Northern chief pays the price for profit warning

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Northern Foods has warned that pre-tax profits for the first half
of 2003 are likely to be lower than expected as a result of rising
ingredient costs and the loss of several contracts.

The third profit warning in 18 months at UK-based Northern Foods​ has finally cost the head of the company's chief executive, Jo Stewart, who was sacked yesterday by the own label manufacturer.

Group chairman Peter Blackburn will take over the running of the company in the executive chairman role until a successor can be found for Stewart.

Stewart was forced to stand down as Northern announced that trading in the second quarter of the year had been worse than in the first 13 weeks of the year - as expected - although sales were ahead of the same period a year earlier as a result of the acquisition of Solway Foods - a producer of chilled convenience foods for the UK retail sector - in June.

Sales in the first quarter of the year were up 5.8 per cent as a result of the Solway acquisition, with a further 9.6 per cent gain in the eight weeks to 23 August, and underlying sales (excluding Solway) also improved, rising 5.5 per cent and 3 per cent respectively. But the decision not to pass on cost increases to its main customers, which include Marks & Spencer, Tesco, Sainsbury, Asda and Safeway, meant that profits will not keep pace with this growth.

In July, Northern said that margins were coming under increasing pressure as ingredient costs continued to rise.

"We have implemented price increases in biscuits to recover higher chocolate costs, but are now seeing costs rising in a number of other product areas, principally those with raw materials linked to the euro,"​ Blackburn said at the time, and the situation has worsened since then as the hot weather across Europe has taken its toll on many agricultural crops, reducing yields and increasing prices.

These problems were compounded by the loss of a number of important contracts to its competitors - underlying sales to the top five supermarket groups were up just 3 per cent in the first part of the second quarter - and pre-tax profit for the first half is therefore expected to be significantly lower than in the comparable period last year, Blackburn said.

As always, the company attempted to put a positive spin on the situation. "Although further raw material cost inflation is expected, with new initiatives now under way the board anticipates that trends in the key trading period of the second half will be more positive,"​ Blackburn said, adding that pre-tax profit for the second half should be roughly in line with that of the previous year.

Tough times ahead, then, for Northern, and a rethink of the company's strategy is likely to see a significant cost reduction programme, possibly involving disposals. Northern was linked with a possible acquisition of Geest earlier in the year, but this now looks extremely unlikely, despite the fact that the general convenience food sector - in which both companies operate - continues to be one of the fastest growing in Europe.

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