Time of transition as Northern Foods ditches unprofitable deals

The Leeds-based group yesterday reported like-for-like sales up just 0.1 per cent in the 13 weeks to the end of December, after it stopped doing marginal frozen pastry contracts.

Northern insisted it will emerge a stronger and more profitable business, with greater scope to grow.

"We are in a chrysalis phase at the moment," said Mr Barden. "We are trying to get back to a food manufacturing company that produces the best food in its category bar none."

Ditching the frozen pastry contracts is the latest in a string of tough decisions the manufacturer has taken.

In 2008 it mothballed the Fenland Foods factory in Grantham, Lincolnshire, with the loss of 730 jobs after refusing a loss-making contract with Marks & Spencer.

It closed a ready meals factory in Hull last year after Bradford-based Morrisons moved a ready meals contract to another supplier.

The latest shift away from marginal frozen pastry contracts drove sales in its frozen division down 10.5 per cent during the quarter compared to a year ago, although profitability increased.

It meant reducing volumes of low margin large private label pies, for manufacturers such as Birds Eye, to instead produce more individual pies under its own McDougall's brand.

"We have resigned all of that business," said Mr Barden. "But we have got the retailers on side and won contracts. Over time we will slowly win that business back."

Northern also stopped making unprofitable packs of five-inch pizzas, to focus on its own brands which include Goodfella's.

"We had to walk away from a lot of volume," said Mr Barden. "It's a big one-off impact on the top line but the bottom line will increase."

The next step will be significant investment in the Goodfella's brand, akin to the investment it has ploughed into its Fox's biscuits range.

The 7m Fox's investment included adverts featuring an animated cross between a dog and a panda called Vinnie.

Mr Barden said a rollout of new Goodfella's packaging will start at the end of February, with a print, TV and online campaign beginning in April.

"What we want to do is make a step change in the positioning of the brand in the same way that Vinnie did to biscuits," said Mr Barden.

"That's a fantastic way to build a sustainable business."

Fox's sales were also helped by a relaunch of the Rocky biscuit brand. Northern produced 160 million biscuits in the run-up to Christmas, including four million assortment tins.

As a result, underlying bakery revenue was up 1.4 per cent, although this was held back by increased competition from Avana Bakeries, owned by Premier Foods', which makes Mr Kipling Christmas pudd- ings.

The chilled division saw "strong growth" in sandwiches and salads, lifting underlying sales 5.4 per cent.

Mr Barden said: "Market conditions remain competitive but at this stage of the year, our sales and profit expectations for the current financial year remain unchanged and in line with market expectations."

Northern added it has also cut net debt by 17 per cent on a year ago.

Mr Barden also quashed speculation linking him with the vacant Morrisons chief executive role.

"I wouldn't be interested in that job," he said. "I've got lots to do here – I'm a manufacturer, not a retailer."

Analysts were uninspired by the update. "We would like to have seen better top line momentum, but numbers are distorted as the group continues to rejig its portfolio," said Investec analyst Nicola Mallard, adding the main attraction to the shares was the forecast dividend yield of about 6.6 per cent.

Backing for retail ombudsman

Northern Foods has welcomed plans by the Government to create a watchdog to enforce a new code of practice covering grocers' relations with their suppliers.

The code of practice was drawn up by Britain's competition regulator after an investigation of the grocery industry from 2006 to 2008 concluded large grocery retailers were passing on excessive risks and unexpected costs to their suppliers.

The Competition Commission asked the Government in August to create an ombudsman to enforce the new code after a majority of retailers failed to agree on a voluntary system.

The new code will come into force on February 4 and a period of consultation will follow, including who the ombudsman should be.

Northern chief executive Stefan Barden said the ombudsman will give consu-mers a more transparent view of the industry. "The ombuds-man will support a process where all suppliers and retailers can hold constructive dialogue to resolve issues," he said.