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November 5, 2008

In the Spotlight – Associated British Foods

With a considerably improved set of full-year results, Associated British Foods (ABF) has brought vitality to a sector that has been somewhat battered by the deteriorating economic climate. While Primark, ABF’s discount clothing unit, has reaped the benefits of the downturn, the company has focused on returning its bakery unit to profitability and building a strong foundation of grocery brands. Clearly, this strategy is starting to pay off. Dean Best reports.

By Dean Best

With a considerably improved set of full-year results, Associated British Foods (ABF) has brought vitality to a sector that has been somewhat battered by the deteriorating economic climate. While Primark, ABF’s discount clothing unit, has reaped the benefits of the downturn, the company has focused on returning its bakery unit to profitability and building a strong foundation of grocery brands. Clearly, this strategy is starting to pay off. Dean Best reports.


The success of discount UK clothing retailer Primark may be grabbing the headlines for owner Associated British Foods but the group’s expanding wardrobe of grocery brands is providing the business with a strong foundation for future growth.


ABF, the company behind food brands from Ryvita to Patak’s and Kingsmill, said yesterday (4 November) that annual profits rose by 7% on the back of a 21% jump in turnover.


ABF’s grocery division played a key role in the company’s robust annual results. Underlying profit from that part of the ABF empire climbed by almost 27%, with revenue up 25%. Success in pushing through price increases to offset commodity cost pressure helped the results and, tellingly, ABF was able to answer a long-term concern about one part of its business – bread-making.


Last year, ABF was forced to admit that Allied Bakeries, its bakery arm, had performed “poorly” in the face of rising commodity costs and fierce competition in the UK bread market. Some industry watchers had even begun questioning ABF’s future in bread, a business central to the start of the company in the 1930s.


However, following a relaunch of flagship bread brand Kingsmill earlier this year, ABF chief executive George Weston was able to talk of a “substantial improvement” from the company’s baking business.


Julian Lakin, an analyst at Mirabaud Securities, says ABF has struggled to make money from bread “for as long as anyone can remember” but he believes the recovery at Allied means the company is likely to stay in the sector.


“A lot of the improvement [in ABF’s grocery profits] was due to the recovery at Allied,” Lakin tells just-food. “The business has improved substantially and it looks like ABF will look to fight on through and try to get back to making some sensible returns.”


While ABF earns credit for the partial recovery of its bread business, the company has also won praise for its continued moves to bolster its wider grocery stable.


In the last 12 months, ABF has built on last year’s acquisition of Indian cuisine brand Patak’s with the creation of a wider ethnic business, AB World Foods. The unit, which also includes brands like Blue Dragon, sells into around 40 countries worldwide and, in a sign of the confidence in the business, is eyeing further expansion in the US.


ABF has also moved to take control of UK cereal maker Jordans and merge it with its own crispbread business Ryvita. Lakin says that ABF’s moves away from the more mature categories of UK grocery and into the buoyant areas of the market was quietly paying dividends.


“The growth in grocery has been in building little sections within the whole grocery picture that have reasonable growth potential and a strong brand opportunity,” he says.


One obvious blot on ABF’s annual results was the slump in earnings from its sugar business. Profits fell 23.1% due to costs linked to reform of the EU sugar industry and lower sugar prices in China. The revamp of the EU sugar sector has weighed on that part of the ABF business in recent months but now that the end of the reforms is in sight, Lakin believes the company will soon see earnings improve. “They will get better returns from sugar. The sugar business has reached its trough,” he says.


And after all the strengthening of ABF’s grocery business in the last year, the next 12 months promises further expansion of other parts of the company’s operations. “ABF will continue to be a cash-generative business and where they are investing at the moment is in Primark, sugar in Africa and China and into yeast and enzymes. Primark is only scratching the surface of its expansion potential.”


But, for all the promise of Primark, it is the cash cows of grocery and sugar that should provide the bedrock for ABF’s future plans.

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