Thriving discount retailer Primark is the part of UK group Associated British Foods that has grabbed the headlines in recent quarters.
The success and expansion of Primark amid the downturn in the UK means that the division – at least according to the half-year results ABF issued this week (20 April) – is the most profitable part of the business and is inching closer to grocery in terms of sales.
The reaction to ABF’s interims bore out this emphasis on Primark among commentators and the headline writers, with much focus on future margins within the retail business.
However, while Primark sales grew by double-digits and ABF continued to look to expand in markets like Spain, the Kingsmill bread, Twinings tea and Jordans cereals owner had causes for optimism through a business that also spans grocery brands and food commodities.
And it was that grocery business, which also includes brands like Ryvita and Patak’s, that most cheered ABF’s management. The portfolio has been in the shadow of Primark in recent months but, with restructuring initiatives within the Jordans Ryvita unit, with the creation of ACH as a pure FMCG business in the US and with new bakery products in Australia, ABF’s grocery basket looks healthier than it has done for some time.
“For all the rebound in sugar and the continued fireworks from Primark, in the first half, the grocery business has been the source of the greatest profit improvement for ABF,” chief executive George Weston said.
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The ABF boss took time to note the recent performance of the group’s Allied Bakeries operations, a business much maligned in recent years. Three years ago, there were concerns about the future of Allied Bakeries, a business central to the history of ABF.
The group has grown into one of Europe’s largest food firms by market capitalisation but its origins date back to the 1930s, when it consisted of seven baking subsidiaries. However, even as recently as 2007, the question of whether ABF would exit baking was being raised.
Now, despite tough competition from Premier Foods plc’s Hovis and family-owned Warburtons, Kingsmill is holding its own in a static bread market. In fact, speaking to analysts on Tuesday, Weston was more upbeat about that part of the ABF empire.
“I wanted to pay tribute to the bread business in the UK where the recovery has been a longer process than simply a single year It’s a very different business to the one we all knew two or three years ago,” Weston said. “Allied Bakeries really is extremely strong at the moment and Kingsmill volume and share have both grown half on half.”
Of course, ABF’s grocery business is more than just UK bread, encompassing ethnic cuisine, tea and cereals products in the UK, edible oil in the US and bakery in Australia – to name a few of its elements.
Indeed, Sanford Bernstein analyst Andrew Wood cited a number of factors for a “step-change” in margins from grocery, which illustrated the breadth of the business and perhaps the hard work that has been needed to breath fresh life into it.
“Management seems to finally be focused on improving the profitability in this business…with a major improvement in grocery margin in the first half of fiscal 2010 of 190 basis points – following an over 100 basis point improvement in the second half of fiscal half of 2009,” Wood wrote after the results were published.
“We see a number of factors driving this: restructuring in the Silver Spoon, Ryvita and World Foods businesses; improved profitability in ACH given no hedge losses and a return to growth for the business; better profitability in Australia bread; and improved shares and positive volume growth in Kingsmill.”
The good news for Weston, ABF and the company’s investors is that Wood believes the business will see its grocery margins continue to rise. Wood said he did not expect ABF’s grocery margins to reach the “mid-teen” level of its peers in Europe but should climb from 5.9% now to almost 8% by 2012.
ABF finance director John Bason bullishly told analysts that the company expected earnings from its grocery business to improve again in the second half of the year, if not at the same level of growth in the six months to the end of February.
“We should see some big improvements from grocery for the remainder of the year,” Bason told analysts. “You probably need to raise your forecasts for grocery.”
Martin Deboo, analyst at Investec, said those in the City would likely raise their forecasts on the back of not just ABF’s performance in grocery but across the whole group.
“Viewed in the round, these are a strong set of results. We are expecting to see consensus upgrades for FY10 earnings of 2-3% and are looking to move our numbers, which are more or less consensual, by a similar amount,” Deboo said.
In the wake of ABF’s numbers, the market seemed to agree. The company’s stock jumped the most on the London Stock Exchange on Tuesday, climbing almost 6%.