Discount clothing chain Primark again grabbed the headlines for Associated British Foods as it booked higher half-year profits and sales – and saw its shares hit a record high. But what about ABF’s grocery business? Dean Best spoke with CEO George Weston about the performance of and prospects for the UK group’s food operations.

It was not only the London morning sunshine in which Associated British Foods chief executive George Weston was basking on Tuesday (23 April).

After ABF reported higher half-year sales and profits, Weston and his management team also had the warm glow of City praise for its numbers. Comments like “H1 results were very strong”, “an outstanding performance” and “an excellent H1 performance” give a flavour of how most analysts viewed the figures. And, by the end of the day, ABF’s share price had reached a record level of GBP19.99.

However, as it has been for a while, it was ABF’s discount clothing chain Primark that boosted the UK-based group’s results and grabbed the headlines. Operating profit at Primark jumped 55%. Sales were up 24%. Like-for-like sales increased 7%, a very solid result in challenging trading conditions in the retail sector.

But what about ABF’s stable of grocery businesses? The operations take in the UK and Australia, as well smaller units in North America and Mexico. Some in the City have argued that, with the continued growth of Primark, and the recent buoyancy of ABF’s industrial sugar business, the investment community do not put a huge amount of importance on the company’s grocery assets. In ABF’s last full financial year, which ran until 15 September, grocery accounted for 30% of sales but just over 17% of adjusted operating profit (albeit in a year when restructuring costs dented grocery profits). The headlines from the national business pages tend to focus on Primark and did again yesterday. So how does Weston view ABF’s grocery basket?

“It’s absolutely central to ABF,” Weston tells just-food. “It’s a big chunk of it. We pay as much attention to it as we do to any other part of the portfolio. It’s lovely to have Primark growing at the rate it is, of course it is, but that doesn’t change the focus.”

ABF’s grocery business saw profits jump in the first half of the company’s fiscal year, although the results were helped by the absence of restructuring costs at the group’s UK bakery and Australian operations it incurred last year. Revenues were up 1% at GBP1.83bn, with ABF’s grocery business continuing to be something of a mixed bag.

Its Twinings Ovaltine hot beverage unit is thriving, the company said it saw “good growth” from oriental cuisine brand Blue Dragon in the UK and reported higher profits and sales from North American arm ACH. However, ABF said volumes and margins from its UK retail sugar business Silver Spoon suffered amid “intense” competition, its UK bread operation – even as it recovered wheat cost increases – battled continued stiff competition and its Australian arm, although ABF says it is progressing in line with expectations, is still loss-making.

Broadly, away from the praise for Primark, City analysts said ABF’s grocery business performed as expected in the first half of the year, although there was some concern profits did not recover well enough. Weston, however, says there are a number of factors that could improve the profitability of ABF’s grocery arm in the second half of its financial year, including the start of its contract to supply UK retailer The Co-operative Group with own-label bread from tomorrow.

“We’re cautiously optimistic for the second half of this year,” Weston reveals. “The Co-operative business will improve the profitability of our bread business we expect. Twinings and Ovaltine will have a good second half. They’ve been growing at a good rate now for eight years. The other grocery brands are fighting their corner well. Sugar will remain difficult.”

He adds: “Taken as a whole, and with further improvements to come from Australia, the second half in grocery will see further good improvement.”

It has been in UK bread and in Australia where ABF has had to roll up its sleeves and do the most work in grocery in recent months. The UK bread sector is very competitive, has been dogged by intense promotional activity and excess capacity and, of course, has had to battle commodity volatility. ABF has moved to reduce costs from its Allied Bakeries business, including the closure of a plant in Gateshead, but it has also invested in other factories and in products. There are signs ABF is managing to navigate the tough trading conditions in the sector – in which rivals Premier Foods plc and Warburtons have closed plants – relatively effectively.

“There are some days we think that’s right and some days we don’t,” Weston says. “We were pleased to recover the wheat price increase from last year’s very poor harvest. That was a major battle but we got through it. We are delighted that we are supplying The Co-op with bread as of Thursday. That’s a major change for us. We’ll be delivering bread to every postcode in the country as a consequence. We’re just commissioning the Walthamstow bakery now, which was a rebuild of that bakery. We’ve been investing in the category, in the cost base, in the quality of bread we can produce and in the reliability of supply. On our good days, I think that we’re demonstrating the benefits of that investment programme.”

Australia, meanwhile, is renowned as one of the most challenging developed grocery markets and a number of multinational food manufacturers with local operations have recently complained about the tough trading conditions in a country where two retailers, Woolworths Ltd and Coles, account for over 70% of grocery sales.

Weston says it can be “difficult” to be an Australia-based manufacturer but he is sanguine about the power of the country’s two largest retailers and points to another issue that has affected suppliers – foreign exchange.

“The trade relationship is robust and reminds me of the trade relationship we have with retailers in this country, which is no great surprise because Coles in particular has a lot of UK retail talent now inside it,” Weston explains. “Between Coles and Woolworths, they have something well north of 70% market share. These relationships are always going to be robust. I think there’s a second problem with Australia, which is a very over-valued currency has caused problems with import substitution. We see a lot of the cake category being imported.”

However, ABF’s business in the country, George Weston Foods, remains in the red and the company has faced questions over its performance in the market.

Much of the story around ABF’s bread business in Australia is similar to the UK. The company has faced pressure on its wheat bill and has moved to reduce costs and simplify the business.

ABF also produces meat products including ham, salami and bacon in Australia and, in recent years, has looked to reshape that business, too. Plants have been closed and ABF commissioned a new factory. However, the benefits of those moves were slow to emerge after issues in transferring production.

Reflecting on six months in which ABF’s Australian business made a loss, but one which narrowed year-on-year, Weston indicates progress is being made. “We recovered wheat price increases in the bread business earlier this year, we have simplified structures – we have reduced a lot of overhead costs – and there’s been some good innovation in bread,” he says. “There’s a product called The One, a fortified white bread and that’s up to 10% market share. The second part of that business, in the meat processing business, we’ve got greater stability in the new factory and lower operating costs as a consequence.”

Weston, then, sees reasons for optimism from its grocery business, which can be overshadowed by the expansion of Primark. There are some possible clouds on the horizon. The poor weather in the UK over the winter has hit the wheat crop, which suggests ABF and its UK bread rivals could again be facing another year of commodity volatility.

However, the ABF boss insists grocery is a key part of the UK-based group’s empire, which also takes in agricultural businesses, industrial sugar and other ingredients. And he ends by indicating the company remains ready to make bolt-on acquisitions in grocery.

“We’re always on the look-out for things that will improve the competitive strengths of our grocery businesses. I think we have less interest in categories we are not in. We are more interested in strengthening categories we are in.”