Deals could stunt Premier’s growth, says firm

Premier Foods’ sales growth has become too dependent on promotional activity, putting its ability to “translate top line fizz into the bottom line recovery” increasingly in doubt, according to a new report from Investec Securities.

With concerns about Premier’s debt mountain now off the table, its 6% operating profit growth in the first half was generally seen as a good result in a tough market, accepted Investec analysts. “But these should be Premier’s salad days, surely. Underlying profits excluding synergies [from the acquisition of RHM and Campbell’s] declined by 10% in the first half. This is a concern for us given that, once 2009 is out of the way, it is organic, not synergistic, profit growth that needs to become the Premier ‘story’

Although promotional activity had delivered good results for the Loyd Grossman brand, its longer term price positioning may have been jeopardised by “making the brand overly dependent on deal-conscious buyers”, argued the report. “The broader issue is what we see as an apparent dependency of Premier’s top line on promotional activity of various kinds.”

While Premier was by no means the only firm engaging in promotions, it observed, “we sense a much bigger cultural and operational bias towards them at Premier than other branded peers. We have historically taken the view that Premier’s portfolio of ‘iconic’ British grocery brands has been a source of strength and a platform for profit growth. But, as the evidence builds, we find ourselves questioning this thesis.”

Meanwhile, sales growth at Premier’s meat-free arm (Quorn and Cauldron - acquired in 2006), which “should be an unequivocal on-trend ‘star’ business”, was slowing post-acquisition, while “the returns being made three years in are likely to be below the costs of capital”, it predicted.

On the plus side, the market clearing price for the 2009 wheat crop was looking like it would be around £130-135/t (about 25% less than it was last year), offering the hope of higher profits for Hovis - the jewel in Premier’s crown - it noted.

However, “it almost goes without saying that we don’t think that Premier will be holding on to anything like all of it [margin gains]. The big four retailers will all be watching the wheat price, so if £135/t wheat comes to pass, Tesco et al will be after Premier for lower bread prices.”

Another confounding factor was the ongoing issue of overcapacity in the plant bakery market, it claimed. “For us, Avonmouth [Warburtons’s new £45M bakery in Bristol] represents a £45M tank parked on Hovis’s south west England heartland lawn. Indications to date are that Warburtons is struggling to fill Avonmouth. Given its overall market leadership and long-term horizons, the inference for us is that the negotiating equation is not favourable for Premier. So, net net, we see some limited room for lower wheat prices to benefit Premier.”