Multiples wouldn't commit to Fenland, analyst

12-Nov-2010 - Last updated on 12-Nov-2010 at 09:44 GMT

Fenland Foods: Redevelopment would cost £30-40m

While the supermarkets have expressed “some interest” in the re-opening of the mothballed Fenland Foods factory, Northern Foods has been unable to secure firm commitments from any of them that would justify spending the £30-40m it would cost to make this happen, according to City analysts.

The ready meals site in Grantham – which was mothballed in 2008 after Northern Foods failed to agree terms with Marks & Spencer – has been used as a testbed for new technologies and processes, some of which are now being implemented in its other sites.

Speaking to FoodManufacture.co.uk after Northern confirmed that it was winding the site down, Investec Securities analyst Nicola Mallard said: "Northern had been contemplating a future for the unit, but it needs significant reinvestment (c.£30-40m) and whilst Northern says there were retailers interested in the unit re-opening, none would commit to firm contracts.

“They don’t do contracts in this market, but if you are going to spend that kind of money, you’d want a pretty firm commitment on volumes, and they didn't get it."

She added: “It’s got an inner and outer shell and the inner shell would effectively need pulling out and starting again if they were to re-open.”

Chilled ready meals capacity

While overcapacity in the chilled ready meals sector had been a problem, a lot of spare capacity had now been taken out of the market by the leading players, and sales were now growing strongly again, she said.

“Given that the ready meals market grew by more than 10% in the last year and it’s worth something like £1.6bn, that’s enough business for a good-sized factory [assuming such growth rates continue].

“But understandably Northern, without volume promises, is nervous of making a large financial commitment.”

Stronger than expected performance in chilled

The performance of Northern’s chilled division in the first half was “stronger than expected”, added Mallard. “It appears this division has good momentum running into the main selling period for the group.

“The chilled range is more geared into the second half with hot eating products such as ready meals and also the seasonal Christmas lines. New business wins with BA and Costa should continue to boost like for like sales.”

Northern Foods, which posted a 7.7% drop in pre-tax profit to £9.6m on sales down 3% to £453m in the 26 weeks to October 2, said it had contemplated re-opening Fenland but had now decided to wind things down with a view to a possible sale.

“We are now focusing on our manufacturing capacity being based upon two large scale, efficient and highly automated sites, alongside our speciality Grimsby soup and sauces site.”

Click here to read more about Northern Foods’ interim results.