Allied Bakeries has secured an important win as it strikes a supply contract with UK retailer the Co-op that Premier Foods has been forced to cut, ABF’s finance director says.
The Associated British Foods’ (ABF) UK bread firm will commence supply of its Kingsmill, Allinson and Burgen brands to the Co-op in mid-2013 once Premier’s contract is ceased.
Hovis manufacturer Premier Foods announced the cut of its £75m ($119.8m) contract with the retailer last month in its interim management statement.
John Bason, finance director of ABF, said the move signified an important win in light of a very competitive market.
“The supply contract with the Co-op is a very big and important win for Allied Bakeries,” Bason told BakeryandSnacks.com.
The business contract previously held with Premier Foods has been transferred to Allied in the same shape, he said. It requires two-thirds of supply to be branded and one-third own label.
However, Bason said that Allied will be working closely with the Co-op in its new partnership to develop presence in store and this may lead to future changes.
Graham Jones, executive director, equity research at Panmure Gordon, agreed that the move is a “customer win” for Allied Bakeries.
“Premier Foods cut this contract as they considered it a high-cost, low margin retail partnership, but Allied Bakeries clearly thinks differently,” Jones said.
Sure win for Allied?
Clive Black, director and head of research at Shore Capital, was less certain that the contract marked a sure win for Allied Bakeries.
“I presume Allied anticipates the benefits of marginal economics from the Co-op but time will tell if it is a sound commercial decision,” Black said.
However, he added: “It is probably fair to say that Allied is more efficient than Hovis and so has more ammunition at hand.”
He said that ABF is a “little more committed” to the plant bread category. “The Co-op business is presumable a step in the right direction.”
The new contract marks part of a wider balancing act where Allied Bakeries is making cuts and investments to drive business and up competition. It has closed two bakeries and made significant cuts to overheads but has also invested in new cost-effective machinery across many of its facilities.
“We think Allied Bakeries is well-positioned in the UK bread market despite the difficult market decisions,” Bason said.