With a steady trading update this week, Premier Foods may believe it has stopped the rot at the UK’s largest food maker. However, a series of questions still hang over the business and the jury is out over whether the company can thrive in an ever-changing grocery sector. Dean Best reports.
Investors in Premier Foods, the UK’s largest food maker, received a small crumb of comfort this week.
After a tumultuous few months that have seen a slump in Premier’s shares, the company slashing its dividend and the maker of Hovis bread suffering from soaring wheat costs, Tuesday’s (13 May) trading update would have calmed the nerves of some weary shareholders.
Premier chief executive Robert Schofield said some progress had been made in pushing through price increases to recoup rising commodity costs, while there were indications that the company would inject some life into Hovis bread, one of its flagship brands.
Nevertheless, with Premier’s share price plummeting 37% since December, and with the company still busy digesting the 2006 takeover of RHM, the jury is out on whether the company can fully win over the sceptics.
“It was nice to see a solid statement without any scares but we would need to see that [performance] sustained before we are convinced Premier is over the worst,” Shore Capital analyst Darren Shirley tells just-food.
Commodity costs are showing little sign of easing, while retailers, faced with UK consumers concerned about the country’s economic outlook, are likely to put up some resistance against pleas to push through further price increases. And all the while, Premier’s debt stands at around GBP1.7bn (US$3.3bn). The combination of those three factors is likely to put pressure on margins and, therefore, the share price.
A solution could be for Premier to take more cost out of the business through a series of disposals, and the signs are that Schofield could be ready to hoist the For Sale sign above some parts of the Premier empire. Two weeks ago, it emerged that the company was looking for a buyer for its French bakery unit Sofrapain, while there has also been speculation that Schofield is mulling whether to offload RF Brookes and Avana Bakeries, two units that supply Marks & Spencer.
However, it will take more than a handful of disposals to convince some that Premier is back on track. The company will need, for instance, to drive sales volumes from its stable of brands, which also includes such traditional UK household favourites as Mr Kipling cakes and Branston pickle.
The move to breathe fresh life into Hovis will be key. The UK bread category is fiercely competitive and bakers, on the whole, have found the going tough against the backdrop of rising wheat costs. Last autumn, one of Premier’s rivals, Associated British Foods (ABF), faced questions over the future of its bread business in a group that has interests in areas ranging from sugar and ethnic grocery to discount clothes retailing.
ABF’s relaunch of Kingsmill bread, to some extent, answered those critics, but its recent success in bread – combined with plans at northern English baker Warburtons to extend its distribution in the south of the country – illustrate just how tough it will be for Premier to rejuvenate Hovis.
Martin Deboo, an analyst at Investec, believes Premier’s recent record in revitalising parts of its business stands the company in good stead.
“The company buys unglamorous brands that the majors do not want and gives the brands some fairy dust to put them back on track,” Deboo says. “Premier has got the Campbell business back into growth, it has brought growth to the RHM cake business and it has put RHM’s culinary brands into growth. Premier has demonstrated that it is able to get growth back into mature categories.”
A look at Premier’s brand portfolio, however, begs the question – is the company really operating in the more buoyant parts of the UK grocery sector? For all their history and tradition, do Angel Delight and Mr Kipling cherry bakewells resonate with a UK consumer that, according to most indicators, is putting healthy eating top of its agenda?
As Shirley points out, three years ago, Premier boosted its healthy-eating credentials with the acquisition of Cauldron Foods, the meat-free and organic products maker. However, since then, Premier has yet to push on and build its presence in the healthier parts of the market. “Premier has over-exposed itself to areas that have not got good growth potential,” Shirley says.
Premier may have got over the worst of its recent problems. And the further integration of the RHM business, combined with the possible success of a relaunched Hovis, may help assuage some investor concerns. However, the suspicion remains that Premier is a touch out of synch with the prevailing trends in the UK food sector.