Premier Foods plc’s new austere message has encapsulated the mood of the time. Gone are the days of frivolity – the UK firm is knuckling down and reducing complexity across the board. Not necessarily great news for Premier employees and – in addition to the two bakeries the group has closed – we can expect more job cuts in the pipeline. But it should be good news for shareholders, shouldn’t it? Well, cutting costs may lead to higher margins – but the detail Premier has given on how it plans to invest behind its brands has been scant to say the least.
As Gavin Darby was quick to emphasise when he took up the role of CEO at Premier in January, the background of this chief executive says a lot about the man and his mission.
Prior to taking the helm at Premier, Darby was most responsible for overseeing the turnaround of Vodaphone’s B2B unit Cable & Wireless. His experience of the FMCG space includes a 15-year stint at Coca Cola, where he held various positions, most recently regional president with responsibility for 30 European countries.
In these positions, Darby learnt the importance of managing good customer relationships, the necessity of running a tight ship and – significantly – the value of focus.
From his stint at Coke, Darby insisted that he came away with some key understandings: “Do a few things well, spend your money where you’re strong” and “the winners tend to be the ones that really execute well”, he told analysts as he took up his post three months ago.
Since then, Darby has acted swiftly to move along Premier’s cost reduction programme. While to some extend Darby inherited this direction from his predecessor, Michael Clarke, it is clear that the current CEO is sharpening the focus on efficiency.
The rhetoric applied by the company has moved starkly to one of sensible austerity, measured meanness. Just as Premier was happy to raise its borrowing levels when debt was fashionable and credit was cheap, the food group has moved with the times and now echoes the dominant economic discourse of the day, favouring financial discipline over frivolity. Premier has a clear mandate: to strip costs out of the business.
And yesterday (23 April) we got a clear indication of how Darby plans to achieve this. Premier will reduce costs by cutting complexity on three fronts. The group will reduce its supplier base; it will cut the number of SKUs and it will remove complexity from internal business functions.
“We are going to be working with our suppliers to hopefully simply reduce our supplier base, which will be to the benefit of those suppliers that remain with us and obviously for us will make it simpler to work,” Darby said on a conference call yesterday morning.
“My early impressions are that we still have too many flavours, ingredients, packaging variations and sometimes SKUs,” he added. “We have to mention the complexity, which might be new to you, in terms of internal like price files and things like company statutory legal units, which are a result of all the acquisitions and mergers. Those are the three complexities – suppliers, internal complexity and those associated with SKUs and packaging – and if you round those up there’s an important opportunity there for us.”
While there is a lot of very sensible talk about cost cutting at Premier at the moment, it is quite notable that management has revealed considerably less about any plans to invest in the business to drive growth.
For a number of years, Premier has said it will focus growth generating investment behind its so-called “power brands”. This strategy appears to be paying some dividends: the group booked its fifth consecutive quarter of sales growth from its core power brands, with sales up 3.3%.
However, it is not clear how the company is planning to drive continued revenue growth.
In yesterday’s introductory remarks, Darby did make passing comment on the need to invest in the group’s “power brands” – which range from Hovis, to Batchelor’s and Sharwood’s. However, no exact figures have been given and we are yet to get an indication on whether the investment levels will be up or down on last year.
“There is scope to reduce complexity further in the business – this includes SKU reduction, fewer recipes, packaging formats etc. The rationale is to free up funds to invest further in power brands,” a spokesperson for the group reiterated. “There is no further update on this but Premier will be identifying more specific opportunities in coming months,” the spokesperson added.
So, will Premier be investing more in product development or marketing? The truth is that we don’t really know: as yet, Premier have not disclosed any detailed plans. And, while on the one hand a lower cost base should improve margins, if this is not accompanied by the necessary brand building initiatives the company is likely to be on the back foot in the longer-term.