Associated British Foods finance director John Bason has struck an upbeat tone on the company’s prospects in the next 12 months in the UK and Australia, two markets central to the drop in annual profits from its grocery business.
The Kingsmill and Tip Top bread manufacturer this week reported a 23% fall in adjusted operating profits from its grocery business, pointing to restructuring costs in the UK and Australia.
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ABF expects profits from its grocery arm to increase this year. Speaking to just-food, Bason said the work to reshape the businesses had improved them.
“The restructuring costs will set us in good stead. We’re about lowering the cost base, both at the Allied Bakeries business in the UK and George Weston Foods in Australia,” Bason said.
The ABF finance chief said Allied Bakeries “had a good year” against a “very tough promotional backdrop” despite profits falling. He insisted the investment ABF had made in its UK bread operations meant the business compared favourably to its competitors.
“I think we are stand-outs over the last couple of years with the investments we have made in recent years in new bread lines. It’s not about having capacity but reducing the unit cost of a loaf of bread. Around the UK, we’ve invested behind our lines and have reduced our cost base. I think we are very well placed for the future,” he said.
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By GlobalDataSpeculation has grown around the future make-up of the UK bread sector amid reports ABF rival Premier Foods plc has hired Goldman Sachs to sound out what interest there could be in its own bread business.
Premier has made no comment on those reports but has insisted it is looking to “unlock value” from its bread business. A sale to ABF or Warburtons, the third-largest UK bread manufacturer, could raise competition concerns. However, there is a view in the City that a combination of ABF’s Allied Bakeries subsidiary and Hovis could be possible.
Bason refused to be drawn on the subject. “We do not comment on M&A and I think it wouldn’t be really right for me to comment on that,” he said. “I don’t want you to infer one thing one way or the other from that. It’s very difficult for me to do it.”
UK bread manufacturers are facing higher commodity costs after the wet weather in the country and a severe drought in the US this year.
Bason, however, insisted ABF had managed to secure price increases from retailers and pointed out the broader commodity pressure on the company was “patchy”.
“The challenge for grocery is making sure where prices have gone up we are recovering those. The main one that we are looking at for grocery is UK bread. It has been very challenging but that has been achieved,” he said.
“Our view is that its effect is patchy, it’s not in all food commodities. What we’re looking at here is particularly grains, cereals and barley have been affected by the poor weather here in the UK and then in the US corn prices affected by the drought. Certain other food commodities are less affected. Vegetable oil prices have not gone down to their lowest point but they haven’t specifically gone up either.”
Bason also insisted ABF has secured price increases on its bread products in Australia, a market the company described as “a difficult retail and competitor environment” in its results announcement this week.
Australia is a market in which two retailers, Woolworths Ltd and Coles, account for almost 80% of sales. Speaking to just-food in September, Coles MD Ian McLeod said suppliers would in the past demand price increases “with no real justification”. Now, he said, Coles would need to be convinced price hikes were necessary.
Bason was sanguine about operating in Australia and dealing with retailers more broadly. “It was ever thus in FMCG. You earn your place by being relevant to the consumer and it’s all about good brands and the products you bring to the market,” he said. “We’ve got one of the best known names in food in Australia – Tip Top. We’ve seen a lot of innovation and new prodcuts behind that brand. We have again got price increases in Australia to cover the wheat cost.”
However, Bason admitted ABF had found the meat business in Australia “tough”. Restructuring charges from that unit was a factor in the lower profits from grocery in the last 12 months but Bason said the company was now looking forward.
“The meat business in Australia has been quite tough for us. About a year ago, we opened a new meat factory, closed our existing factory and consolidated it into one bigger factory. The focus has this year been about improving the performance of that meat factory and now the focus is about building volumes from here.”
