Northern Foods attempts radical surgery to stem losses

By staff reporter

- Last updated on GMT

Related tags Northern foods Marketing

Northern Foods will put 40 per cent of its business up for sale,
and focusing on pizzas, biscuits, ready meals, sandwiches and
Christmas puddings.

The outline of the recovery plan yesterday by Northern Foods chief executive, Pat O'Driscoll, provides a roadmap of where the company hopes to become more competitive after announcing a £5m (€7.3m) loss for the financial year ended 1 April 2006.

The manufacturer of Goodfella's pizzas and Fox's biscuits is struggling amidst sliding sales and margins as its supermarket clients adopt tough bargaining positions on prices and consumers change preferences.

Higher costs, particularly for energy, combined with weak pricing, in a number of what the company calls "increasingly discounted and promoted markets" also hit results. About 75 per cent of the company's revenue comes from the five largest retailers in the UK.

The group's underlying revenue grew by 2.2 per cent in the financial year ended 1 April 2005. Operating margin declined to to 4.9 per cent from 6.1 per cent, according to figures released yesterday.

The company's profit before tax and restructuring items was £45.1m, compared to £62.2m in the previous financial year. The loss after accounting for restructuring was £5m, compared to a profit of £22.8m the previous year.

The company's frozen division's gains were offset by declining sales at its chilled and bakery units.

The company will put up for sale its Smith flour milling unit, cakes, speciality bread, the chilled pastry products division and its chilled distribution business, NFT. Together the business for sale account for about 40 per cent of the group's £1.44bn (€2.1bn) turnover and employ 9,000 people, 45 per cent of its total workforce.

The company plans to take a tougher line in negotiating prices with supermarkets in the future.

Using the current financial figures for the company the group after restructuring will have revenues of £860m and an operating margin of about 6.5 per cent, and an operating profit of £57m. The figures do not reflect any restructuring costs expected over the current financial year.

Northern Foods will concentrate on what O'Driscoll sees as its five key categories - either with strong leading brands, or high growth, or own label positions in the market.

It's pizza division is led by Goodfella's, the market leading frozen brand, and with a growing number three position in the chilled private label market.

The biscuits unit is led by its Fox's brand, a leader in the premium segments of the market, O'Driscoll said in announcing the results. The ready meals division has joint market leadership in a growing food sector. In the sandwiches market, Northern Foods holds the number position, and sees it as a high growth area.

Northern Foods also holds a major chunk of the Christmas puddings market with its Matthew Walker brand and private label business.

The company's brands will represent about 50 per cent of sales after restructuring; O'Driscoll plans to reposition the chilled division into higher growth categories.

The company plans to grow the division through more targeted innovation, focused upon changing consumer needs such as in the "ready to cook" sector.

The chilled division operates from 15 principal manufacturing sites with three units: pastry products, ready meals, and sandwiches and chilled pizza.

The company has closed two manufacturing sites in Evesham and Carlisle over the past year. During the year the division lost market share to newer competitors in pastry products and failed fully to leverage its strengths with key customers, O'Driscoll stated.

Average selling prices were 0.7 per cent lower during the year, reflecting deflationary pressure in the retail market and changes to product mix, she said.

Central costs for the while company will be cut over two years by £12m. Responsibility for brands is being devolved to " category teams".

The company's core customers will continue to be UK and Irish retailers after restructuring.

Market analyst Investec said the restructuring has "potential to stop the rot" but that the plan would take some time to be reflected in the company's results, if successful.

"We do not see any significant immediate upside,"​ Investec said in a note to investors. "The disposals in theory should be earnings neutral rather than dilutive, but it will be at least a year before we see the new Northern emerge and prove to the market that this is a more sustainable and robust operation, which can deliver growth."

Investec has put Northern Foods on its "hold" list for stocks, up from "reduce".

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