Premier Foods' bread split is logical: Analyst

07-Oct-2012 - Last updated on 08-Oct-2012 at 11:06 GMT

Premier Foods hopes to avoid a burn-out in its bread division

Debt-ridden Premier Foods has made a 'logical' decision to split its struggling bread arm from grocery in a bid to drive business forward, an analyst says.

In March, the UK group’s bread business nose-dived sharply by 90.4%, posting a yearly trading profit of only £3.4m (€4.2m). This dip came amid an overall £259.1m (€312.6m) pre-tax loss for the year.

The split represents part of the firm’s wider transformation to become a more focused and profitable food business, it said. This includes a dedicated focus on eight ‘power brands’ – including two bakery – Hovis and Mr Kipling.

A fundamental approach will be taken with the newly separated bread division “to help unlock future value and address the category challenges faced by this division”, Premier Foods said.

“I think it’s a logical move to segment the bread business,” Clive Black, director and head of research at Shore Capital, told BakeryandSnacks.com.

“It has been done to inject more focus into the unprofitable bread business,” Black said.

“It may in time allow for disposal. But I’m not sure there is a buyer out there for their bread business,” he added.

‘Substantial’ challenges to overcome

These ‘challenges’ highlighted by Premier Foods are very substantial, he said, and will take many years to overcome.

Added to this, “Premier Foods doesn’t have the strongest balance sheet to be particularly radical”, he said.

Premier Foods is “toughing it out” in a sector plagued with challenges, Black said.

The UK bread market’s largest problem is overcapacity, he said; supply and demand is not balanced and there is a lot of inefficiency in the sector. “Bread distribution in particular is loss-making.”

Industry needs to streamline and collaborate to cut costs and “distribution represents an opportunity to do this”, he said.

Headed up strong

The firm has appointed a new chief operating officer, ex-CEO of Uniq Geoff Eaton, to oversee the split.

“Geoff has extensive experience of tackling complex financial and operational restructuring projects and creating value through organic growth,” Premier Foods said.

While Eaton has clear management experience, “to what extent he actually understands the bread market is another question”, Black said.