Troubled rejig curbs Cerealia profits

Related tags Bread

The last 18 months or so have been tough for Cerealia, with
profitability well down on previous years as a result of a number
of disposals designed to refocus the group on a smaller number of
business units. But replacing disposed of cake and biscuit
businesses with a new, enlarged bread unit thanks to the
acquisition of Schulstad in April 2003 has proved far trickier than
expected, and profits continue to suffer as result, as Chris
Jones reports.

Cerealia reported net profits of SEK58 million for the first eight months of the year last week, well down on the SEK104 million seen a year earlier, and less than half the SEK139 million posted in the whole of 2003 - a clear indication that the integration of the new business is taking longer to achieve than had been hoped.

The company's financial director Lennart Sandberg admitted as much to​ this week. "We are perhaps a year behind in our integration programme, and this has had a particular impact on the expected cost savings in the distribution segment,"​ he said, stressing that the problems were for the most part confined to the Swedish market.

The domestic bread market has been under pressure for some time now - Cerealia closed eight bakeries there last year - and while the consolidation brought about by the acquisition of Schulstad will undoubtedly help, overcapacity remains a problem, especially with the retail sector demanding lower prices and, increasingly, single suppliers.

But if profitability remains under pressure as a result of the delayed integration, sales have held up well (SEK5.4 billion, compared to SEK 5.7 billion), thanks mainly to an increased focus on growth markets as diverse as health food, bake off and fast food.

Sandberg said that healthy foods - in particular speciality breads such as rye bread and wholegrain products like pasta - had performed very well in the first eight months of the year, although he declined to give any specific sales figures. "The acquisition of Schulstad has given us a larger share of the 'dark' bread market in Sweden - around 30 per cent of all bread sold in Sweden.

"Schulstad is one of the premium brands in this section, and we have worked hard to promote the health benefits of speciality breads, whole grain pasta and other such products over the last year."​ TV adverts and nutritional information disseminated through sports clubs and other similar organisations have formed the crux of this promotional programme, he added.

While other nations have seen baked goods sales impacted by the low-carb diet phenomenon, Sweden has remained unscathed - a result, Sandberg suggests, of the more balanced view taken by consumers there. "Swedes are more likely to learn as much as they can about a subject before they make a decision, so they are much more likely to be swayed by the large body of information about the health benefits of bread - and of a balanced diet in general - than any headlines about the efficacy of low-carb diets,"​ he said.

Indeed, dieting is not a high priority for many Swedes, at least if the growth in another sector of the market is to be believed. Sandberg said that Cerealia had benefited from increasing sales of fast food products - in particular the peculiarly Swedish penchant for hot dogs.

"When Swedes fill up their car with petrol, they also tend to fill themselves up with a sausage in a bun, sold through the adjacent convenience stores such as Shell Direct. Since we provide about 80 per cent of the buns sold (McDonalds has its own bakeries), this has been a major source of revenue growth for us in recent years.

"These sausages are a cheap (around SEK15 each), convenient snack, and if the sausage is not seen as particularly healthy, the bread is, and this has been enough to keep sales increasing."

Convenience is also at the heart of the other main area of growth for Cerealia - bake off products. These part-baked products are sold to the retail trade for completion in the in-store bakeries which have increasingly become a part of the global retail trade, and, notwithstanding the company's ongoing problems with the domestic retail sector, it is seen as a major source of revenue growth for the company following the acquisition of Schulstad.

Indeed, the biggest growth in this sector has come from export markets - for example, Sandberg said that the company sells in excess of 200 million Danish pastry products to US retailers, while the UK's biggest (and fastest growing) supermarket operator Tesco is another major customer.

With clear growth potential in a number of sectors, it is vital that Cerealia complete the integration of Schulstad as rapidly as possible. The recent creation​ of a new unit combining fresh bread and other cereal products (pasta, breakfast cereals) is an step in the right direction, enabling the company to better meet retailer demands for single suppliers - and contacts - for a wide variety of products, but if Sandberg's assessment of the integration process as a year behind is accurate, then there is little chance of a recovery in profitability in the current year, no matter how hard the company works to drive sales growth.

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