Cake market slow-down to threaten Inter Link success?

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Canny acquisitions have led Britain's cake sector whiz kid, Inter
Link Foods, to report another strong profit rise, but the company
should tread carefully amid rising debts and a sluggish home market
that prizes quality over quantity, argues Chris Mercer.

Inter Link has taken only 10 years to become Britain's third biggest cake maker and the company underlined its status by announcing a 16 per cent rise in preliminary pre-tax profit in the six months up to 30 October last year, compared to the same period in 2003.

The company has benefited from a fragmented industry by making a jumble of acquisitions in niche markets, including buying up Soreen with its famous Malt Loaf brand for £8.4 million in February 2003 and securing the licence for all Disney's small cakes a year later.

But rising debts have inevitably chased Inter Link on the fast-track to success. Its net debt has almost doubled to £25 million in the last year and this will put the company under pressure to maintain results, even though operating cashflow remains stable at around £1.86 million.

Chairman Alwin Thompson said the company would now invest more modestly and that the firm was currently holding talks with potential customers. Inter Link has already spoken openly of its desire to fill an estimated £30 million hole in the UK private label cake market which opened up when British food firm RHM decided to up sticks and focus on brands.

Private label products are notoriously cheaper than their branded counterparts, especially with the low-pricing initiatives of multiple retailers, and Inter Link will have to be careful in a market increasingly moving towards premium, higher-priced goods. The latest figures from market analyst group Mintel​ reveal that although the market has risen in value by 3.8 per cent since 2003, this is mainly a reflection of higher prices and not increased sales.

Quality not quantity is the order of the day and RHM has embraced this philosophy by announcing the re-launch of its Mr Kipling brand, made by subsidiary Manor Bakeries, with a new premium product range and a focus on the brand's heritage. A recent Datamonitor​ survey showed that 73 per cent of consumers asked saw quality as the most important factor when choosing a treat.

That, of course, is fine for RHM with its established brands such as Kipling, Lyons and Cadbury's Cakes, but not so easy for Inter Link. However, the flipside of the argument is simple business sense: if Inter Link buys up the private label contracts then no one else can. Plus the growth of multiple retailers seems relentless, providing a good outlet for Inter Link as long as it can adapt to their needs.

With fewer people buying the standard products, Inter Link will have to work harder than ever to develop new ideas, ranges and gimmicks. Various health niches such as gluten-free and low-carb are also a possibility and these are already being tapped by Ireland-based private label producer, Greencore.

Another outlet for Inter Link is the European mainland, and particularly the eastern end, after the firm announced its acquisition of Polish cookies and cakes firm Cukiernia Mistrza Jana (CMJ) for around £1 million.

It is Inter Link's first venture into the Europe and the firm should be able to make limited immediate gains from CMJ's existing private label business, supplying retailers in Poland and neighbouring countries. However, CMJ only boasts a one to two per cent market share and further gains will depend on the success of Inter Link's plan to make more British-style cakes, such as small tarts and mini-rolls, and also to use up the spare capacity at CMJ's 70,000 square ft factory in northwest Poland.

Poland is now one of the most supermarket-oriented countries in Europe and British companies like Inter Link should have a particular advantage due to UK retailer Tesco's strong position there. The chain leads the Polish hypermarket sector with 261 stores and a fifth of all sales, and is also present in the Czech Republic, Hungary and Slovakia.

Inter Link's proven track record in private label supply will undoubtedly help it to build a reputation but what will eastern European consumers make of the British-style products? A recent report by the Euromonitor​ group identified "economic growth and an incipient middle class following Western habits,"​ in Poland. A sign of potential, but this is only a minority group and Inter Link will have to reach out further to succeed.

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