Price of bread will rise as wheat costs soar

The group, which makes Hovis bread, said it will have to pass rising wheat inflation on to retailers, which could lead to a 10p increase in the price of a loaf of bread.

Wheat costs have rocketed by around 50 per cent since late June.

Harsh droughts and wildfires in Russia, one of the world's largest exporters, are thought to have killed a fifth of its wheat crops, pushing global prices higher.

Premier expects to increase prices later this year.

The group warned that Hovis second half profits will be lower than last year because of the increase in prices.

Premier, which makes Quorn in Stokesley, in North Yorkshire, said its non-branded sales had fallen by nearly 13 per cent, or 61m, in the six months to June 26.

Branded sales rose by 0.5 per cent and both Hovis and Mr Kipling cakes took volume share in declining markets, helped by the launch of new products.

But Quorn sales fell by 1.6 per cent after the group reduced promotional and marketing spend in the early part of the year following the decision to preserve margins at the expense of sales revenue growth.

Talking about Quorn, Premier chief executive Robert Schofield said the group has reduced the brand's costs by outsourcing some production and changing the supply chain.

"We are focusing on returning the brand to growth in the second half and are encouraged by the fact that Quorn resumed sales revenue growth in the second quarter," he said.

Analysts believe that Associated British Foods, which has expressed an interest in buying grocery brands, could make an offer for Premier's Loyd Grossman, Branston or Quorn brands.

Mr Schofield said he was open-minded about disposing of some of the company's assets, but he ruled out the possibility of buying new brands.

"It takes us a few years to get to our target of cutting debt organically. Therefore, we are open-minded about disposals if they accelerate that journey," he said.

"We had acquired a lot of brands and they have been under-funded. So we are trying to make up for that under-funding now as we restore the brands."

In the six months to June 26, the group's pre-tax profits fell from 39m to 33m. Revenues fell by 5.2 per cent, to 1.18bn.

Trading profits fell six per cent, to 110m, reflecting 11m of additional pension, marketing and restructuring costs.

Premier reduced its debt pile by 110m, to 1.37bn.

The group, which also owns brands such as Branston Pickle, Sharwoods sauces and Bisto gravy, said it remained cautious about 2010 market conditions.

Evolution analyst Warren Ackerman said: "Double-digit increases in some of Premier's key input costs are a real concern.

"Although Premier may offset some of this through pricing, given the current consumer environment we suspect under-recovery will be inevitable which will impact second half margins."

He added that it will take Premier a number of years to reduce its debt level organically.

Premier Food's biggest input cost is wheat, but other important raw materials such as cocoa, dairy, paper and plastic packaging prices are also rising sharply.

"Whether the company will be able get sufficient pricing to recover input cost inflation in the depressed consumer environment in the UK, is questionable," said Mr Ackerman.

"We suspect that some under-recovery will be inevitable which will impact Premier's second-half profitability."

The Quorn story

Over the past year Premier has expanded the market for its Quorn meat-free protein beyond vegetarians to people who want to eat more healthily.

As part of an ad campaign, the group has re-branded the product,a mycoprotein derived from fungi.

Quorn is now being targeted at people who want a low-fat diet, as well as its staple market of vegetarians.

The Quorn story started in 1967 with the discovery of a fungus in a garden in Buckinghamshire by researchers looking for a way of converting starch into protein to alleviate global food shortages.