Sliced bread is no longer the greatest thing to have hit British consumers, judging by falling sales, which are posing a growing problem for bread manufacturers

Last updated: November 6, 2013 6:42 pm

Sliced bread no longer greatest thing

By Scheherazade Daneshkhu, Consumer Industries Editor

Sliced bread is no longer the greatest thing to have hit British consumers, judging by falling sales, which are posing a growing problem for bread manufacturers. Premier Foods, the heavily indebted UK company, said on Wednesday that it had appointed bankers to search for outside investors for its Hovis, Mother’s Pride and other bread brands, which have struggled during the recession.The maker of Ambrosia, Mr Kipling cakes and Bisto gravy has appointed Ondra Partners to “assist in developing investment options for the bread business, which include co-investment by a partner,” it said.

Some analysts said that Premier would struggle to attract an investor into a declining market in which the three main players have similar market shares and are battling it out for retailer space and consumer spend.

Grupo Bimbo, the Mexican bakery, is a possible investor – analysts believe it has expressed an interest previously.

Premier Foods and Associated British Foods – which owns the Kingsmill, Sunblest and Allinson brands – both have a 32 per cent share of the bread market, while privately owned Warburtons has 25 per cent, according to Investec. The two largest bakers also manufacture private-label bread.

The 123-year-old Hovis is one of the best-known foods brands in the UK, but it has suffered in the highly competitive £3.6bn domestic bakery market.

“Consumers have reduced their bread consumption, driven by tighter budgets and health concerns,” said Tim Eales, director at market research group IRI, noting that some parts of the market were doing well. “Healthier breads are generally performing better, as well as those for special dietary needs, such as gluten-free.”

Although the value of bread sales has increased 4.1 per cent in the past five years, prices have been driven by inflation. Bread volumes have fallen 4.7 per cent over the same period, said Kantar Worldpanel, the consumer research group.

Graham Jones, analyst at Panmure Gordon, said: “Premier’s Hovis brand has slipped from number two to number three behind Kingsmill this year, and we believe the price competition in the sector remains intense.”

Premier has cut costs by shutting three bakeries and two mills, which slashed the workforce by 10 per cent.

Nevertheless, almost half Premier’s 9,000 workforce is still employed in the bread and milling division, which contributed 30 per cent of operating profits in the first six months of this year.

Gavin Darby, chief executive since February, indicated last month that Premier intended to expand the bread business. But given its high debt levels, analysts say that it lacks the means to make the necessary investment itself.

“We’ve done the hard yards on Hovis, we’ve taken the pain of the restructuring, taking 1,000 jobs out of the business, taking significant restructuring costs,” said Mr Darby. “I tend to come from a background of trying to grow things, so we are working hard on a growth strategy for Hovis.”

Mr Darby has separated the bread and milling division from the grocery arm, which could make it easier to set up a separate company owned by Premier and a potential new investor.

There was some good news this year for the British bread industry, with a better harvest than last year’s rain-soaked season. Wheat shortages and poor quality wheat, which was more expensive to mill, led to higher prices in 2012.

Mr Darby said that this year the price of bread was slightly lower, reflecting the improved harvest.

Hovis lies at the root of Premier’s financial problems, after its 2007 highly leveraged 2007 acquisition of RHM, the previous owner of the brand.

Premier has gone through a painful corporate restructuring involving asset sales and several changes of top management. It is working on a capital restructuring plan for next year, which could involve trying to raise new equity, although it has not confirmed this.

“This is the latest thrilling episode in the Hovis soap opera,” said Martin Deboo, analyst at Investec. “Bread has been a drag on Premier and we think Premier would be well advised to exit or part-exit bread, even if this doesn’t reduce their leverage very much.”