George Weston seeks profits in premium products

- Last updated on GMT

Related tags: George weston, Low-carbohydrate diet

Hurt by rising operating costs and a shift in consumer taste
against traditional white flour based products, Canadian food giant
George Weston has embarked on a search for better margins in
premium bakery products.

The group's bakery division Weston Foods which operates well known brands like Stroehmann Pennsylvania Dutch Bakers, Weston Fruit Cake Company and Arnies Bagels suffered a 54,4 per cent reduction in operating profit to $91 million in the first half of 2004. The division sales, accounting for 15,5 per cent of the total group's revenue, were down 6,7% to $2,1billion.

Subsequently, George Weston managed to improve its total sales only by 2,9 per cent to $13,5 billion while total operating profit rose by 2,8 per cent to $744 million. The group was kept on the positive growth terrain by an upbeat contribution of its general food supplying division Loblaw. This division accounts for about 80 per cent of total activity.

Were it not for the depressing performance of the bakery division, George Weston would have seen double-digit earnings growth during the period under review.That is why the group is reviewing strategy particularly on the bakery side of things.

The group is broadening its product mix and stresses an up-market movement. This is because the economy market has been flooded by competitors from within the baking industry and across other food type manufacturers.

First, the low carbohydrate diets staked a big claim of the market by appealing to the increasingly health conscious consumer. Another attack came from conveniently packaged products like cereal bars. Perfect for the on-the-go consumer.

Responding to a shrinking market, bakers drew swords against one another through a price war. Not a prudent strategy when the cost of raw materials is skyrocketing. It explains why Weston Foods operating margin has almost been halved to 7,7% from 14,1 per cent in 2003.

In this situation the solution is value-added products, a revenue driver that is less susceptible to price wars. The market for premium bakery brands including chilled and health cakes has seen remarkable growth in the past six years when the general cake market has been stagnant.

Its a trend reflected in the research conducted by Mintel Marketing Intelligence which show demand of chilled cakes rising 71 per cent between 1999 and 2003 in the UK when total cake retail sales remained almost flat.

George Weston response is in line with this view. The group has witnessed strong growth in its whole grain and premium products including low carb types.

"We are well positioned to meet the consumers increasing demand for healthier and more convenient products,"​ said group chairman Galen Weston.

This strategic shift will not come easy. It has already put a strain on the balance sheet. Interest expense increased 38,6 per cent to $79 million in the second quarter of 2004, partly as a result of gearing up for increased working capital levels.

Increased capital expenditure has not been limited to beefing up Weston Food's product mix but the food distributing division is set to benefit immensely from this programme. Loblaw is scheduled to substantially extend and revamp its retail square footage.

In the first two quarters Loblaw discontinued 31 trading stores and added the same number of new stores in its portfolio resulting to a net increase of 2,8 per cent of 1,2 million square feet in trading space.

While the group seem to be pro active in meeting the challenges faced by its two major divisions Loblaw and Weston Foods, it seems dumbstruck by a crisis that has sunk its farmed salmon division, Fisheries, into the red.Accounting for about 2 per cent of total George Weston sales, Fisheries has been badly hit by the rising environmentalist concern over increasing salmon farming which may have negative ecological impacts. Fisheries half-year sales were down by 24,7 per cent to $73 million and it posted a loss of $3m.

Except to say that the Fisheries performance was affected by negative publicity, George Weston has expressed no other view about Fisheries future.

Related topics: Markets

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