Questions surrounding the future direction of UK food manufacturer Northern Foods intensified this week as the company confirmed a raft of job cuts as part of a major organisational revamp.
Northern has experienced a somewhat problematic year to date. In August, Northern sold loss-making Dalepak Frozen Foods for GBP6.4m (US$10.2m).
A month earlier, the group had booked a 1.6% decrease in like-for-like sales for its fiscal first quarter, on the back of a 25% drop in revenues from frozen food, a division that has continued to be a problem for the firm.
And so it perhaps came as no surprise to industry watchers that Northern has decided up how it runs its business to boost efficiency and reduce costs.
The new structure, announced on Tuesday (5 October) is designed to “further streamline the business, focus management expertise and drive performance improvements and cost savings”.
Northern is slimming down its business from five divisions to two. Previously, the group operated across five units: biscuits, puddings, frozen, ready meals, and sandwiches and salads.
The company will now operate two divisions – branded (comprising Goodfella’s, McDougalls pies, Holland Pies, Fox‘s biscuits and Matthew Walker puddings) and chilled (sandwiches, salads, ready meals, and its British Airways supply business).
The costs of implementing the changes are expected to reach GBP6m, with those costs largely reflecting redundancies at the senior management level.
A spokesperson for the firm told just-food this week: “There will be job losses but at the level of management and not on the ground. We expect a decision to be made in the next couple of months but not until the restructuring has been put into place. We cannot say yet how many jobs will go.”
The firm employs a workforce of around 9,500 staff with 500 of those top management positions.
However, Panmure Gordon & Co. analyst Graham Jones believes the savings Northern is trying to make could come at the cost of driving growth from its brands.
“It has indicated that most of the cost savings will come from redundancies at the more senior level and that they will become surplus to requirements,” Jones said. “The jury is out on that one at the moment. We will have to see if they deliver on the growth in brands. They are taking costs out and making savings, which is good news, but they are perhaps doing that to the detriment of quality of management.”
And it is the growth in brands, particularly in the firm’s frozen division that were indeed the focus of Northern’s first-half results this week.
The company noted a 23.6% slide in sales from its frozen business, while sales from chilled food rose 6.3% and sales from bakery climbed 3.3%.
“Frozen [sales] dropped mostly due to the Goodfella’s relaunch in the first quarter,” a spokesperson for the company told just-food, adding that the sale of Dalepak Frozen Foods in August, as well as the exit of a contract with Birds Eye Iglo had also had an impact on sales.
“In the first quarter, frozen was weak,” the spokesperson said. “In the second quarter, frozen started to come back slightly but it is still negative. It is moving in the right direction and we have made a big investment in Goodfella’s to try and deliver in the second half, but clearly there is still a lot to do.”
However, while Northern remains optimistic that it will eventually benefit from the relaunch, Jones believes competitors are giving the company a run for its money in pizza as the firm struggles to gain traction from the huge spend on the Goodfella’s range.
“Revenue deteriorated in frozen and in particular because of pizza,” Jones told just-food. “We know the company stopped promoting the old Goodfella’s product…but the company is finding it difficult to get traction from the relaunch and they have admitted that it is perhaps not going as well as anticipated.
“I believe they could have done the relaunch slightly better. They are trying to emphasise the traditional Italian heritage [of the brand], but if you look at the packaging differences between Goodfella’s and Dr Oetker’s pizzas, I think Dr Oetker is winning the battle in my view.”
Jones, however, believes the firm has left itself open to the possibility of future investment in the second half to reinvigorate growth in the frozen category.
Investec Securities analyst Nicola Mallard reiterated the view that frozen remains a problem for the manufacturer.
“Northern has shown an improved second-quarter result on revenues, albeit with some marked differences between divisions,” Mallard said. “Chilled and bakery appear to be trading well, but frozen remains an issue. In order for the group to meet FY11E forecasts, we believe it would have to see an improved performance from this division in the second half.”
Mallard added that the competitive market has had an impact on the promotional traction of the Goodfella’s range in store.
But while Northern hopes the GBP5m relaunch will have an impact in the second half, it seems the spend may have come at a cost, as stockbrokers forecast a 28% drop in half-year profits when the numbers are issued in November, according to the Financial Times.
Nonetheless, while the firm’s full-year forecast remains unchanged, analysts are expecting a “considerably stronger” performance from the group in the second half in order to match consensus expectations.
Investec forecasts full-year EBIT of GBP56.5m, implying a second-half EBIT of GBP39.2m, a 14% increase half-on-half.
“Clearly, in order to meet forecasts, the group cannot afford to see any slippage in the second half momentum on chilled or bakery, but also it needs to see a market improvement in frozen as well,” Mallard says.
She adds: “In this climate, we do not see the market giving Northern Foods the benefit of the doubt over second-half prospects right now,” she concluded.