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November 6, 2007

ABF faces questions over bakery despite rising profits

Associated British Foods, the UK food giant, today (6 November) booked a set of robust annual results driven by diverse parts of its business, from sugar to clothing retail. However, bakery, a sector that is central to ABF's history, remains a problem. Could these problems lead ABF to sell the business? Dean Best reports.

By Dean Best

Associated British Foods, the UK food giant, today (6 November) booked a set of robust annual results driven by diverse parts of its business, from sugar to clothing retail. However, bakery, a sector that is central to ABF’s history, remains a problem. Could these problems lead ABF to sell the business? Dean Best reports. 


Associated British Foods, the UK-based food and ingredients group behind brands from Silver Spoon sugar to Ovaltine malt drinks, has undergone rapid and diverse expansion over the last 12 months.


From investment in its sugar business, through its buoyant clothing retail business, to its acquisition of brands in emerging sectors like ethnic cuisine and organics, ABF has moved further and further away from its bread-making origins.


That diversification seems to be paying off. The company announced today (6 November) that it saw full-year profits rise 11%, with turnover up 13%, thanks to rising profits from its sugar operations and rising earnings from its Primark clothing retail business.


ABF chief executive George Weston said “major investment” in capital expenditure and acquisitions had driven the company’s results. In the last year, ABF has added to its stake in the Illovo Sugar business with the acquisitions of the Patak’s Asian cuisine brand and UK cereal firm Jordans.


A note of caution on rising commodity costs meant ABF shares dipped this morning but industry watchers believe that, generally, the business is in good shape.


“The results came in slightly ahead and I think that, given the headwind that the company has been facing in terms of rising raw material costs, 11% [profit] growth represents a good performance,” Shore Capital analyst Darren Shirley tells just-food.


Shirley preferred to look past this morning’s dip in the ABF share price and analyse the stock over a longer time-frame. “I’d say have a look at the share price over a one-month period. The shares have risen from around GBP8 (US$16.69) to north of GBP9. I think the 2% fall can be taken in its stride.”


However, as ABF builds a more diversified business, questions remain about the long-term health of its bakery business. ABF has grown into one of Europe’s top five food firms by market capitalisation but its origins date back to the 1930s, when it consisted of seven baking subsidiaries.


For all ABF’s success in building Primark into one of the UK’s most attractive clothing retail operations and for all the company’s persistence in building a viable sugar business amid EU reform of the sector, its Allied Bakeries business in the UK is suffering. The UK bread market is in decline with most of the major players suffering from over-capacity and rising input costs. ABF admitted the business had performed “poorly” last year and questions are beginning to emerge about its future.


“Clearly, there’s an issue in Allied Bakeries in terms of ABF being able to get price increases through to consumers,” Shirley says. “We expect to see losses of circa GBP10-15m from the business this year and that’s not sustainable on a medium- to long-term basis.”


Fellow analyst Martin Deboo, from UK investment bank Investec, agrees. Deboo sees three main pillars to the ABF business – sugar, ethnic grocery and retail. There is, he argues, a question mark over the future of ABF’s bread business.


“Those of us, who have spent a long time in the sector, tend to think of ABF as a big player in bakery,” Deboo tells just-food. “But, they said today that bakery represents about 3% of sales. Bakery is nowhere near as important to ABF as it used to be. There is a question over whether ABF will stay in the bread market; I see the long-term winners in the bread market being Warburtons and Hovis.”


Independent baker Warburtons does seem to have prevailed this year but, generally, UK bakers have suffered against a backdrop of rising wheat costs and fierce price competition. Inter Link Foods was sold earlier this year after profit warnings and falling sales, while even Hovis owner Premier Foods has spoken of challenging trading conditions.


However, there is no doubt that ABF would loathe to sell off a business so intrinsically linked to the history of the company. For all the economic and business rationale, ABF has emotional ties to bread-making, perhaps in a similar way to Tate & Lyle and sugar refining.


ABF relaunched Kingsmill this year to breathe fresh life into the brand and would like to build on what it saw as “significant improvement” from the brand during the last six months. Nevertheless, with over-capacity in the sector, and the attraction of focusing on more buoyant parts of its business, ABF could look at what the future holds for its presence in UK bakery. Shirley says: “I don’t think you could rule anything out; the one thing I would say is that you cannot sustain those losses over the long term.”


ABF prides itself on its diversification and that strategy has yielded some solid results this year in tricky trading conditions. However, given how tough the UK bread market is right now, it seems more tough decisions lie ahead.

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