Northern's pizza fairy tale fails to spark sales lift

Earlier this year the Leeds-based manufacturer, which makes food for retailers ranging from Marks & Spencer to Tesco, launched a 5m Goodfella's advertising drive featuring a magic wand-toting fairy earlier this year.

Faced with stiff competition from German pizza maker Dr Oetker, which owns the Chicago Town brand, it ploughed cash into advertising, recipe revamps and packaging.

But Northern said this failed to lift sales as much as hoped. While Goodfella's market share lifted from 16 per cent in April to 20.4 per cent in September, it was about 26 per cent a year ago.

Northern has been unable to pass on increased costs through higher pizza prices, and its pizza business had to absorb about 3m in higher commodity costs in the first half.

Coupled with quitting marginal contracts, this drove its frozen division to a 4.6m half-year loss for the six months to the start of October, compared with 5.1m profits a year ago.

"We've got to work harder at connecting the (Goodfella's) brand with the product in-store," said chief executive Stefan Barden.

Northern said this "disappointing" trading from its frozen division contributed to a 25.6 per cent slump in group profits. It expects improved frozen sales to feed through in the second half.

At an underlying pre-tax level, Northern's group profits of 9.6m compared with 12.9m profits a year ago.

But after taking into account non-cash pension costs plus site restructuring costs, Northern slumped to a 9.5m pre-tax loss.

Like-for-like sales increased 2.7 per cent, but total revenue was down three per cent to 453m.

"Northern Foods is trading in line with market expectations, in tough and uncertain market conditions," said the group.

Poor frozen performance was offset by much better chilled performance.

Northern's chilled division lifted sales by 15.3 per cent to 255.1m, and profits soared 64 per cent to 11.8m, driven by an improving ready meals performance and continued salads and sandwiches growth.

But Northern has given up on reopening its Fenland ready meals plant in Grantham, which it mothballed in 2008 after failing to agree a deal with Marks & Spencer. It is winding down the site and may put it up for sale.

"We are drawing a line in the sand," said Mr Barden.

Its bakery arm lifted sales by 2.2 per cent to 103.2m, with profits growing 2.1m to 10.3m.

Northern expects a tough Christmas for consumers, as concerns over job security and Government spending cuts weigh heavily.

"We think it's going to be quite tight," said Mr Barden. "Last year the consumer had a lot more money in their pockets than the year before.

"This time round people have less money in their pockets. It's going to make it quite a tough Christmas for the retailers."

Northern cut net debt by 7.3m to 142.3m and maintained its interim dividend at 1.55p a share.

While rivals struggle with heavy debt burdens, Northern said its "strong financial position... differentiates us from many of our industry peers".

Analysts expect the group to attempt acquisitions in the short term to grow sales.

The results were broadly in line with City expectations, and Investec analyst Nicola Mallard said frozen fared worse than she expected, with chilled doing better than forecast.

Shares dipped 1.63 per cent to fall 0.75p to 45.25p.

Downsizing to two divisions

Northern Foods is restructuring to create two distinct divisions: branded and chilled.

It is to downsize from five divisions to just two, each of which contribute roughly half of Northern's revenues. It hopes the changes will drive growth and cut costs.

The branded arm will encompass labels such as Goodfella's pizza, Fox's biscuits and Matthew Walker Puddings. These are products typically made to stock for retailers, with a longer shelf life.

The chilled arm includes sandwiches, salads, sushi, ready meals and Northern's new contract to supply meals for short-haul British Airways flights. This restructuring will cost it 6m and result in some management job losses.