Premier has pledged to "fix" bread business

Premier has pledged to "fix" bread business

"Radical" and "decisive" was how one City analyst described Premier Foods' announcement today (20 November) of how wholesale changes to its bread division. But could the Hovis maker have more up its sleeve?

Premier today set out plans to close two bakeries, cut over 100 distribution routes and revamp its logistics operations in a bid to cut costs from its bread arm.

The UK company, operating in a UK bread sector dogged by promotions and excess capacity, is trying to shake up its bread business to cut costs and improve returns.

In 2011, Premier managed to increase its bread revenue but the high level of promotional activity in the market ate into profits, which tumbled 90%. In the first half of this year, underlying bread sales fell 1.7% and profits dropped 27% as promotions continued and Premier battled higher costs.

Premier indicated last month it was prepared to make some tough decisions on bread when it decided to walk away from renewing a contract to supply The Co-operative Group.

The news of the end of the contract came as Premier reported its third-quarter sales. CEO Michael Clarke said Premier had "not been sitting on its hands" and had been working on "a number of exercises" to improve its bread business. He refused then to divulge the details but today's announcement is the first major programme.

"It is critical that we act to assure the long-term future of the bread division," Clarke said this morning. "By simplifying our cost base, we can increase focus on improving efficiency, quality and service levels to help grow our core Hovis business."

The City welcomed the news. Premier's shares closed up 2.71% at 94.75p. A year ago, the stock was at 45.35p and even in September was at 54.5p. Clarke's recent work to sell off assets to raise funds to pay down debt and cut costs has buoyed the shares in a company once derided by the City and today's announcement was also applauded.

"We see this as a decisive and welcome move to improve long-term profitability," Investec analyst Martin Deboo said.

Graham Jones, executive director at stockbrokers Panmure Gordon, has long had a circumspect view of Premier's prospects. Today, he reiterated his "caution" on the company's stock, pointing to the "dilutive" effect of recent disposals, the "still very high gearing" and its pension deficit. However, he said Premier's proposals for its bread business were "very logical" and better than the "alternative" of being "more aggressive" to regain the lost volume from the Co-op contract.

But could Premier announce more changes in the coming weeks and months. Last month, after its Q3 sales statement, Clarke said Premier had spent "a lot of time working through different business models". He said the company had decided on its "preferred solutions" but declined to comment further.

There has been speculation in the City that Premier could look at a joint venture to distribute bread. Or, in order to make the need for a national bread distribution network more profitable, Premier could look to distribute third-party products along its routes. "They could still pursue other opportunities to spread distribution costs," Deboo noted.

There has even been talk Premier could look to sell its bread business and reports it hired Goldman Sachs to see what interest there was has fuelled those rumours further. However, there could be competition hurdles to the likes of bakery rivals Associated British Foods and Warburtons buying the business; Investec estimates 89% of UK bread sales are already in the hands of those three players.

Could the changes announced today make Premier's bread business more attractive for, say, a buyer from the world of private equity?

Premier is a company that has rarely been out of the headlines for the last six years since it acquired Hovis from RHM. (Indeed, union officials today blamed that deal for the cuts planned in the bread business). The changes announced this morning are wide-ranging but it would be a surprise if they are to be the last in what remains a very tough market.