Blackfriar: Out go good old days as Northern looks to a new era

The engineer was complaining because his boss insisted on producing a line which not only made no money, it was actually loss-making.

Why would a competitive food company continue with a loss-making line?

Because the customer was Marks & Spencer and his boss's mum was so proud that her son was supplying M&S.

She would invite her friends round to try any new varia- tions her son's company produced.

It's a true story and goes some way to explaining the love/hate relationship between suppliers and retailers.

Go back 20 years or so and Leeds-based Northern Foods (then based in Hull) had such a friendly relationship with its main customer M&S that there weren't actually any documents signed.

Business was done on a handshake and the two companies did very well out of it.

But times change and both companies have been through tough periods over the past decade.

Under chief executive Stefan Barden, those pally, you scratch my back and I'll scratch your days are well and truly over for Northern Foods.

It has culled factories and jobs, refusing to continue doing low margin business in order to retain the bigger, more profitable contracts.

The most recent example is the closure of a ready meals factory in Swansea in April after Northern failed to agree a new contract with Sainsbury's.

This week Northern's tough stance on low margin contracts led to a fall in sales in the first quarter.

"When it comes to low margin contracts, our policy is we don't do bad business," explains Barden.

The company, which supplies Marks & Spencer, Leeds-based Asda, Bradford-based Morrisons, Sainsbury's, Tesco and Aldi, said like-for-like sales fell 1.6 per cent in the three months to July 3.

Last year Northern walked away from a contract to make frozen pies for Birds Eye. This, and the planned exit from some marginal business, led to a 25 per cent fall in frozen like-for-like sales over the quarter.

Yesterday morning analyst Alex Sloane put out a fairly damning note on Northern entitled "Not so good-fella's" – referring to Northern's frozen pizza line Goodfella's which is 10 weeks into a 5m revamp.

Sloane argues that Northern's profits are going to come under increasing pressure from rising raw material prices, particularly cocoa and dairy.

"We believe that increasing pressure on Northern's profitability together with the prospect of cash pension contributions post the 2011 triennial pension review could make the dividend unsustainable. We cut our recommendation to Reduce (from Neutral) and the target price to 44p (from 53p)," says the note.

It doesn't make good reading for either Northern's management or its shareholders.

But Barden himself is quietly confident Northern can replace the lost low margin work with better business and be back in growth by the end of the year.

"We expect to win more business than we walk away from. We expect group sales to grow now, we'll be back in growth by the end of the year," he says.

Northern is quietly stealing business from rivals, but Barden won't say too much about it because his customers don't want it made public.

We'll have to wait and see who is right about Northern, but Blackfriar is putting his money on Barden.

He's a canny operator, he's ruthless and he obviously thrives in the cut and thrust of winning business and ditching loss-making contracts.

As to the dividend, Barden has said he has no intention of cutting it. Shareholders will be relieved.