Premier Foods plans to close its Greenford bakery site in west London and its Birmingham bakery next year. This is in addition to the previously announced closure of the Eastleigh bakery. Production from these locations will be moved to the firm’s remaining bread manufacturing sites.
Its bread distribution network will also be simplified by removing about 130 distribution routes. The move followed “the reduction in volumes from the previously announced loss of a low-margin bread contract by mid 2013”, according to a company statement. Last month the firm lost the contract to Allied Bakeries.
Reflecting the lower volumes, Premier plans to close distribution operations in Greenford, Birmingham, Mendlesham and Plymouth. The firm’s outsourced logistics will be restructured.
'Simplifying our cost base'
Michael Clarke, the firm’s ceo, said: “Having generated solid growth momentum in our grocery division, it is critical that we act to assure the long-term future of the bread division. By simplifying our cost base, we can increase focus on improving efficiency, quality and service levels to help grow our core Hovis business.”
Clarke acknowledged the impact on employees at the sites affected. But he added the decisions “are necessary if we are to build a strong and successful future for the bread division and those who remain with our business”.
The cost of implementing the plan is expected to be about £28M and will be reflected in Premier's 2012 and 2013 financial statements.
Most of the cash outflows to implement the proposed changes will take place next year.
Cash impact
Premier said it expected to recover most of the cash impact of the proposed changes in future periods through site disposals, reduced working capital requirements and lower capital expenditure.
The savings from the proposed restructuring are expected to offset the margin forgone from the lost bread contract, said the firm. These proposals are not expected to influence 2012 trading profit.
Graham Jones, City analyst with Panmure Gordon, said the sale was the least worst alternative. “While in some respects the move can be seen as running to stand still (a £28M spend to effectively hold profits flat next year), in our view it is much better than the alternative of being more aggressive with pricing in order to regain lost volume which ultimately could damage margins further.”
Panmure maintained its ‘Hold’ recommendation on Premier’s stock.