Another British icon joins Premier portfolio

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Premier Foods has added another popular British food brand to its
diverse portfolio with the acquisition of the Bird's Custard brand
from US-based food giant Kraft. And this continued focus on 'Great
British brands' is likely to pay dividends in the future, as
Chris Jones reports.

Premier, which already owns a number of British brands such as Branston pickle, Crosse & Blackwell sauces and condiments and Hartley's jam, bought the Bird's Custard and Angel Delight brands from Kraft for £70 million. The Bird's business, the first to be bought by Premier Foods since its floatation in July this year, comprises 17 products including custard powder, instant custard, ready-to-eat custard, trifle, semolina and sugar-free jelly.

The brands, which have been owned by Kraft since 1989, are a good fit with the company's existing desserts business (Ambrosia custard and rice pudding and Rowntree's jelly) and registered sales of £37 million in 2003.

Bird's was the original custard powder, invented by Alfred Bird in 1837 for his wife who was allergic to eggs and so could not eat traditional custard. It is the leading brand in the UK, accounting for nearly half of all the pints of custard consumed in the country and an 85 per cent value share of powder custards.

Angel Delight is the number one player in the UK instant cold desserts sector with a 40 per cent share.

Premier will acquire the brand rights, associated intellectual property, stock and packaging machinery for the brands, although production and packing will be integrated into Premier's existing manufacturing facility in the UK, at an expected cost of £5 million.

The combination of the Ambrosia and Bird's businesses will generate cost savings of around £1 million, the company said.

The acquisition was welcomed by analysts Goldman Sachs​ for strengthening the company's strategy of focusing on core brands with strong market positions. GS said that Premier had shown itself to be highly adept at taking brands with a solid, if not spectacular, following and generating real growth from them.

"Branston is an example where the group has been successful in stimulating growth through brand rejuvenation,"​ the analyst said in a research note. "An estimated 90 per cent of Branston pickle in the UK is sold in jars, but with the introduction of new easy-squeeze bottles, the group is aiming to reduce this figure to 75 per cent. The group also launched a sour pickle range in December 2003 which achieved a distribution rate of 80 per cent with the leading UK multiples within eight weeks of launch."

But the company's steady if largely unnoticed profit growth - GS suggests that Premier Foods is one of the most undervalued food industry stocks - has not only come from brand innovation and development.

GS said that the company had taken a number of initiatives which had generated substantial cost savings, including the reduction in the number of SKUs from 2,600 to around 1,600 (and 1,000 in the medium term), and streamlining its purchasing. "Management highlighted that Premier Foods currently buys 14 grades of sugar, but this can be pared down to just two lines in due course,"​ the analysts said.

The company's relationship with its main retail customers was also highlighted by GS as contributing to its good performance. In the past, the company negotiated at the sub-category level with each retailer, with negotiations taking place daily, but now agreements for all product lines relating to any given retailer are completed in one go, the analysts said, a move which has given the company more leverage with the retailers when it comes to negotiating prices.

Premier's focus on top-performing retailers Asda and Tesco (which account for 25 per cent of its sales collectively) rather than under-performers such as Sainsbury (10 per cent) and Marks & Spencer (0 per cent) have also allowed Premier to grow both its branded and own label operations while its peers such as Northern Foods and Geest (which generate 36 per cent and 23 per cent of their sales from the struggling retailers) have suffered.

But there is still more to do for Premier. Capacity utilisation is still relatively low (60 per cent), and GS suggests that 80 per cent could be reasonably achieved in the medium term. Further integration of the disparate businesses is also needed, GS said, citing the example of HP (whose canned foods Premier produces under licence from Danone) which is being integrated into the wholly-owned Crosse & Blackwell business.

But above all, GS predicts more acquisitions, with Premier sitting on a 'war chest' of more than £150 million. GS suggests that disposals of non-core businesses by multinationals or sales of family-owned businesses are the most likely, with Weetabix and Burton's Foods both mentioned as potential acquisition targets (not least because they are both owned by Premier's former owner and leading shareholder Hicks Muse Tate & Furst).

Despite its bullish assessment of Premier's current performance, GS nonetheless predicts that the company's sales will in fact decline over the next five years (from £871 million in 2003 to an estimated £848 million in 2007), largely as a result of poor performances in the tea and potato processing sectors, which although relatively minor parts of Premier's business (17 and 16 per cent of sales respectively) are expected to show negative or no growth over the coming years.

In contrast, the convenience foods, pickles and sauces sector, which accounts for 44 per cent of Premier's sales, is expected to show the strongest growth (3 per cent for convenience foods, 2.4 per cent for pickles and sauces). The sauces and desserts sector, which accounts for 23 per cent of Premier's sales (excluding Bird's) is seen as showing mixed fortunes, with 3 per cent growth for sauces but flat sales for desserts, showing the challenge that Premier faces for its new acquisition.

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