Northern Foods shuts factories to increase efficiency

- Last updated on GMT

Related tags: Price, Food preservation, Cost

Northern Foods is to close two of its UK factories with the loss of
1,000 jobs in an attempt to drive down costs as it struggles
against rising raw material bills and price squeezes from
supermarkets.

The manufacturing group, whose products include Fox's biscuits and Dalepak frozen foods, said its Evesham and Carlisle plants are scheduled to close in 2005. Northern believes that this proposal is the best means of enhancing plant utilisation and productivity.

The company hopes that these and other cost-cutting initiatives will save it £10 million a year by March 2006 at a one-off cost of £45 million. Northern Food's operating profit before goodwill amortisation and exceptional items to April 2004 was £107 million, down 7.4 per cent from last year.

In the current climate it is manufacturers that are bearing the costs, and this is being reflected in the squeeze on margins of major processors. Food makers and ingredients firms across the world have been affected by rising prices for basic food commodities.

The difficulty for Northern Foods is that it has been unable to pass on these higher costs because it is squeezed by an increasingly powerful retail sector. Manufacturers have been squeezed relentlessly to cut wholesale costs in order to pay for retail price cuts.

In July for example, retail giant Marks & Spencer asked Northern Foods to cut prices by 1.25 per cent from September 2004, and from next April to accept a much bigger cut of 2 per cent to help finance part of M&S's £100 million-a-year price cut programme.

As a result, the plant closures announced this week can be seen as being very much in line with Northern Foods' need to establish ever-greater processing efficiency.

"We continue to take robust action to reduce costs and improve manufacturing efficiency,"​ said the company. "We have made extensive management changes during this half year to implement the simpler divisional operating structure, with shorter reporting lines and the removal of duplicated activities. This has included the elimination of 30 senior management positions across the group."

The company is also in the process of creating a new, simpler group structure, which will replace 16 operating companies with four divisions. Two will be focused on chilled products, while one each will both focused on ambient and frozen food.

But despite the current difficulties being experienced by manufacturers, Northern indicated that trading has remained largely in line with its expectations. At a meeting with equity analysts this week prior to the end of its first half on 2 October 2004, the company revealed that underlying sales trends actually improved from late July.

In the 11 weeks to 18 September, underlying sales increased by 5.5 per cent versus the corresponding period last year, compared with a 1.5 per cent uplift in the 13 weeks to 3 July.

Northern's ambient and frozen food operations are doing well, the company said, showing good sales growth with Tesco, Asda and Morrisons, although the profitability of some of its chilled operations "remains unsatisfactory".

"Our ambient and frozen food operations have made good profit progress during the first half,"​ said the company. "The profitability of some of our chilled operations remains unsatisfactory and improving this is our highest priority, though we recognise that it will involve some risks in the current competitive climate.

"We have continued to achieve particularly good sales growth with Tesco, Asda and Morrison. Inflationary pressures have continued, as expected, though we have made further good progress in recovering these through higher selling prices."

Northern Foods​ expects trading conditions for the remainder of the year to remain extremely competitive, reflecting continuing retailer pressure and ongoing cost inflation, particularly in view of the poor UK harvest and recent increases in energy prices. The company expects to announce its interim results for the 26 weeks to 2 October 2004 on Tuesday, 16 November 2004.

Related topics: Markets, Natural Colors & Flavors

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