provides anywhere from 30-90% of the establishment’s total spend.

“It's a very small percentage of customers that wake up every morning and say, ‘I'm buying product from someone else today’ for a number of reasons. … And I’ve owned two restaurants, probably worked with two to three distributors just depending on what type of restaurant that is.” – Former Director of Transportation at Sysco Corporation

“The customer base is very sticky and loyal because particularly in that foodservice arena what matters is the service, and they're not willing to take a risk on 3p on that tin of beans for the risk of someone they don't know whether it's going to turn up or not. It's just not worth it to them. They're making enough money anyway on their margin structures. What's important to them is someone that they know and trust in the good times and the bad times. There might be a case, they ring at 2:00 in the afternoon going, ‘God. I've had a run on this at lunchtime. It wasn't on my order. Can you add it on?’ You do the right things, and you've got that reputation in the market, so people won't just move on price, particularly in foodservice. Maybe more so convenience, but certainly less so in foodservice. Once you've got that customer, if your service is good, they are very sticky and the price becomes slightly more inelastic in that vein in terms of the ability to lose a customer on price.” – David Brind, CFO of Kitwave Group

“If I own say 10 restaurants and I’m looking for a specific product, I might switch out to a different supplier for that over time. But my broadliner who’s shipping me 30-70% of my goods, I’m probably not going to switch out that guy that often at all. If I switch that guy out, it’s a huge pain. If I switch from Sysco to US Foods, the Sysco guy knew where to park to deliver to my restaurant, and the US Foods guy might park in the wrong place and piss off my manager for the first two weeks.” – Board Member, Food Distributor

Food Categories: Ambient and Frozen & Chilled

Foods broadly fall within one of two categories: ambient and frozen & chilled. Ambient foods are foods that do not require temperature control and can be stored and transported at room temperature. Frozen & chilled foods are foods that do require temperature control and must be carefully monitored during storage and transportation to prevent spoilage. Spoilage is not only bad for the retailer and the consumer but presents health and safety liability risk for the retailer and distributor as well.

Frozen & chilled distribution earns higher gross margins, incurs higher OpEx, and earns similar operating margins as ambient because of the complexity and expertise involved in handling frozen & chilled products. In a warehouse, while ambient products can be stacked anywhere there is space, frozen & chilled inventory must be stored at their specific temperatures. Similarly, during transportation, while ambient products can be placed anywhere there is space on a truck, frozen & chilled products must be also transported at those specific temperatures. Food distributors such as Kitwave who have experience in handling frozen & chilled products often utilize dual-temperature and tri-temperature trucks to maximize logistics efficiency when distributing frozen & chilled products.

Seasonality

Convenience stores, restaurants, and pubs generally perform better during the warmer months of the year. The main reasons are because warmer weather leads to greater outdoor foot traffic and because of the increase in televised soccer games which are broadcast at pubs and restaurants. It is easy to see why this leads to more business for foodservice outlets. For convenience stores, people set foot outside more frequently during warmer months, walk or drive by convenience stores more often, and complete higher quantities of impulse purchases for soda, ice cream, chips, cigarettes, etc.

Kitwave Servicing Recession-Proof Industries

The convenience store and foodservice industries, which together comprise 67% of Kitwave’s total sales and 74% of Kitwave’s total operating profits by our estimate, have historically demonstrated themselves to be “recession-proof,” or highly resilient to the broad-based decline in consumer demand that occurs during a recession.

The below chart of convenience store industry revenue in the U.K. from 2007 through 2023 illustrates clear resilience through the Great Financial Crisis and COVID-19 recessions:

(Source: Association of Convenience Stores, USDA Foreign Agricultural Service)

As an analog, historical U.S. convenience store data also clearly evidences the industry’s resilience through a myriad of recessions spanning over the past several decades:

(Source: LinkedIn, U.S. Convenience Stores: Recession Resilient Business)

The below chart of restaurant industry expenditures in the U.K. from 1995 through 2022 also illustrates a high degree of resilience through the 2008-09 recession:

 (Source: OECD)

Although restaurants are the largest component of the foodservice industry and don’t represent the entire foodservice industry’s revenues, two other major components of foodservice include healthcare operations and education. In our view, these segments represent highly inelastic demand because of the nature of their end food recipients (e.g., students, hospital patients, elderly living in care homes) and are therefore unlikely to see a material decline in revenues throughout the economic cycle.

Convenience stores have remained highly resilient through recessions for various reasons including their consumption-on-demand value proposition, uptake of tobacco and alcohol during recessionary periods, and high degree of adjacency to gas stations. Restaurant expenditures have remained resilient as well for reasons including increased pricing and industry-wide net store count increases during recessionary periods.

“Restaurants and c-stores are two areas that capital will be going into for a long time. If you are Lamb Weston selling french fries to McDonald’s, you can be sure there will be more McDonald’s stores and that you will sell more volume over time. With restaurants, you will be certain there will be more restaurants the  next year. On the other hand, you have to be careful with grocery stores. There is only so much capacity, and in some years the category just doesn’t grow that much. C-stores and restaurants are better than grocery stores and I haven’t seen any of them internalize their own distribution.” – Board Member, Food Distributor

Food distributors who are exposed to the convenience store and foodservice segments in turn receive this benefit of highly recession-resilient, if not recession-proof, income streams along with steady industry volume growth.

Food distributors also have a set of levers they can pull during recessionary periods to adjust for weakness amongst any areas of their customer base. For example, during the COVID-19 period, pub sales were a notable area of weakness for Kitwave because of social distancing restrictions. In response, Kitwave notified many of its 4,000 pub customers who were ordering one keg 3x per week that they would now be receiving three kegs 1x per week in order to reduce operating costs, and 99% of those customers accepted because they did not want to lose their relationship with Kitwave and its service. Broadly speaking, distributors maintain the levers during recessionary periods of laying off warehouse and driver staff, reducing inventory to conserve cash, and consolidating delivery drop frequency where appropriate.

Kitwave Group: Why Kitwave Wins and Will Continue to Win

So far, we have discussed Kitwave’s primary target customers, noteworthy aspects about those customers’ industries, and the main value proposition elements that drive customers’ decisions when deciding which food wholesalers to procure their goods from. We now examine why we believe Kitwave has positioned itself well to meet these customers’ needs at a level that is either on-par with or better than the vast majority of its competitors across the many towns and regions of the U.K..

For years, Kitwave Group has stood as one of the largest, and today perhaps the largest, U.K. food distributors with a specific focus on servicing independent establishments. Thanks to its competitive advantage of scale, focus on high-quality distribution service, and insulation from competition from the larger domestic food distributors, we firmly believe that Kitwave should continue to maintain its strong revenue and profit base now and long into the future.

National Scale: Source of Competitive Advantage vs. Smaller Regional Competitors

Kitwave has established itself as a unique player within the independent food distribution landscape, and in an advantageous way. The company’s £600+ million in annual revenue is derived from over 42,000 customers in localities all across the United Kingdom, as captured below:

(Source: Kitwave IPO Prospectus)

These maps are taken from the company’s IPO prospectus filed in 2021. While outdated, particularly for the foodservice segment which has seen significant M&A activity since, they help illustrate the collective national reach of Kitwave’s local operations.

Kitwave is unique within the independent segment of the food distribution market because in each town and city where Kitwave serves its convenience store, restaurant, and other independent customers, its competitors are overwhelmingly regional or local distributors, whereas Kitwave services these independent customers as well while also having national scale. These regional and local competitors have operations solely in that region or locality and carry annual revenues in the millions or tens of millions, dwarfed by Kitwave’s revenues of £600+ million.

Before describing exactly why we find Kitwave’s national scale provides it with advantages, we recognize and point out that there are limits to the benefits of national scale applied at a local level here. This helps local and regional competitors stand their ground. As long as a distributor has a central warehouse, core SKU inventory, a set of wheels, and a scrappy operator, it is often able to provide good enough service at good enough prices to maintain its longstanding customer relationships. As mentioned earlier, customer retention among independents in this industry tends to be quite sticky with low churn. This benefits entrenched local competitors who might not offer the best available solution.

As a result, the benefits created by Kitwave’s national scale do not enable them to steal away hordes of customers from smaller competitors in every town they enter. However, what this scale does allow Kitwave to do is be a first-class distribution option that offers an equivalent or better value proposition to convenience stores and foodservice establishments than any of its local and regional competitors. This in turn minimizes Kitwave’s customer churn, helps maximize product cross-sales, and helps Kitwave marginally win new customers. In other words, in any given geography, Kitwave will likely either be in first or tied for first, and will almost certainly never be last or even middle-of-the-pack.

Kitwave’s substantial scale advantage over local and regional competitors provides it with a sustainable competitive advantage over its peers in several ways, which we break down below:

1. Greater Bargaining Power over Suppliers → Structurally Better Service: Kitwave’s national scale allows it to buy its goods from manufacturers at an average cost of 1-2% lower than its typical local and regional competitors can. With this extra margin, rather than earn higher profits or undercut competitors on price, Kitwave chooses to reinvest this capital into providing better service for its customers. This better service manifests in various ways including lower minimum order values, more frequent delivery drops, and faster delivery times.

In an industry with razor thin bottom-line margins, a 1-2% margin difference is significant from the perspective of a smaller distributor. This can easily represent the majority of a local distributor’s profits, or even the totality. The below table presents industry data from publicly listed Western European food wholesalers from 2011 – 2022. These firms earned an average operating margin of 3.37% during those years, which is likely to be higher than those of local and regional firms given that these firms are publicly listed and therefore likely to have above-average industry scale. Even if we were to assume that the average U.K. local or regional food distributor earns a 3.37% operating margin, a 1-2% disadvantage to Kitwave represents a meaningful chunk of those profits.

(Source: NYU Stern, Aswath Damodaran)

In order to remain competitive with Kitwave’s value proposition, smaller competitors are often forced to choose between competing with Kitwave on price and losing on service, or trying to compete on service and losing on price. In Kitwave’s experience, smaller competitors cannot financially afford to beat Kitwave on both price and service for sustainable periods because of their lower margin structures, and therefore cannot sustainably match Kitwave’s value proposition.

“It all comes down to scale, it comes down to buying power, it comes down to logistics, it comes down to efficiencies. If we can buy full trunks of stock, we get a benefit from doing that. … The smaller regional players don't quite have that strength of a relationship and the pricing and margin piece, which means it's very difficult for them to do two things: undercut us on price and over-service against Kitwave. That's where we have that differentiation. You can't be the cheapest in the market and service it better than we are because you don't have the profitability to do that.”

– Ben Maxted, CEO of Kitwave Group

One quantifiable metric the industry measures for service level is the percentage of a distributor’s deliveries that are on-time and in-full. This metric measures both a distributor’s consistency in delivering goods to customers when they say they will and also a distributor’s ability to maintain consistent availability of its SKUs through manufacturers and warehousing. Since its IPO, Kitwave has disclosed this metric four times in its prospectus and annual reports, and in each instance they have delivered an on-time and in-full rate of between 98-99%. According to management and other industry participants we have spoken with, the industry average lies in the low 90% range, whereas 98-99% represents a best-in-class service level.

The last important service consideration that is not captured in the on-time and in-full metric is the consideration of minimum order value. One of the ways in which Kitwave invests in its service offering to provide leading service to its customers is through low minimum order values while still maintaining frequent servicing flexibility. The lower the minimum order value, the better the value proposition for the customer, as customers can place orders more frequently and at their convenience.Kitwave’s typical minimum order value is £100 for ambient goods, £150 for frozen & chilled goods, and in some circumstances as low as £75.

Another reason why Kitwave is able to offer lower minimum order values than its average competitor is because it typically enjoys higher route density than its local and regional competitors. By offering a full assortment of goods across the full spectrum of ambient and frozen & chilled food and beverages, as well as within both the convenience and foodservice segments, Kitwave maximizes its customer density in a given area, whereas smaller distributors might only serve a partial combination of those categories. All else equal, Kitwave then becomes more likely to have higher route density than its competitors, and can better afford to offer lower minimum order values and more frequent deliveries while still maintaining satisfactory economics.

When combining low minimum order values with Kitwave’s standard next-day delivery scheduling for customers (or “day one for day two” in industry parlance) and industry-leading on-time and in-full rates, Kitwave’s service offering becomes difficult for competitors to beat. Given how important the various elements of service are to the average convenience store and foodservice customer, it is hard to overstate how important having best-in-class service is to Kitwave’s ability to retain and strengthen customer relationships. Given the quickest way to lose a customer in this industry is to provide bad service, by providing first-class service, Kitwave maximizes retention and minimizes churn.

“Pretty much the U.K. market is on day one for day three because day one for day two has huge premiums associated with it. So, if [Kitwave is] doing £75 minimum order day one day two within 25 miles, then that's a very premium service offering for a relatively small minimum order value.” – Former Executive at Compass U.K. & Ireland

2. Wider Product SKU and Category Breadth: Kitwave’s national distribution network and expansive warehousing space allow Kitwave to become a more desirable distribution partner to food manufacturers which enables Kitwave to carry a wider breadth of products than its smaller competitors. In addition, Kitwave’s historical acquisitions of food distributors have included category specializations which have also added to Kitwave’s product category range.

When procuring SKUs, not all distributors have equal access to food manufacturer products. Larger distributors generally represent a higher value proposition to food manufacturers because one of the top priorities of a food manufacturer is to sell as much of their product as they can as quickly and conveniently as they can. All else equal, a food manufacturer would rather work with 3 or 4 large food distributors than 10 or 12 small distributors to sell a certain product because the fewer, larger distributors can allow the manufacturer to sell the product with more speed, more guaranteed volume per shipment, and present lower risk of operational disruptions.

Distributor service levels are also relevant to a food manufacturer’s desire to want to work with a given distributor. If a manufacturer’s products arrive to the end customer damaged, late, or at quality control risk, for instance, the manufacturer might prefer working with a different distributor. One industry participant at a food manufacturer we spoke with indicated that his firm ended its relationship with Matthew Clark, the U.K.’s 10-largest distributor by revenue, because of issues with Matthew Clark not delivering orders in-full and also not delivering them on-time. This serves as an example where a distributor’s large scale does not necessarily translate to better manufacturer relationships if quality service is lacking.

Kitwave’s extensive warehousing space as compared to smaller distributors is also an advantage because even if a regional distributor would like access to a product or category, they may not necessarily have the space to store that product and add it to its product breadth.

“We wouldn't sell to a smaller distributor because they just can't take all of our products. We have nearly 10,000 SKUs in our portfolio. … I don’t think any independent distributor can take those products.” – Head of Strategy & Transformation at Princes Limited

Additionally, in an effort to improve operational efficiencies, larger food manufacturers have recently been increasing minimum annual spends required in order for distributors to have the ability to buy products from them directly. According to a February 2024 article from The Grocer, “One of the biggest issues wholesalers have been battling with in the past two or three years has been patchy levels of availability from suppliers. … The sector has been rocked by a fresh supplier bombshell. That came in the form of a letter from Diageo, informing many wholesalers that it was introducing a new way of supplying the wholesale sector and that only those wholesalers spending over £2m per annum would remain eligible for direct supply. Furthermore, those wholesalers that did not qualify – which is most of them – would stop receiving orders from 1 April.”

As a result, in this case of Diageo, smaller wholesalers whose businesses are not large enough to support a £2 million annual spend are forced to either drop all Diageo products (i.e., Guinness, Smirnoff, Baileys, Captain Morgan, Tanqueray, Gordon’s brands) or to buy those products re-wholesale from other larger wholesalers such as Kitwave if they wish to continue having access to these key branded products. Given re-wholesale prices will almost certainly be higher than those previously offered by Diageo directly, smaller wholesalers have even less margin to work with and are now at a further disadvantage to larger distributors like Kitwave.

Lastly, a number of Kitwave’s acquired companies over the past 13 years have brought additional food product categories into Kitwave’s product range fold. Among those categories, the category that has been the biggest point of differentiation for Kitwave is frozen & chilled. Kitwave acquired its first frozen & chilled distributor Eden Farm in 2014, and in the decade since has developed high proficiency in distributing frozen & chilled products.

As discussed in the industry overview section, selling frozen & chilled products is a significantly more complex task than selling ambient products, and as a result fewer distributors offer frozen & chilled products than ambient products. According to Kitwave’s CEO, Booker and Bestway, the U.K.’s very largest food distributors, actually utilize Kitwave for their frozen & chilled temperature-specific deliveries to some of their own customers through a drop-shipment arrangement. The fact that Booker, the country’s largest food distributor and owned by grocery giant Tesco, is utilizing Kitwave for its frozen & chilled deliveries suggests to us that Kitwave’s frozen & chilled skill set is valuable, and that a high barrier to entry exists for competitors, let alone local and regional competitors, to develop this competency.

3. Ancillary Customer Value-Adds: The last way in which Kitwave’s scale helps it provide superior service to its customers is through its ancillary value-adds that many of its competitors might offer only in part or not at all. These ancillary value-adds that Kitwave offers include:
   • A full web ordering platform where customers can place their wholesale orders electronically instead of over the phone.
   • Range and inventory advice to help customers maximize SKU efficiency and store profits by leveraging Kitwave’s company-wide sales data.
   • Real-time access to new products from food manufacturers thanks to Kitwave’s direct relationships with manufacturers as opposed to local distributors who may not have direct manufacturer relationships and may have to rely on re-wholesale relationships due to their lack of scale.
   • Warehouse management investments that increase operational efficiencies which help Kitwave save on costs and customers receive orders with higher speed and accuracy.

These value-adds, while not as essential to customers as service and breadth of offering, are notable, and can only help Kitwave in maintaining, strengthening, and winning customer relationships.

Insulation from Larger Competition: U.K. Distribution Giants Not Capable of Servicing Independents 

One natural question after discussing how Kitwave’s scale provides it with a meaningful service advantage over small local and regional food distributors is, aren’t there even bigger delivered food distributors in the U.K. than Kitwave, and why aren’t they using their even bigger scale to beat Kitwave and everyone else on the independent side of the food distribution market?

The answer is, while there are indeed larger delivered food distributors in the U.K., most are focused on a different subset of food distribution customers, specifically high-volume, high-revenue retail chain contracts, and possess a different set of infrastructure than is necessary to provide high-quality service that meets the needs of mom & pop outlets and small chains. As a result, they are not economically interested in providing service levels that meet the needs of independent customers, and are also not physically capable of competing with Kitwave’s service levels for mom & pop outlets and small chains.

These U.K. food distribution giants who generate billions in annual revenue and possess meaningful scale advantages over Kitwave include the likes of Booker, Brakes, Bestway, and Bidfood. These wholesalers have built the necessary infrastructure to service large chains with 100s or 1,000s of national locations that need food procurement solutions. Examples of these types of customers include large restaurant, grocery, hotel, catering, fitness, and other chains that have some food and beverage component, whether major or minor, as a part of their service offering to customers. There are almost no other U.K. food distributors, Kitwave included, who have the proper large-scale infrastructure to compete with them on these national contracts. Therefore, they possess their own set of competitive advantages that allow them to sign multi-year, high-volume, high-revenue contracts with large retail chains that Kitwave can’t.

Conversely, because of how their infrastructure is set up, these distribution giants also cannot compete effectively with Kitwave in providing first-class service to the independent market, even if they wanted to. For instance, the fixed delivery fleets operated by Booker and Brakes feature large 26-tonne and 44-tonne vehicles as compared with Kitwave’s 3.5-tonne box vans, 7.5-tonne vehicles, and 12-tonne vehicles. These larger vehicles struggle with smaller drops as the logistical complexity and route density required to fill these trucks while still turning a satisfactory profit increase significantly.

Additionally, these larger distributors’ depot networks are structured differently with larger depots built to service national clients. Consider that Brakes generates over 6x in  annual revenue as Kitwave, yet operates 35 depots as compared to Kitwave’s 30, a similar number. Most of Kitwave’s depots are smaller hubs and built to service high frequency, low-volume drops as opposed to low frequency, high-volume drops.

As a result of the above, large distributors have the ability to service their national customers’ locations an average of 3-4x per week, even despite the larger guaranteed volumes and revenues per location than they would receive from an independent outlet. In contrast, Kitwave services many of its independent customers daily, and some up to 2-3x per day. If a customer’s convenience store is located on a side street, a large Brakes truck may also find it difficult to reach the store and execute the delivery, which is a consideration.

In addition to the fact that the distribution giants are structurally unable to service independent customers as effectively as Kitwave can, the economic incentive to chase independent customers in lieu of procuring multi-year, 100-1,000 location contracts is also missing, and is the other main reason why the large distributors don’t compete with Kitwave on first-class service to independent establishments.

Given that a single contract to be a broadline distributor to a 100-location chain of Nuffield Health fitness centers will generate far more revenue than a mom & pop store ever can, and given that distribution giants possess the trucking, warehouse, and logistics infrastructure and capabilities to service large national chains which almost no other distributors can, it is simply more economical for a large distributor to service the largest contracts possible than to try and move the needle on revenue with thousands of mom & pop stores. A 3-year agreement with Subway U.K. to deliver ingredients to all of its 2,000 locations is more predictable and less demanding than answering the needs of 2,000 separate mom & pop restaurants, each of whom may run out of a key ingredient any given Thursday at 2:00 p.m. and require a new delivery by dinner time.

Lastly, as affirmation that large distributors are not interested in servicing independent customers, according to our research, after COVID a number of the distribution giants made a conscious decision to cater more towards the right tail of their customers that had higher spends while cutting off the left tail of their customer base by raising minimum annual spend thresholds, similar to actions being taken by the large food manufacturers, and reducing delivery frequencies. While larger retail customers have been better able to work with these higher spend thresholds and reduced delivery frequencies (e.g. having back-up storage and chill rooms on-site), many smaller chains have not been able to work with these changes as easily, and subsequently have had to find new distribution partners to supplement or replace their existing relationships. While this has become opportunity for Kitwave and other regional distributors, the key takeaway here is that large distributors are actively moving away from servicing customers closer to the independent side of the spectrum, not running towards them.

“I'm aware of the bigger players like Brakes and Bidfood, especially Brakes. Just after COVID, they ditched quite a few of their caterers who didn't come up to a certain size. Their minimum delivery rate was increased.” – General Sales Manager: Food Service, Industrial & Co-packing Channels at Princes Limited

We note that we have seen examples where large distributors including Brakes and Bidvest offer low minimum order values to their customers. Upon further investigation, we discovered that these minimum order values were still associated with high annual spend thresholds and infrequent deliveries, implying that the large distributors are only able to offer part of the first-class service equation. Furthermore, these low minimum order values are only offered to existing clients who might own a 30-restaurant chain, not to independent restaurants hoping to work with Brakes or Bidvest, as the large distributors would almost surely not be interested in servicing a one-location business.

As further evidence of the scale required for large distributors to provide service, below is a table of symbol group agreement terms as of 2021 from various distribution owners and partners:

(Source: The Grocer)

As observed in this table, the food distribution partners typically require multi-year contracts (Kitwave does not require contracts) and the minimum order spends that are measured in pounds range from £1,000 to £7,500 per week. Given symbol groups, as discussed earlier, have been a way for big distributors to win market share within the independent market, we believe these terms demonstrate the limits to the service that the big distribution players such as Booker and Bestway, both of which are symbol group owners here, are either willing or able to fulfill to service a mom & pop outlet.

As an aside whilst on the subject of symbol groups, we wish to note that although 60% of the U.K. convenience store market spends 50-60% of its weekly budget with symbol group partners, Kitwave has still managed to maintain and grow its organic revenue base within this segment. This suggests to us its value proposition to independent customers of providing high-touch, quality service for that 40-50% of an independent’s basket spend is important and different from what the larger distributors are able to offer. Also worth noting, the symbol group model is not compatible with restaurants for obvious reasons (restaurants maintain independent branding), which is a positive for Kitwave as foodservice continues to become a larger part of its overall business.

Overall, Kitwave and its larger distribution peers each serve their separate segments of the market effectively, and have little overlap in their respective operations. For the reasons described here, we feel confident that Kitwave will continue to be insulated from competition from these larger distribution peers.

Industry Tailwind Towards Delivered Wholesale and Away from Cash & Carry

The industry trend of retail food establishments increasingly seeking convenience for its food procurement solutions is a gradual tailwind that should continue to benefit delivered food wholesalers such as Kitwave and work against traditional cash & carry store wholesalers.

In lieu of having access to industry-wide data, we share annual data provided by Booker Group, the U.K.’s largest food wholesaler, largely from when it was still a publicly traded entity:

(Source: Booker Group Annual Reports, The Grocer)

We believe the above data demonstrates the retail industry’s shift towards delivered food wholesale solutions. Although Booker Group does not represent the entire industry, we gather that the company serves as a strong proxy for the industry and its preferences because of its standing as the country’s largest food wholesaler. Even if this were in part the result of Booker voluntarily increasing its delivered capabilities, it stands to reason that they would only do so if there were demand for it. With consumer behavior in countless industries also trending more and more towards prioritizing convenience, particularly after COVID, in our view it is easy to see why this industry should continue to trend towards desiring more convenience as well.

While many of Kitwave’s top 30 wholesale peers service customers through a mix of cash & carry stores and delivered food solutions, as well as other adjacent assets and industries, Kitwave operates as a pure-play delivered food distributor. This will allow time to be the friend and not the enemy of Kitwave as its delivered business model stands on the right side of this industry tailwind moving forward.

Kitwave’s Other Business Segments

Kitwave’s independent food distribution sales to convenience stores and foodservice establishments, the company’s core focus, comprise 67% of the company’s annual revenues and 74% of the company’s annual operating profits by our estimate. The remainder of Kitwave’s business is generated through vending, re-wholesale, and larger retailer and discount chain distribution channels.

(Source: Public Filings)

Vending

Kitwave’s vending segment customers include large national vending companies as well as smaller vending machine operators. Products sold to these customers include soft drinks, confectionary, and vending specific products (e.g., cups, milk, stirrers). Deliveries are made not to the actual locations of the vending machines but rather directly to the customer’s depots.

Given Kitwave’s long history in the confectionary food wholesale space, its first acquisition in 2011 was for Automatic Retailing, a vending food wholesaler which today serves as Kitwave’s subsidiary responsible for the company’s vending operations.

Re-Wholesale

Kitwave’s re-wholesale segment includes the sale of its SKUs to other wholesalers including large cash & carry businesses as well as smaller local and regional wholesalers. Given Kitwave’s better buying power from food manufacturers than many local and regional wholesalers, it is able to turn a profit by re-selling SKUs to other wholesalers who may not have the necessary scale to form direct relationships with certain food manufacturers.

There has been an increasing trend in recent years among some large food and beverage manufacturers (e.g., Diageo) to increase minimum order values to wholesalers in an effort to consolidate manufacturer-wholesaler relationships which has squeezed out smaller wholesalers from having direct manufacturer relationships. This impact requires smaller wholesalers to rely on re-wholesalers such as Kitwave if they wish to continue carrying those SKUs.

This segment also includes high-revenue partnerships with other distributors such as Booker and Bestway who outsource certain frozen & chilled distribution responsibilities to Kitwave because of Kitwave’s proficiency in handling frozen & chilled products, as was discussed earlier.

Larger Retailer and Discount Chain

Kitwave’s larger retail and discount chain segment is comprised of a concentrated number of high-revenue partnerships with nationally recognized chains including B&M European Value Retail and Domino’s. B&M European Value Retail utilizes Kitwave to deliver certain frozen & chilled products to its stores. Domino’s along with its food manufacturing partners Unilever and Coca-Cola have designated Kitwave as the preferred partner to deliver Ben & Jerry’s and Coca-Cola goods directly to over 1,100 Domino’s locations across the U.K.

Within the larger retailer and discount chain segment, as well as the re-wholesale segment, Kitwave manages a handful of high-revenue distribution relationships where the company capitalizes on its strengths of a national distribution network and excellent frozen & chilled capability. According to management, the company has no intention of chasing national contracts and expanding its infrastructure to mirror that of the larger distributors. Rather, Kitwave leverages its existing infrastructure and national scale to take advantages of these high-revenue partnerships as a supplement to its existing core independents business.

“We'll only look at those opportunities as and when we can do it on a wholesale basis and make a wholesale margin. We get approached for tenders for contract work. It's not what we're interested in. So it'll only ever be few and far between. Our reason for being is the independents. These make nice bolt-ons when we can make proper margins on them. And yes, they come with some nice bigger volume. £20 million at a time revenues. But it's only for the right and proper time. It's not something we actively chase. It's more when people approach us.” – David Brind, CFO of Kitwave Group

Regarding the Domino’s-Unilever partnership, for instance, the two were seeking a solution to route Ben & Jerry’s ice cream pints into all 1,100 Domino’s U.K. locations. While they could have chosen any food distributor such as Booker, Brakes, or Bestway to solve this problem, they sought out and chose Kitwave. This selection was not through a tender process but through direct outreach to Kitwave because of the company’s reputation for quality, high-frequency service of frozen & chilled products and with a national presence. Following the Domino’s-Unilever selection of Kitwave, Coca-Cola also decided to switch out its then-distribution partner for its Domino’s U.K. drops in favor of partnering with Kitwave.

In our view, the fact that Kitwave is indeed a trusted partner for major distribution and food manufacturers alike including Booker, Bestway, B&M European Value Retail, Domino’s, Unliever, and Coca-Cola, is a strong vote of confidence in Kitwave’s competencies. Distribution to independents remains the company’s bread and butter, and high-revenue partnerships should continue to serve as bolt-on wins.

Substantial Long-Term Growth Opportunity Ahead for Kitwave

Having established why we find Kitwave to be a high-quality business within the U.K. food distribution ecosystem, we now walk through the paths to future growth that we believe should easily allow Kitwave to continue compounding its profits at a +10-20% CAGR over the next 3-5 years and beyond.

Kitwave breaks out its total addressable market opportunity between retail & convenience and foodservice:

Within each category, Kitwave recognizes the 59% and 52% market share proportions, respectively, that are captured by distribution giants such as Booker, Bestway, Brakes, etc., which represent market segments that Kitwave does not service. This leaves a remaining combined fragmented market opportunity of £10.7 billion of which Kitwave currently captures 5.6%.

M&A: Rolling-Up Regional Distributors

Kitwave’s primary path to growth over the past 13 years, and which it fully plans to continue pursuing going forward, has been roll-up acquisitions of smaller regional distributors across the U.K.

“We are building a reputation as a good home for businesses. We buy second, third and fourth-generation businesses, and then harness the management teams and people within those businesses because they are fundamental to what makes them a success. We’re not buying businesses to take cost out of them. We’re buying businesses to grow with, and to grow Kitwave. Paul mentored us to make sure we take the benefits out of those businesses. Culturally, we’re running them as they always have been and are slightly enhancing them, rather than changing them.” – Ben Maxted, CEO of Kitwave, NET Times Magazine

We will be the first to admit that “roll-up” businesses have not been at the top of our list for outstanding investment prospects. This has had nothing to do with the historical returns of highly acquisitive companies, which if anything research shows have statistically outperformed their non-acquisitive peers, and everything to do with our caution, perhaps a bit unfounded, of the implicit risk in M&A. As investors, we have been particularly fearful of companies engaging in transformational acquisitions, which research has shown bring significant risk to the combined entity. However, after learning about Kitwave’s acquisition history, rationale, and strategy, as well as industry precedent, we view Kitwave’s approach to M&A as highly logical and, as long as continued in a disciplined fashion, a powerful way to create economic value.

Below is a summary of Kitwave’s acquisition history:

(Source: Public Filings)

Kitwave has acquired 14 companies over the past 13 years since 2011, when management first decided to embark on this M&A strategy and sought its first private equity partner. Several key items are evident here.

First, Kitwave has never engaged in a transformation acquisition and has pursued exclusively smaller regional distributors, which it plans to continue pursuing going forward. Second, Kitwave has paid an average EBITDA multiple of 4.4x and a maximum EBITDA multiple of 6.0x for its acquired companies according to our estimates and disclosed terms. This is before considering synergies, which according to management amount on average to 0.5-1.0x turns of EBITDA. While Kitwave didn’t disclose terms for its acquisitions of Wignalls and Wilds of Oldham, the reason is because these were small businesses acquired primarily for their assets which were of strategic interest to Kitwave. Third, the categories of Kitwave’s chronological acquisitions were a function of Kitwave’s strategic decision to bolster its ambient and frozen & chilled divisions before pursuing foodservice, which will continue to be the primary category in which Kitwave intends to complete future acquisitions.

We have high confidence in the likelihood of success for Kitwave’s future M&A, for the following reasons:

• Kitwave appears to have a high success rate with its previous 14 acquisitions. Historical financial statements show no impairments to goodwill, or other evidence of significant underperformance of acquired businesses, a fact to which management has expressed strong agreement.
• M&A is not only common, but ubiquitous across the food wholesale industry. Every large publicly listed food wholesaler we could find across the U.S. and Europe has gained some significant portion of their historical growth through M&A.
• Management has expressed key priorities in evaluating acquisition targets including buying quality businesses with entrepreneurial managers, keeping those managers in place, and giving those managers decentralized freedom to operate their businesses. Altogether, if coupled with good judgment, we believe these priorities should help reduce risk and enhance odds of business success.
  
  According to Kitwave’s CEO, “We're not into turnarounds. We're not into failing businesses, because if Kitwave is a failing business, it's lost the goodwill of the customer base and therefore it breaks everything that we are which is service and breadth and delivery capability. It's about buying good businesses with good management teams. Invariably, what you find is the management team then is entrepreneurial in nature and obviously what we're doing in a way we're looking to improve that business, we're certainly not telling them how to run that business. What you tend to get then is an entrepreneurial management team that wants to take that business to the next stage with the investment that Kitwave can give to them and the infrastructure and the KPI analysis that we look to put down in terms of that rigor of control. I think what you tend to find is put those things together and you get a business that goes in the right direction.”
• Management’s three strategic factors when deciding whether to consider an acquisition target are: (1) Does it bring us a new customer base? (2) Does it bring us a new product base? (3) Does it provide something we already do to a new geography? We find this rationale to make sense, and believe management has demonstrated these words through historical actions when they exerted patience in first building out their frozen & chilled capabilities through M&A before entering the foodservice category with a strong ambient and frozen & chilled food catalog. This framework also suggests that there is a great deal of wood to chop for Kitwave going forward on the M&A front as there are still large geographical gaps in its segment categories (e.g., Kitwave does not yet have a foodservice presence in the London area).
• Management has also made it clear that they have no intention of executing M&A for the sake of growth and rather that they will only wait for the right opportunities to present themselves. According to Kitwave’s CFO, “We do M&A for the right reasons, not for M&A sake. We're not going to sit here and say, I'm going to do two M&A this year, I'm going to do four in the next three years, whatever. It'll be the right M&A at the right time. It will be profitable. It won't be turnaround. It will be bought at a sensible multiple pre any synergies we can bring to the business. Then we get it in and we do it correctly.”

• Potential acquisition targets are likely to view Kitwave favorably as an acquirer as compared to private equity firms and large multi-national corporations, who represent the alternative potential acquirers for their businesses. A significant percentage of the industry’s smaller regional distributors are multi-decade, multi-generational family run businesses, and these family businesses often have resistance to the thought of selling to a private equity firm or large corporation that might lay off employees, cut other costs, and/or create radical change to their business. Kitwave, which is still 17% owned by the founding Young family, is often viewed by these businesses as a preferred home, and we think should continue to give Kitwave an edge in acquisition sourcing, negotiations, and goodwill among acquired operators.
• Kitwave has demonstrated financial discipline when acquiring companies through its historical average of paying 4.4x EV/EBITDA before synergies based on disclosed terms and our estimates. Given Kitwave’s increase in revenue base, its deal sizes will likely increase in order to continue moving the needle, though management has expressed that they don’t wish to pay more than 6.0x EV/EBITDA before synergies for a business. This was recently exemplified in its March 2024 acquisition of Total Foodservice Solutions, which management acquired for 5.0x EV/EBITDA by our estimates. Low acquisition multiples are important because they both reduce financial risk to Kitwave and all else equal increase economic value added to the company.

In addition to low acquisition multiples, Kitwave also repeatably receives 0.5-1.0x turns of synergies as expressed through EV/EBITDA multiple paid. According to management, in the first six months following an acquisition, cost synergies are gained by moving the acquired company’s purchasing terms with suppliers to the greater Kitwave Group’s terms with suppliers, which is near certain to be an improvement in cost of goods sold for the acquired company. During that period, revenue synergies are also gained by introducing to the acquired company’s customers Kitwave’s wide catalog of food items across its various categories that can be cross-sold. There are also intermediate-term synergies that are not always present though occasionally realized through reduction of redundant overhead or PP&E.

• Similar to how local distributors receive the benefit of sticky customer relationships, acquirers such as Kitwave inherit this benefit with their acquired company’s customers. By buying customer relationships that could be as old as 30-100 years and then improving service even further, we believe Kitwave’s acquired revenues and profits are already largely de-risked.
• Our research suggests there are dozens of well-run independent U.K. distributors generating between £10-70 million in annual revenue. This presents a strong pipeline of companies in a deeply fragmented industry which could become potential acquisition targets for Kitwave in the future, and suggests that Kitwave should have rights to win within its existing segments and existing parameters, for which it has already demonstrated a strong history of success, for at least the next 10 years.

Organic Growth

Kitwave should continue to generate organic growth across the board in addition to its wins from M&A. In FY23, the company grew organic revenues by +13% YoY, of which +10% was attributable to price inflation and +3% attributable to case rate, or volume, growth. According to management, blended organic case rate growth of +3-4% annually has been the company’s historical average. Case rate growth results from a combination of strengthened cross-selling within existing customer relationships, net new customer wins, industry growth, and lingering revenue synergies following acquisitions.

According to IGD estimates, total U.K. convenience store spend is forecast to increase from £46.3 billion in 2023 to £50.9 billion in 2027, or a +2.4% CAGR. According to Mordor Intelligence, total U.K. foodservice spend is forecast to increase from £99.4 billion in 2024 to £134.5 billion in 2029, or a +6.2% CAGR, with the fastest growing sub-segment within foodservice expected to be independent outlets. Positive industry growth should be beneficial for Kitwave to maintain and grow its organic business.

It is also worth mentioning that, despite the high inflation levels seen in the U.K. in 2022 and 2023, Kitwave has demonstrated that it is able to pass along pricing increases handily which is an advantage of operating a consumer staple business.

Historical Growth

Below are historical revenues and profits for Kitwave from FY16, its earliest set of publicly available financials, through FY23:

(Source: Public Filings, Companies House)

Kitwave, largely through M&A, over the last 7 years has compounded its EPS at a +22% CAGR.

Kitwave’s improving gross and operating margins have mainly been the product of its foodservice segment becoming a greater part of its revenues and profits. As discussed in the industry overview section, the foodservice industry carries higher wholesale margins, stickier customer relationships, and higher wallet share than the convenience store and other retail industry. Given management’s clear direction that future acquisitions will continue to focus on expanding the company’s foodservice operations, Kitwave’s margins should continue to improve further.

Going forward, if Kitwave spends an average of £20-40 million annually on acquisitions at an average deal valuation of 5-6x EV/EBITDA (Pre-IFRS 16), we calculate that, combined with LSD-MSD organic growth, Kitwave has a clear path to compound its EPS at a +10-20% CAGR over the next 3-5 years.

Valuation

At today’s price of £3.85/share, we believe Kitwave Group’s shares have room to appreciate considerably over a 3-5 year horizon based on our expectations of +10-20% growth in annual per-share profits and our view that Kitwave currently trades at a substantial valuation discount to its food distribution peers in the U.S. and Europe.

Below is our output of future profit estimates for Kitwave Group on an absolute and per share basis:

Our base case is that Kitwave grows its EPS at an average rate of around +15% annually over the next 3-5 years, supported by our already established M&A and organic growth assumptions. Should Kitwave grow at a rate anywhere near our estimates, we believe it is highly unlikely that we will lose money on this investment over a 3-5 year horizon, and that there is a good chance we will make money over this period.

Meaningful Discount to Comparable Company Valuations

Aside from what we view as strong forward-looking growth for a recession-proof consumer staple business trading at a FY24 P/E of 13.1x based on our estimates, what excites us even further is the valuation gap between Kitwave and its U.S. and Europe food distribution peers. We compare these valuations in the following table.

(Source: TIKR, Public Filings)

In comparison to its publicly traded food wholesale peers across Europe and the U.S., Kitwave is trading at a sizable discount on both a P/E and EV/EBITDA basis, despite having a significantly more robust growth profile and industry-leading returns on invested capital. The only other companies that are trading at similar valuations as Kitwave have delivered either anemic or negative profit growth, and the companies that have demonstrated similarly impressive growth and/or returns on capital, a proxy for quality, are trading at far higher valuation multiples than Kitwave currently is.

Should Kitwave eventually merit a below-average 18.0x P/E multiple, based on our EPS forecasts this would imply a 3-5 year forward share price range of £7.43-9.85 or a share price appreciation of +93-156% from today’s price.

Among the above listed comparable companies, in our view the most comparable company to Kitwave is The Chef’s Warehouse given The Chef’s Warehouse’s exclusive focus on delivered food distribution to the U.S. foodservice industry. Similar to Kitwave, The Chef’s Warehouse has grown largely through M&A, and currently carries a sell-side consensus EBIT growth forecast of +13.8% CAGR over the next 5 years, presumably through continued foodservice industry M&A, which is similar to our assumptions for Kitwave. While we don’t expect Kitwave’s valuation multiples to fall in line with those of The Chef’s Warehouse of 37.0x P/E and 13.5x EV/EBITDA, at least any time soon, we do believe this comparable company along with the others highlight the significant valuation discount currently assigned to Kitwave Group.

Why This Opportunity Exists

We believe this valuation gap and opportunity might exist for several reasons.

1. Lone Sell-Side Analyst Perpetually Underestimating M&A Activity and Future Growth: Since Kitwave’s IPO, its only publishing sell-side analyst Canaccord Genuity has perpetually underestimated the company’s forward-looking results to a significant degree. Below is Canaccord’s Adjusted EBITDA upgrade guidance history as of March 2024:

(Source: Canaccord Genuity Sell-Side Report)

At Kitwave’s IPO in 2021, Canaccord forecast FY23 Adjusted EBITDA to be £22.0 million, which in FY23 turned into an actual result of £41.1 million or +87%(!) greater than Canaccord’s original estimate in just 2 years. Even looking at 3-year forward estimates for FY26 Adjusted EBITDA, Canaccord is estimating only +19.0% total growth or a +6.0% CAGR, which Kitwave may achieve through organic revenue growth and recent acquisition synergies alone. We are convinced that in forming its estimates, Canaccord Genuity is giving zero credit to Kitwave’s future M&A activity. This is puzzling to us, as Kitwave has both a trailing 13-year history of completing ~1 acquisition per year and has clearly communicated its intention to continue down this acquisitive path.

2. Recent IPO with Little Coverage: Kitwave’s initial public offering was in May 2021, or three years ago. Its small market capitalization, brief existence as a public company, and lack of meaningful sell-side and buy-side coverage have likely contributed to what we view as its undervaluation.
   
3. U.K. Small-Cap Equity Outflows: For most of 2022 and 2023, U.K. small cap equity funds saw billions of dollars in net outflows. This has likely contributed to lower U.K. equity valuations, which through February 2024 remained below historical averages.
   
   
4. M&A Component of Thesis Subduing Investor Interest: Understandably, we think Kitwave’s communication of M&A as a core component of its business strategy may dampen interest from some investors. While we are comfortable with Kitwave’s acquisition goals, we appreciate why others may turn away.
   
   
5. FY20 Fiscal Year Change Confounding Historical Numbers: The company changed its FY20 fiscal year ending date from April 30 to October 31. According to the company, this change was initiated in order to better capture warmer weather period seasonality beginning with the Easter holiday in the same fiscal year. We believe that the inconsistent 18-month fiscal year, preceded and followed by 12-month fiscal years, not to mention occurring squarely during COVID, may be skewing screens and superficial historical financial analyses. The company’s recent release of its FY23 results adds to a consistent series of 12-month fiscal year data.

Precedent Transaction: Tesco Acquires Booker Group

In January 2017, U.K. multi-national grocer Tesco PLC announced its acquisition of U.K. food distributor Booker Group for £3.7 billion. Based on Booker’s fiscal year results ending in March 2017, Tesco acquired Booker at a P/E multiple of 23.0x net of cash and an EV/EBITDA multiple of 18.3x, or significantly above Kitwave’s current trailing P/E multiple of 13.5x and EV/EBITDA of 7.8x. This acquisition also suggests U.K. food distributors can be viewed as strategic assets as they approach a certain size.

Kitwave Group as a Potential Future Acquisition Target

While we certainly aren’t invested in Kitwave Group with the hope that it eventually gets acquired (we would be thrilled to own Kitwave today under a theoretical guarantee that it were never to be acquired), we do believe there is a realistic chance that as Kitwave continues to grow in size, it becomes of interest to strategic or financial acquirers in the future.

Of the 14 food wholesalers in the U.K. that are larger than Kitwave, excluding Costco, based on our analysis, 5 of those 14 are already owned by a larger parent company, and only 2 of those 14 operate as pure-play delivered food distribution businesses, both of which are already owned by larger parent companies. Given Kitwave’s niche position within the industry’s independent customers and the industry’s shift away from cash & carry and towards delivered wholesale solutions, we wouldn’t be surprised if Kitwave eventually becomes an acquisition target itself.

“They will almost definitely become a target for private equity investment. I'm talking about the U.K. here, but most businesses of a certain size, so that's probably Kitwave size and above, and with an EBITDA percentage as strong as Kitwave very rarely stay kind of independent. As I understand that they've got a CEO who’s about to retire. I think it's a family-owned business basically. … It's never part of a strategy, but everyone hits £1 billion and gets acquired.” – Head of Strategy & Transformation at Princes Limited

Addressing Risks

Below we address several potential risks that could impact the company moving forward:

Acquisition Risk

Like all acquisitive companies, Kitwave could face future risk of buying assets that are lower-quality than expected or poorly executing future acquisitions. While possible, we believe that the small sizes of Kitwave’s typical acquisitions relative to that of the overall company and the current management team’s track record of executing 14 of 14 successful acquisitions within the same industry over the past 13 years provide a ceiling to the impact this future risk can present to the company.

Aside from quality and execution risk, the other risks with respect to the company’s future acquisitions are the pace of and price paid for those acquisitions. While we believe there is a strong pipeline for Kitwave to continue acquiring distribution businesses at low multiples that further its strategic goals and grow its profits, there are the risks that Kitwave either completes future acquisitions at a pace that grows its earnings per share at a rate notably slower than its historical growth rate and/or that Kitwave’s multiples paid for future acquisitions are higher than what they have paid historically. Given Kitwave’s last 3 material acquisitions over the last 2 years have occurred at multiples between 4.4-6.0x EV/EBITDA (Pre-IFRS 16) and an average net consideration of £18.9 million, we view this as evidence that the company can continue making prudent acquisitions within its target valuation range.

Customer Revenue Concentration

As of the company’s FY23 annual report, Kitwave’s largest customer represented 9% of revenue. We believe this is likely to be one of the company’s customers within its re-wholesale or larger retailer and discount chain segments such as B&M European Value Retail. A loss of such relationship could lead to a significant one-time decline in revenues and profits. Given these relationships are highly likely to carry lower operating profit margins than the company’s core convenience store and foodservice segments due to the larger scale and lower margins associated with these types of relationships, we gather the profit impact would be less than 9% and perhaps closer to 5-6%. We also know that Kitwave’s relationship with B&M is longstanding at 16 years, which suggests both companies have found value in the relationship for a long time rather than on that has been recently entered into and more promiscuous in nature.

Unionization Risk

During our research of food distributors, one industry-wide risk that arose was the potential presence of unions at food wholesale businesses. Kitwave does not have unionized employees, and trade union density has been in gradual decline across the entirety of the U.K. over recent decades. In addition, given Kitwave’s decentralized nature, Kitwave’s staff generally view themselves as employees of the smaller acquired subsidiaries they work for (e.g., Eden Farm, Automatic Retailing) rather than working for the larger Kitwave Group, which generally helps against unionization as smaller companies tend to have lower rates of unionization as compared to larger companies. However, should unions form at Kitwave Group or its subsidiaries, this could put pressure on operating costs.

Manufacturers Cutting Out Distributors from Supply Chain

The threat of manufacturers cutting out distributors from their industry’s supply chain, or supplier disintermediation, has occurred in a handful industries from electronics to apparel to travel and hospitality. The threat of supplier disintermediation occurring to companies like Kitwave in the food supply chain appears quite low to us.

The main argument against supplier disintermediation occurring in the U.K. food distribution industry, which we strongly agree with, is that food manufacturers attempting to sell their products directly to distribution customers (e.g. convenience stores, restaurants, grocery stores) would be at a serious route density disadvantage to food distributors and particularly the larger ones. For instance, even if AB InBev were willing to invest in the infrastructure necessary to try and distribute its beverages directly to clients, their products would only represent a small percentage of their average customer’s wallet share. A distributor, on the other hand, may carry AB InBev, along with Molson Coors products, Budweiser products, and every other category of soft beverages, ambient foods, frozen & chilled foods, etc., and therefore enjoys significantly greater route density which translates to profitability. It is difficult to see how a food manufacturer could deliver their own products cheaper and more efficiently by themselves than by relying on food distributors to do it for them.

Appendix A: Insider Ownership

Below is a table summarizing the insider ownership of Kitwave Group’s employees and directors. Kitwave Group’s executive officers and board of directors altogether own 22.4% of the company’s diluted outstanding shares. We note that, as part of the company’s 2021 Management Incentive Plan ending FY24, CEO Ben Maxted and CFO David Brind are expected to receive an additional 583,333 and 350,000 shares, respectively, in February 2025. These awards would bring the CEO’s and CFO’s combined share ownership to 5.4% of diluted shares outstanding.

(Source: Kitwave Group Public Filings)

Appendix B: Summary of Distribution Vehicle Fleet

Kitwave Typical Vehicles

3.5-tonne vehicle:

(Source: Easihire.co.uk)

7.5-tonne vehicle:

(Source: Empire Van Hire)

12-tonne vehicle:

(Source: Prologistics)

Large distributor typical vehicles

26-tonne vehicle:

(Source: Maun Motors)

44-tonne vehicle:

(Source: FuelCellsWorks)

Appendix C: Kitwave Uptake in Customer Electronic Orders

Higher electronic ordering rates are associated with +8% higher customer AOVs for Kitwave.

(Source: Kitwave Group, FY23 Investor Presentation)

Appendix D: Consumer Staples vs. Consumer Discretionary Exposure

Market exposure to consumer staples sector relative to consumer discretionary sector lower than in most of 2022. This suggests market positioning towards consumer staples has room to increase should fears of inflation and/or a weakening economy arise.

(Source: StockCharts)