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Premier needs to address ‘sensitive’ distribution issue: Analyst

By Kacey Culliney , 23-Oct-2012
Last updated the 26-Oct-2012 at 12:15 GMT

Premier Foods has split its bread business and upped sales in Hovis over the last quarter, but it has a lot more work to do and distribution is the sensitive issue that needs to be addressed, says an analyst.

In its interim management statement for the three months ending 30 September, Premier Foods said sales and market share of its iconic bread brand Hovis were up.

However, it also revealed that it had to cut a contract with a retail customer worth £75m ($120m) in annual sales and supply chain efficiencies had been hit by a lower quality UK wheat harvest and higher net costs to serve.

Clive Black, director and head of research at Shore Capital, said that the group’s bread arm remained a challenge and much work was still to be done.

“Distribution is the sensitive issue that needs to be addressed,” Black told BakeryandSnacks.com.

“Supply chain efficiencies, while a delicate subject, need to be looked at by Premier Foods and the wider bread industry,” he said.

There is a sense that a lot is happening behind the scenes in the bread industry at present including an ongoing debate on structures in the distribution channel, which remains fragmented, he said.

Collective distribution rethink

“Industry needs to look collectively at ways to cut costs in the bread sector and distribution is an opportunity,” Black said.

“The industry needs to rationalize; they need to take costs out,” he said.

However, industry proposals to do this must avoid cartel accusations as it is already very concentrated, he added.

Driving business forward

Black said that management at Premier Foods is showing more discipline, referencing its decision to cut a low-margin retail contract at a cost of £75m ($120m).

“It’s a low-margin business, it is better out than in,” he said.

Premier Foods said: “As previously announced, the company is examining a range of options to unlock the future value of the bread business and address the challenges facing the category.”

Earlier in October, the group split its struggling bread arm from grocery to enable more concentrated efforts in driving business forward.