Northern's poor results reflect processing difficulties
2004 reveal how the pressures on food manufacturers are impacting
profits.
"As we warned in our September trading update, performance in the first half has been disappointing, with reduced margins resulting from unrecovered cost pressures in a difficult trading environment," said Northern Foods chairman Peter Blackburn.
Operating profit, before goodwill amortisation and exceptional items of £2.4 million, declined by 9.8 per cent to £42.2 million, despite a 7.5 per cent improvement in the results of the group's grocery businesses.
A 22.8 per cent reduction in convenience operating profit before goodwill amortisation and exceptional items reflected the under-recovery of raw material cost inflation, the loss of a major savoury products contract, and the impact of record summer temperatures.
Food prices on both sides of the Atlantic are also being held down by the high level of competition among supermarkets, which is putting a squeeze on food manufacturers. A recent report from Ernst & Young suggested that even with increased prices for commodities such as wheat and soybeans, food prices are being forced down by retailers.
"We're starting to see strong price promotions among supermarket chains, which should continue to stabilise inflation in this sector." said Jay McIntosh, Americas director of retail and consumer products at Ernst & Young.
It is this price competition that is squeezing the manufacturing sector, and affecting financial performances.
"The recent operating performance of the business has been unacceptable," said Blackburn. "Urgent action is being taken to improve our profitability and return on capital and to ensure that there is a solid platform for our new chief executive."
Northern Foods is currently implementing a number of measures to get the business back on track. These include the introduction of a new group purchasing structure, and the amalgamation of its two biscuit businesses, Fox's and Elkes, under a single management team.
"As the year progresses we expect to see benefits from both cost savings and a more integrated approach to the market place," said Blackburn.
However, the marketplace remains highly competitive, and Blackburn expects further raw material cost inflation as a result of the relative strength of the euro and the impact of hot weather across Europe. This has affected the yield of many crops, most notably cereals and fruit.
"In common with other manufacturers, we are negotiating with our customers to recover these cost increases," he said. "Whilst as always the Christmas trading period will be critical to our results, with the actions we are taking we aim to stabilise second half pre-tax profits before goodwill amortisation and exceptional items at around the level achieved in the comparable period last year."
But whether Northern is capable of pushing through these changes in such a difficult trading environment remains to be seen.
