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Premier Foods

In: Business and Management

Submitted By skafi
Words 3820
Pages 16
Introduction
Premier Foods is a renowned name in UK food manufacturing industry that has several market leading brands under its umbrella producing Items of Bakery, Desserts, Instant Meals, Sauces and variety of other categories.
Over the period of time, they acquired several brands in order to expand their customer base and revenue. For the sake of operating effectiveness, the business is categorized in two layers “Groceries” and “Hovis”. Groceries division handle the entire groceries market and thus responsible for nearly a market share of 6.8%. Hovis handles the bakery division with its strong influence in the Bread market.
Premier foods is in a downward projectile growth with excessive debt and started to lose its position as a market leader, reasons behind that shall be discussed by showing the financial history for Premier Foods and suggest strategies that Premier Foods need to implement in order to enhance its revenues and position in market.

Premier Foods Background
The company was founded in 1981 when Hillsdown Holdings purchased Lockwood’s Foods. Then named as Hillsdown Ltd. The company dealt with canning fruit and vegetables and carbonated drinks. In 1983 Hillsdown Ltd. acquired TKM Foods including Smedley’s canned and frozen fruit and vegetables. In 1985 they acquired meat canning of Robert Wilson. In 1986 they acquired John Morell & Co Ltd. who was into the fruit and vegetable canning as well and also had pet food business at Bardney, Lincs. This factory was later changed to pet food manufacturing only. This year they also acquired Morton’s from Beechams. Their factory at Lowestoft was producing fruit fillings, seasonal vegetables and processed peas, later closed. Later in December the same year Premier Foods acquired furit and vegetable canning operations of Beechams. In 1987 they sold to Salvesens thefrozen veg operation. 1989 Haywards Pickles at Bury St Edmunds was purchased from Brooke Bond.

January 1990 Premier Brands was acquired, the Hartley Canning operation, Typhoo, Chivers, Smash, Cadbury’s drinks. Prior to this, Premier Brands had acquired Pickering Foods, a fruit and vegetable canning company from Heinz. 1990 Various canning businesses acquired, consolidated to Long Sutton and Wisbech sites. Sutherlands Meat Canning Divisions was acquired (brand and equipment only). However, this business transferred to Wilson’s at Kilwinning. Hartley’s Canned Fruit and Vegetable business sited at Montrose and Didcot (later closed), and was transferred from Premier Brands. Also, British Fish Canners business was also transferred.
Sterling Wygate dry dog food business was integrated with Canned Pet Food ex Bardney, to form Pet Food Division. Chilled Foods Division formed from Henry Telfer and Smedley Foods. Product lines are M&S sandwiches at Northampton and Chilled Salads at Spalding. New factories were commissioned at both sites.
1990s Hillsdown Ltd became HL Foods Ltd, HP Canned Goods acquired, Jonker Fris factory was acquired in Holland. 1991 British Fish Canners was sold. Pet Food Division was sold to BP Nutrition (UK) Ltd.
Hillsdown Ltd name was changed to HL Foods Ltd. Company structure changed to form four divisions: Fruit & Vegetable Canning - Haywards Foods; Meat & Ready Meals; Chilled Foods - Smedley Foods/Henry Telfer; Pickles.
Foresight Canning, Halstead was acquired (Pease Pudding and organic veg).
Anglia Canners was acquired from ABF. Canneries at King’s Lynn and Brechin. Canneries was later closed and capacity transferred to Long Sutton and Wisbech. Ready Meals factory at Brechin was be expanded to incorporate existing capacity and products currently being produced at Kilwinning.

In 1993 Premier Foods was restructured. Ambient Foods Group formed, comprising: HL Foods Ltd - Fruit & Veg Canning; Robert Wilson & Sons Ltd - Meat & Ready Meals; Chivers Hartley - Jams, Preserves and Haywards Pickles.
Robert Wilson & Sons Ltd sold Brechin factory to Pataks.

In October 1994 Acquired the stock, plant and machinery of F E Barber (previously CWS, Lowestoft) with a two year title to the CWS Own Label Canned Fruit & Vegetables.
In March 1996 HP Canned Goods operation was acquired. Factory based at North Walsham. BTS and Pasta products 4.5m cases annually.

In 1997 Robert Wilson Ltd, Kilwinning was closed by Hillsdown Holdings. HL obtained business rights and relocates at North Walsham.
In April 1998 Smash Instant Mashed Potato was transferred from Premier Biscuits to HL Foods (Hillsdown Holdings decision).
In 1999 Jonker Fris factory at Heusden, Holland was acquired.
Hillsdown Holdings acquired by Hicks, Muse, Tate & Furst.

Between January to March 2000 Integrated the Chivers Hartley’s Business from Histon into HL Foods - Jams/Preserves/Honey/Pickles and Sauces
In January to March 2001 Integrated the Premier Beverages business from Moreton into Long Sutton.

In April 2001 Acquired and integrated Stratford upon Avon Canners canning and pickles business
In September 2001 ift lemon tea brand acquired from Northern Foods.
In October 2001 acquired Nelsons of Aintree from Associated British Foods
In May 2002 acquired Nestlé's UK ambient food business for £115m. The acquisition brought favourites like Branston, Crosse & Blackwell, Sarson's and Sun Pat into the fold and established Premier Foods as one of the country's leading food manufacturers. The purchase included factories at Hadfield and Middleton.

In November 2002 Dropped the ‘International’ and became known as ‘Premier Foods’.
In November 2003 Purchased Ambrosia and Brown & Polson from Unilever Bestfoods UK Ltd.
In July 2004 “Premier Foods” was floated in the Stock Exchange, with an initial market capitalisation of £526 million. Premier Foods businesses was integrated under one management team.

In 2005 Acquired Birds custard and Angel Delight from Kraft Foods
In June 2005 Purchased Marlow Foods Holdings Ltd the owner of Quorn, the UK's leading meat alternative brand, from Montagu Private Equity
In October 2005 Typhoo Tea business was sold to Apeejay International Tea Limited.
Sold Jonker Fris to NPM Capital B.V., a Dutch private equity firm.
Acquired Cauldron Foods Ltd, a leading manufacturer of branded, chilled meat free products, from Rayner & Co (Investments) Limited.
The £460 million acquisition of Campbell’s UK & Irish business was completed in August 2006, adding OXO, Batchelors, Homepride and Fray Bentos to the portfolio.

In March 2007 the £1.23 billion acquisition of RHM along with many of the UK’s best known food brands including Hovis, Sharwoods, Cadbury cakes, Bisto and Mr Kipling was done .
March 2009 Placing and Open Offer and Firm Placing.
Two businesses Martine Specialites and Le Pain Croustillant were sold. In April 2009 Sofrapain was sold.

March 2011 Completed the sale of the Meat-free business to private equity from Exponent.
April 2011 CEO, Robert Schofield, announces his intention to retire no later than April 2012.
July 2011 Completed the sale of the East Anglian Canned operations to Princes Foods.
August 2011 Michael Clarke joins Premier Foods as new CEO from Kraft Foods, Europe.
October 2011 Michael Clarke unveils new priorities for the company to restore profitable growth.
December 2011 Mark Moran joins Premier Foods as new CFO from SSL International.
December 2011 Completed the sale of the Brookes Avana business to 2 Sister Food Group.
January 2012 Completed the sale of four Irish brands to The Boyne Valley Food Group.
March 2012 Announced re-financing package and further information on growth strategies .

Business Overview of Premier Foods
Premier Foods operates from two divisions Grocery & Bread.

£1,122 million Grocery Division includes both branded and own label products in a wide range of sectors such as cakes, soups, stocks, gravy, ambient desserts, spreads, home baking, cooking sauces, convenient meals, pickles and vinegar .

Premier Foods focus on a number of Power Brands which they believe have the highest growth potential. These include Ambrosia custard and rice pudding, Mr. Kipling cakes, Loyd Grossman cooking sauces, Sharwood’s sauces and Asian foods, OXO stocks, Bisto gravies and Batchelors soups, pasta, rice and noodles.
In addition, they have a number of support brands including Branston pickles, Homepride cooking sauces, Sarson’s vinegar, Haywards pickles, Smash instant potato, Bird’s and Angel Delight desserts, Robertson’s, Frank Cooper’s, Rose’s and Hartrley’s preserves, marmalades and desserts, Gale’s honey and lemon curd, Sun-Pat peanut butter, Saxa salt, Paxo stuffing mixes, Atora suet, Marvel powdered milk creamer and McDougalls, Be-Ro and Hovis flours and baking mixes. In the cake market they also sell products under the Lyons and Cadbury (under license) brands.

The Bread Division operates principally in the wrapped bread market although we also manufacture morning goods, a wide range of bulk and branded flours and a variety of own-label bread and other bakery products. The Charnwood pizza base business is also part of the division.
Hovis is our principal brand and one of the company’s eight Power Brands . It is also amongst the top 5 grocery brands in the UK. Support brands include Mother’s Pride and Granary.

Food Industry and Environmental Background
In its series of acquisitions, the takeover of RHM a.k.a. Rank Hovis McDougall sparked the crisis for Premier Foods. By March 2007, Premier Foods acquired RHM for £ 1.23 billion as a major stakeholder.

However, this acquisition turned the expectation topsy-turvy, thus causing a huge debt pile up in Premier Foods’ performance. By Oct 2010 investors questioned the performance of the company in due to the huge pile-up of debts. The CEO Robert Schofield was under tremendous pressure. Rising prices, tough economy & competition complemented to Premier Foods’ crisis .

The firm tried to pass the heat to the consumer layer; however, supermarkets like TESCO gave a sharp blow by off-boarding Premier food’s products.

The Major Competitors
Archer-Daniels-Midland Company Decatur, IL
Arla Foods UK plc Leeds, United Kingdom
Associated British Foods plc London, United Kingdom

The Issues
Premier Foods gone into their worst performance due to mainly these issues which need strategic solutions
1. Premier foods is in a downward projectile growth with excessive debt in its history. Its stakeholders have lost trust in the firm. Profit margins and Revenue had taken a hit.
Why it is an issue:
Acquisition of RHM is probably a miscalculated step causing huge pile up of debts, following monetary and other related issues.
2. Premier foods lost its position as a market leader. Its competitors have gained significant advantage over Premier foods.
Why it is an issue:
Rising prices, fluctuating economies complemented by RHM acquisition issues aggravated health of the firm.

"Sick Bread of the Bakery"
Premier Foods suffered heavily in its health due to its over-priced acquisition of RHM (Rank Hovis McDougall) for £1.2bn by the end of Q1 2007. That was a decision made under the leadership of the then CEO Robert Schofield.
Then after issues started surfacing due to excessive interest payments which in turn was an outcome of the costly acquisition accounting to a net loss of £63.3 million pounds. There was a sharp slash on the dividend of 5.5 pence .

By Q1 2011, reported £259million loss fuelled by environmental factors like rising commodity prices of Wheat and Tinplate, of about an increase of £150m in a year .
Rising Wheat Price:
Wheat is one of the vital ingredients for Premier Foods, and is directly impacted by the rising Wheat Prices. Per "UN ` of Economic and Social Affairs Population Division" it is expected to grow in proportion with the growing population, and statistically speaking, it will increase from 7 billion in 2011 to 8 billion in 2025. Premier Foods purchases Wheat more than 1 million tons from within UK from local community. In addition it consumes Wheat from France and Canada for its unique products .
Due to the heavy drought in Russia, the Wheat prices are almost doubled, by early 2011 the market price was $10 per bushel .
Russia stands top in grain exporting of about 17% in global level equating to 21.4 million metric tons by 2009, but only before the severe drought by Aug 2010. The prices are high in the history record followed by the ban on grain exports by Russian Government .
In addition, UK's commitment to Biofuel of converting 20% of UK Wheat to bio-fuel has sky-rocketed the prices .
Few other factors that fuelled the debt are the rising cost of Tinplate, and Time latency to re-price the products .
Crisis in the Euro zone made the consumers to be cautious in their spending behaviour. This coupled with challenging economy made the market slow, thus attributing an indirect factor.

Appendix 1:

SWOT Analysis – Premier Foods

Strengths

1. Broad market encompassing segments like Bakery, Grocery, Desserts, Cakes, Convenience Foods.
2. Huge preferred population and customer base.
3. Loyal customers that stick for the brand over the time
4. Strong brand recognition on the core 8 brands like Ambrosia, Mr. Kipling, and OXO etc.
Weaknesses

1. Huge debt caused by the acquisition of RHM for £1.2bn, and hence turmoil in the business
2. Poor relationship with top retailer like Tesco, resulted in loss of market .
3. Consequently several losses were met by the firm around more than £400m in 2008.

Opportunities

1. Strong influence and support from local community
2. Successful in gaining time for repayment of debts through “Refinancing” – This will help the firm to work on the restructuring on its entirety .
Threats

1. Restructuring may take more time, allowing the competitors to overtake Premier Foods
2. External factors like price of wheat & tinplate, economic conditions and cautious consumer spending still remain as risks.
3.

Appendix 2:

Porter’s Analysis – Premier Foods

Premier Foods
Threat of New Entrants
• Barriers to entry Both groceries and bread business have low barriers to entry. Nowadays, simple and not very expensive equipments are available using which, such business can be setup as starters. Many such small business could be a threat to Premier Foods.
• Economies of Scale Though economies of scale are always a factor, small sectors establishing such business with cheaper equipments are possible as barriers of entry are low, they would also have the advantage of having lower overheads in comparison to large companies
• Product differentiation Branded products such as Canned Foods, bread, etc. have good brand recognition. Other items like bread and other baked items does not make any remarkable difference.
• Capital requirements Capital requirements can be small for setting up a small sized business to start with.
• Access to distribution channels New entrants would need to start-up in the local market and thus distribution channel is not as important.
• Other cost advantages New entrants would have lower over heads.
• Government policies Government policies would not differ for different sized people.
• Incumbent’s defence of market share Incumbent may create new sales strategy to create negative impact to the business of new entrants
• Industry Growth Rate A basic essential the population and growth rate will rise and so should company’s business
Determinants of Buyer Power
• Number of buyers relative to sellers Though balances are maintained as in the competitions remainder will go to a SAP. Other products
• Product differentiation Product differentiation would not be much
• Switching costs to use of other product No switching cost
• Buyers’ profit margins Retailers of the products can demand low price for their own higher margins
• Buyers’ use of multiple sources Buyers always use multiple sources as their customers would want to buy of their choice
• Buyers threat of backward integration Many retailers do have their own products or sources
• Buyers threat of forward integration Not applicable
• Importance of Product to the buyer Not important to buy from PF as many sources are available
• Buyers Volume Buyers volume is considerable and spread across many buyers
Competitive Rivalry within and Industry
• Number of Competitors Number of competitors are many
• Relative Size of Competitors Size of competitors can be big or small
• Industry Growth Rate Moderate growth rate
• Fixed Costs vs. Variable Costs Low fixed cost, High variable cost for cost of inputs
• Product Differentiation Important as different products from competition would give them an edge
• Capacity augmented in large increments Usually has been done through acquisitions, else time required would be high
• Diversity of Competitors Highly affects as many competitors have many variety of products
• Exit barriers High for big size companies like PF
• Strategic Stakes
Threat of Substitute Products
• Relative Price of Substitute Consumers can use any alternative products from other producers
• Relative Quality of Substitute Quality of Substitute can be of same or better quality
• Switching costs to buyers No switching cost, so high risk
Determinants of Supplier Power
• Supplier concentration Suppliers for Groceries and Baking Items are in plenty and would not be a constraint for PF
• Availability of substitutes Normally the same product is used from different sources and not substitutes are not applicable
• Importance of Suppliers’ input to buyer Though this is an important factor, all the suppliers would have similar outputs
• Suppliers’ Product differentiation Quality of products can vary and can impact output quality
• Importance of Industry to suppliers A good demanding industry and suppliers also have many buyers
• Buyers switching cost to other input Suppliers are in plenty so this is possible and favourable to PF
• Suppliers threat of forward integration Possible but not a major risk as this is a different core competence area

Appendix 3:

Industry Competitors

Premier Foods Unilever Associated British Foods Booker Group Greencore
Core Products Grocery & Bread Consumer Goods Food Manufacturing & Textile Food Wholesaler Food Industry Revenue 2.00bn GBP 38.32bn GBP 11.07bn 3.74bn 804.21m
Net Income -230.00m GBP 3.51bn EUR 541.00m 64.90m 19.15m
Workforce 11720 169000 102253 9063 6703 Gross Margin 28.18% - - 3.80% 30.48%
Net Profit Margin -11.50% 9.95% 5.21% 1.73% 2.47%
Operating Margin -8.90% 13.84% 7.61% 2.22% 3.05% Return on Assets -7.53% 10.43% 5.92% 7.59% 2.26%
Return on Equity -29.45% 29.55% 9.80% 20.93% 11.21%
Return on Investment -10.56% 16.53% 8.28% 15.53% 3.79% Total Debt / Total Equity 1.82 0.5512 0.2829 0.0006 1.24
Total Debt / Total Capital 0.6451 0.3455 0.2084 0.0006 0.5499

Appendix 4:

Premier Foods Products

Grocery Bread
Ambrosia Be-Ro
Angel Delight Elephant Atta
Atora Hovis
Batchelors McDougalls
Bird's Ormo
Bisto Mothers Pride
Branston
Cadbury
Coffee Compliment
Dufrais
Frank Coopers
Gales
Hartley's
Haywards
Homepride
Loyd Grossman
Lyons
Marvel
Mr.Kipling
Oxo
Paxo
Robertson's
Rose's
Sarson's
Saxa
Sharwood's
Smash
Sun-Pat

Appendix 5:

PEST Analysis
Political
• Planning Policy Guidance (PPG)
Premier Food should maintain proper protected environment for the manufacturing and storage of foods in order to minimize the risk on customers.
• Food Standard Agency Regulations (UK)
Food Standard Agency Regulations must be considered at Premier Foods such as hygiene, labeling , exporting and importing food.
• Government to support food
Families are already feeling the squeeze from rising food prices and the cost of living. At a time of rising living costs and stagnating wages, the government has no strategic response to the food challenges faced in this country. According to the latest figures from the OECD, food prices have risen by 6.6% in the UK over the last year – three times faster than other major countries.
Governments need to focus more on food production as Food production is the largest manufacturing industry yet is often dismissed as a low-investment, low-skilled, low-innovation sector. Government need to put a plan for growth or dealing with rising food inflation.
Economical
• Rise in Oil Prices which led to increase in transportation cost and food prices.
Meanwhile, on the back of droughts and floods, oil price rises, speculation by hedge funds and increased consumer demand from China, the price of many staple foods is rising faster than it has for two years, and is now close to the records set in 2008/9 when the oil price peaked and food riots broke out in 26 countries. Wheat, maize, sugar and coffee have hit near record levels in the last six months, and dairy, oils and cereal are all 20-50% above where they were last year. In the last six months, too, many leading food companies have said they expect commodity prices to rise at well over the inflation rate this year. Unilever expects a 14-16% increase, Nestlé 8-10%. British food prices are rising faster than in other rich countries, says Paul Donovan, deputy head of global economics at UBS, the biggest Swiss bank, because supermarkets, which control 80% of Britain's food sales, have taken advantage of commodity prices and consumers becoming accustomed to inflation to drive prices up. Only 20-25% of the price of any processed food in a country like Britain – such as a loaf of bread, or a packet of chocolate biscuits – is directly due to the global commodity price, he says, whereas 70% or more of it is down to "labour" costs – which include packaging, marketing and distribution .
• Globalization
As the rate of globalization has accelerated, competition in domestic and international marketsfor manufactured goods has intensified. As well as competition from other leading manufacturing countries such as the United States, France, Germany and Italy, UK manufacturers are now facing increasing competition from emerging economies which are steadily moving up the value chain into higher value activities and industries. Manufacturers in developed countries, including the UK, have responded to the rise in globalization and increased international competition by outsourcing and off shoring to emerging countries lower value activities in the company’s value chain such as production. This has enabled them to enhance their productivity and reduce costs while at the same gaining important access to fast growing emerging markets.

Social
• Prepared/packed food easy to buy and eat as the increased number of women going out for work, for example, led to the need for time –saving products for the home.

• Premier Food to manufacture Healthy Food
In the UK an estimated 60.8 per cent of adults and 31.1 per cent of children are overweight. According to figures from 2009, almost a quarter of adults (22 per cent of men and 24 per cent of women) in England were classified as obese (BMI 30kg/m² or over)

Technology
• Globalization
As globalisation has gathered pace, so the characteristics of UK manufacturing have changed significantly. Much of the activity in modern day manufacturing involves high levels of technological and non-technological innovation and investment in skills, knowledge and intangible investment such as branding, software, marketing and training. This has led to the development of new; better quality and more sophisticated products, and more innovative business models and processes.
To continue competing effectively in the global economy, UK manufacturers must make further efforts to differentiate themselves from lower cost countries including China, India and Brazil which are steadily moving into higher value industries and activities. This means firstly that UK manufacturers must continue to innovate. They must develop and bring to market new, more sophisticated and better quality products and adapt their business models in ways that add further value to the manufactured products which they supply. By responding quickly to the new opportunities created by predicted changes in global demand and the emergence of new technologies, UK manufacturers can exploit first mover advantage, obtaining a larger share of new product and geographical markets

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