Overview: Northern Foods - loss of appetite

It is a story that is being played out all over the country, though not
perhaps on such a grand scale ­ a retailer piling the pressure on its supplier
to cut costs, and an end to a long-standing business relationship.

That is what Northern Foods, whose history has been closely associated with
Marks & Spencer for 20 years or more, is facing. A factory in Lincolnshire
has been mothballed as M&S’s demands finally made it uneconomic.

Where now for the chilled foods supplier, and its CFO Jez Maiden?

What’s happened?

Northern Foods has frozen production at its factory in Grantham,
Lincolnshire.

Quite apart from the 730 redundancies that will follow, and the costs
associated, there are concerns about the impact on the group, given the degree
to which Northern has been associated with M&S over the course of its
history.

The Fenland Foods factory, set up in 1987, was way ahead of its time. The
business represented 15% of Northern Foods sales to M&S. But it abandoned
the contract because it could not make a profit on it.
Northern started supplying food to M&S in 1967, and made it big by producing
a trifle dessert for the retailer. Some of its plants were built specifically to
cater to the high-street giant’s needs.

On top of that, Northern Foods faces a number of cost pressures with regards
to rising fuel prices and retailers keen to avoid too many unattractive price
hikes for consumers.

The City is worried by the plant’s mothballing. Shore Capital, the brokers,
have removed a buy recommendation on the stock.

What’s going to happen?

With such a reliance on M&S, many would argue that Northern Foods needs
to diversify its client base.
But analysts are not overly concerned, hoping that some recent acquisitions
might provide a brighter future.

It bought Ethnic Cuisine in November of last year, a leading supplier of
Chinese ready-made meals for Sainsbury, and Baxters’ soup factory in Grimsby in
January.

‘While M&S remains an important client, Northern has growing scope to
explore additional channels of prepared food business,’ said Clive Black of
Shore Capital.

The Grantham ready-made meals plant could be reheated, too.

The lines for M&S were said to be too complex, chilled food that wouldn’t
keep. It is thought simpler lines could be more effective, but the City does not
expect that to happen immediately.

A former PwC management consultant and having worked at Unilever and
Britannia among other places, Maiden will have his work cut out to take the
chill out of Northern Foods.