UK bakery and ingredients group The Real Good Food Company, a supplier to the country's major multiples and manufacturers, is in a period of transition. Facing volatile commodity markets and ever-evolving customer demand, the Liverpool-based firm has revamped its business. In this month's just the answer, CEO Stephen Heslop spoke with Dean Best about these changes and the outlook for the company.

just-food: In December, the Real Good Food Company warned that 2008 profits would be lower than a year earlier. This month, the group announced plans to consolidate its Renshaw and Napier Brown Foods divisions - to what extent was the move one about cost?

Stephen Heslop: It's two-fold. We concluded two things probably around October last year. One, the way the economic climate and the market was facing some challenges, that we did need to reduce costs. But, more importantly, we recognised that cost is only one dimension within managing a business and we also needed to be able to create and develop a business that had capability going forward.

When we looked at what the two businesses do within the marketplace, we decided there was quite a bit of synergy, not only within the management teams, but also in terms of the customers that both of the business traded with, the markets they served, and [by] also taking a more strategic view of the ingredients market - as opposed to Renshaw being more fixed around bakery ingredients and the Napier Brown business being around sugar trading and associated product. We felt that by bringing the two together we could potentially leverage from that [and], as long as we were able to develop our innovation capability, we felt that would be a very strong proposition going forward.

j-f: What developments will the company look to make in terms of innovation?

Heslop: We are organising the business differently and creating what we class as a virtual innovation team. We've got dedicated resource in that team; we're not necessarily bring more resource in, we're reallocating what we've already got. The number of hours spent on innovation will be significantly more. We're taking a broader perspective. A lot of development time over the last 12 months has been working with our customers to actually cost-reduce recipes - not devalue the recipes but use cheaper, different materials, come up with [ways of] processing the product that are mindful of the pressure that we've been seeing on material inflation. Material inflation has been fairly significant over the last 12-18 months.

j-f: Is looking at cost the main demand customers are placing upon you right now?

Heslop: If you took our Hayden's Bakeries operation, which is not part of Renshawnapier obviously, it's part of the group, their principal customers are looking for what I'd probably call 'new and different'. Customers are looking for value for money from a service perspective and also making sure that we offer them new and different ideas. That might be how we actually get products from our factories to theirs, how we service their accounts but, equally, they are looking for new ideas in terms of what they can sell to their customers. It's a combination of everything really.

j-f: Who are the Real Good Food Company's major industrial and retail customers?

Heslop: Within the old Renshaw business, we trade with all the major multiples in various guises. Within the previous Napier Brown, [we have] very strong links with Tesco on sugar and Morrisons on sugar. In terms of the major industrials, we supply something to pretty much most of them to be fair. Finsbury Food Group is one of our biggest customers but we pretty much supply right across the piece.

j-f: What are your customers looking for in terms of product innovation?

More of our customers are looking for indulgent products. Making sure that when the consumer goes, a lot of their purchasing is impulse purchasing and they look to treat themselves. So when we talk about diversifying our business, a lot of the old Renshaw business was servicing bakery, clearly we have a lot of read-across into confectionery. You have to determine what your customer is looking for - a lot of the cake people would sell novelty cakes, caramel, various things of that nature, which are more indulgent [products].

j-f: There has been a lot of talk among industry watchers that some commodity prices are starting to come down from the heights seen in the last year. What is your take on the current situation with commodity prices?

With all of these things, you get a lag and lead. The first part of the process is your suppliers put their prices up. Your ability to secure any price increases on your products from your customers... there's a lag between one and the other. That's a perennial problem that most manufacturers would have seen in the last 12 months. We are talking to customers about selected price increases at the moment. We have seen some price changes but a lot of that issue is [that] a lot of the products we buy are contracted products. The answer to the question is: when did you purchase your materials, when did your contract run out and what's the purchase price thereafter. There has been a little bit of easing but certainly not to the levels seen two or three years ago.

j-f: Price negotiations are a perennial problem but have discussions become more tense against the current economic backdrop?

Heslop: Price increases have been much more prevalent these last two years then they've ever been in my working career. Normally, where you might get one annual price negotiation, now you can possibly see two or three in the same year depending on how what materials are in each individual product. Given people are much more cost-conscious, those conversations are more difficult. Therefore the amount of work you have to do in terms of justification and understanding and sharing of information with your customers is even more vital.

j-f: What's your outlook for 2009? Should we expect further moves to restructure the business? Looking from the outside, acquisitions seem a medium-term prospect. Will this year be one of transition?

I think 2009 will continue to be a challenge for everyone. I think what we are doing better positions us going forward to the point in time when the economics improve. One has to take control of the situation and do what's within our gift and be mindful of that.

From a consolidation point of view... I wouldn't say we've exhausted [our options] but we've certainly done the ones that would immediately come to the fore. The challenge for us now is to get the innovation side of the business working, access customers more effectively through the new management structures and start to diversify the product portfolio. It's a challenge to build on what we've done. Acquisitions would ultimately form part of our plan but it's a medium term [aim]. The way you described it as a transition year and building on what we've got for the medium term is absolutely correct.