Retail pressure squeezes Geest profits
material costs has hit UK food producer Geest.
The company reported a lower profit for the first six months of 2004, and announced further cost savings, including cutting some 100 management jobs.
It seems that price cuts demanded by some the country's major food retailers have cut into Geest's profit. The Financial Times says that savings of £22 million made in the current year should offset, but not recover, the loss of margin.
Even new revenue streams such as that from making Heinz-branded ready meals for independent convenience stores will do little in the short term to counter the squeeze from the supermarkets.
This year's profit is expected at about £36 million before tax, down from last year's restated pre-exceptional £37.6 million. But there is some hope that next year will see the start of margin recovery and analysts have been edging 2005 forecasts higher.
"The UK trading environment for food retailers continues to be challenging and has created increasingly turbulent trading conditions for suppliers, which are affecting our results this year," said Sir John Banham, chairman of Geest.
"We have responded by improving operational efficiencies and developing new revenue streams. The efficiency programmes, which we outlined at the beginning of the year, have matched our expectations and have started to help us maintain margins, despite continuing selling price deflation."
Andrew Marshall, chief operating officer of equipment supplier SFT, goes even further. He believes that it is the retailers who are partly to blame for the current situation.
If retailers were prepared to work for slightly reduced margins, then billions would be released to create safer products. Farmers, he said, would be able to raise safer livestock and manufacturers would not have to take shortcuts.
"I recently saw an internal memo that some senior buyers for supermarkets had done as part of an exercise," he told FoodProductionDaily.com earlier this year. "It said that if three out often five major multiples (in the UK) got together to delist any one brand name, they could do so.
"In other words, they could break that brand. Over 80 per cent of food sold in the UK is done through the big five [now the big four following Safeway's takeover by Morrisons]. It is essentially a monopolistic situation."
The global squeeze on food suppliers by an increasingly powerful retail sector has been the basis of a number of recent reports. The Wal-Mart business model in which the goal of cutting prices relentlessly is the ultimate objective has been copied extensively in Europe and, from a retail point of view, has been a stunning success.
Nonetheless Geest, which specialises in the preparation of fresh foods, signalled its intention to improve the financial situation through diversification. Yesterday the company announced the £14 million acquisition of Anglia Crow, which will provide Geest with a foothold in the £250 million market for UK hospital food.
Within the £250 million market, £65 million is outsourced and this area is growing rapidly. Anglia Crown is the second largest player in the outsourced delivered meal sector - and the leading producer of fresh meals - with a turnover of around £16 million.
Increasingly, hospitals and their patients demand the provision of healthy, quality food and choice and there is a growing trend for meals to be contracted to third parties. Geest believes, therefore, that there is long-term sustainable growth in this area and that Anglia Crown will develop well within a larger fresh prepared foods company.
