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August 4, 2010

On the money: Own-label bread decline no concern for Premier Foods

Premier Foods plc has brushed off concerns over declining volumes from its non-branded breads division.

Premier Foods plc has brushed off concerns over declining volumes from its non-branded breads division.

The firm this morning (4 August) reported a widening in first-half net losses due to higher mark-to market-losses on swap contracts.

Net losses grew by GBP17m (US$27m) to GBP40m for the six months to 30 June, while profit before tax fell 15.4% to GBP33m.

In the firm’s non-branded bread division in particular, the decrease in sales revenue amounted to 22.6%.

Within this, volumes were down 10.4%, which the firm said related predominantly to market factors, although around 3% of the fall related to own-label bread contracts that were exited in 2009 to free up capacity for a Hovis brand expansion.

Speaking at the firm’s earnings conference this morning, CEO Robert Schofield said the company was securing more business for Premier’s own-label grocery business but added that he sees no improving trends for its private-label bread stable.

“You will see that what we have is an improving performance in grocery and we have picked up some contracts over that time span, which will take us forward,” Schofield said. “But in Hovis we have seen a sharp decline in volume…there is no improved trend, it is still down as before.”

He added: “We have had flour deflation, retailer market declines and contract exits. But I think the Hovis branded market share is solid at nearly 25%, volumes are still growing, which is part of the reason why own label is not troubling us and is even part of what we are deliberately trying to do. Competitively though, the marketplace is likely to impact on the second half and we do think it will be a tough market.”

Schofield also raised concerns about the price of wheat, which dipped yesterday after climbing to a 22-year high on Monday, fuelling fears of rising costs for food manufacturers and higher shopping bills for consumers.

“The biggest catalyst for change will be in the bread category, because of wheat. We do see wheat prices rising significantly, and inevitably you will see an increase in pricing from us,” Schofield said.

However, Investec analyst Martin Deboo believes that an increase in pricing has shown to be their undoing in the past.

“Premier are arguing that the improved health of the Hovis brand and the absence of the advantageous price differential on Canadian Wheat (which benefitted Warburtons in 2007/8) will make life easier this time. But the cost recovery challenge could be Herculean and some profit may well get spilled along the way,” Deboo said.

Despite this, Schofield remains confident that a focus on Hovis will continue to grow the brand’s market share.

“Since we relaunched Hovis in 2008 we have found ourselves in the position of driving our approach to own label,” Schofield said. “Since then we have grown quickly and significantly. We have been maintaining our share since our relaunch and have since introduced ‘100% Wheat’ which has gone well. We have launched ‘Hovis Wholemeal’ and recently we introduced a ‘Hearty Oats’ loaf.

However, Schofield said that Premier remains in an “increasingly competitive” bread market.

“We are competing selectively, growing our brands, and we are increasing marketing and managing our working capital well to generate cash,” Schofield said.
“Our competitive position has remained relatively static but the market itself has intensified,” he added. “We do see a continuation of a competitive environment. Retailers and manufacturers are competing aggressively and very strongly. It is pretty competitive and pretty tough and there are no signs of it abating.

“But we continue to expect to make further progress this year,” he added.

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