News that debt-laden giant Premier Foods plans to axe 900 jobs, close two bakeries and restructure its distribution system was greeted with fury by unions and applause by City analysts.
Unite the union and the Bakers Food and Allied Workers Union (BFAWU) have called for urgent talks with management describing the news as “devastating”.
Jennie Formby, Unite’s national officer for food and drink, said: “This is just another stage in the disaster story that has been Premier Foods over recent years, which has consistently struggled ever since its decision to buy Hovis in 2006.
“At the time, this strategy was described as ‘doomed’ by some analysts and it has resulted in the company being saddled with massive debts.”
Formby added that while management claimed the job losses were the result of competition and wheat prices, the reality was that members were “continuing to pay the heavy price of Premier’s failure to make a success of the business”. The union was extremely concerned about the future of the remaining business.
John Higgins, organising regional secretary told FoodManufacture.co.uk: “This is really shocking news that we received when the night-shift ended at 5am this morning [November 20]. “Management said we should not have been surprised to hear this news after losing the [Co-operative] bread contract but we expected them to have some plans in place.”
John Hemming, Liberal Democrat MP for Birmingham Yardley, said: "I would rather see what we can do to protect people rather than just assume it's going to go ahead as planned.”
But leading City analysts described Premier’s decision as the least worst alternative.
Graham Jones, analyst with Panmure Gordon, said: “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.”
‘Very large pension deficit’
Panmure remained cautious about Premier bearing in mind what Gordon described as: “the dilution from recent disposals, the still very high gearing and the very large pension deficit”. Pamnure maintained its ‘Hold’ recommendation on Premier’s stock.
Martin Deboo, analyst with Investec Securities, said: “We see this as a decisive and welcome move to improve long-term profitability and create option value on further rationalisation or an eventual, profitable exit.”
Deboo said the news was “less than a total surprise given recent announcements”, adding that the marginal economics look attractive and sensible.
“The Co-op contract was intensive to serve, representing close to half of direct-to-store drops in bread,” said Deboo. “Relative to its about 15% contribution to sales, Premier is reducing headcount by about 18% and delivery routes by about 30%. The resultant question is why the move is being guided to profit-neutrality only?”
Deboo said the assumption was the Co-op business had an above-average gross margin and Premier was allowing for knock-on impacts elsewhere.
“Ultimately, this feels like a platform for better long term profitability to us,” he concluded.
Clive Black and Darren Shirley, analysts with Shore Capital, said Premier was “progressively reversing the failed strategy of times gone by, cutting debt, introducing focus and streamlining operations”.
Capacity reduction in plant bread could offer scope for margin expansion in due course.
But the struggle for Premier is still uphill, they added. “Premier is still operating within tough markets, where volume growth is hard to come by. The group also remains burdened by debt, albeit is no longer looking over its shoulder from a financing perspective given the time that recent disposal activity provides.
“And it remains encumbered by considerable pension liabilities. As such, we continue to applaud the decisions by messrs Clarke and co., but the struggle is still uphill.”
- Close two bakeries − Greenford, in west London and Birmingham – next year
- Simplify its bread distribution network by cutting about 130 routes
- Closing four distribution centres
- Axing 900 jobs