Brain Food: Behind the spin

THE DILEMMA

by
Last Updated: 31 Aug 2010

It's tough times for Northern Foods, the creator of Goodfella's pizza, Pork Farms pies and Fox's biscuits. The manufacturer, which supplies ready meals and branded nosh to Marks & Spencer, Tesco, Sainsbury's, Asda and Morrison's, is fighting a war on two fronts. First, the changing tastebuds of British consumers, who are abandoning sugary treats; second, the retailers themselves, who are tightening supply chains and reducing margins where they can. Northern's new CEO Pat O'Driscoll is trying to stop the rot, and her strategy centres on cost-cutting and selling off operations. The company's latest trading update said profits for the half-year to end-September would be 'in line with the board's expectations', despite a decline in underlying sales of 1.1%.

THE SPIN

Says O'Driscoll: 'Although achieving a step change in business performance will take time, our key improvement programmes are progressing well and successful delivery will see us emerge as a more focused and competitive business, with a strong emphasis on driving value ... It's early days, but I'm confident we'll turn this business around.'

THE STRAIGHT TALK

Last year, Northern dropped 145 places to 189th in MT's Britain's Most Admired Companies poll. This year, it's tipped to fall even further. Commenting on Northern's October trading update, Oriel Securities analyst Richard Workman noted that there is 'nothing here to give any greater conviction that Northern's business model is succeeding, but no obvious disasters either'. He added that 'the pressure on the management is intense'. O'Driscoll is juggling several balls and can't afford to drop any of them. Northern hopes to raise £200 million from the disposal of operations that now account for as much as 40% of its sales. Then there are the firm's rising overheads, including energy costs, that it is struggling to pass on to retailers, who themselves are squeezing supply chains dry.

THE VERDICT

Northern hopes to cuts costs by at least £12 million a year by 2007-08, which it says it is on track to deliver through sell-offs, the closure of factories and increased sales from new product lines. Belt-tightening is one thing; a sustainable turnaround is another. In the short term, shareholders and analysts will keep a close eye on O'Driscoll's turnaround strategy. In the long term, Northern needs to find new ways to capitalise on the healthier appetites of the British public. The proof of the pudding is in the eating, as they say.

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