GROCERY

Grocery comprises our businesses that manufacture and market a variety of grocery brands, many of which hold leading positions, both nationally and internationally. Revenue increased by 7%, adjusted operating profit was 9% ahead and margin improved slightly to 6.8%. The growth in profit was driven by strong performances from Twinings, Ovaltine and our UK grocery businesses, and benefited from a lower charge for restructuring.

The trading performance at George Weston Foods in Australia was disappointing. The average level of capital employed increased by 22% reflecting higher working capital, driven by higher commodity costs, and by capital investment in our production facilities to improve the efficiency of our operations and expand capacity. Return on average capital employed fell as a result but some of the investment has still to deliver benefits.

Twinings achieved strong sales growth especially in the important markets of the UK, the US and Australia. A programme of sustained improvement in products and packaging continued throughout the year in many markets. Capacity expansion at our factory in China is complete and the new tea plant in Poland is now fully operational with both factories supplying our international markets and the Andover facility now dedicated to UK supply.

Twinings was again the fastest growing tea brand in the US and we increased our market share in Australia. Ovaltine also achieved strong sales growth driven again by its developing markets. In Brazil, we supported the powder business with a successful television advertising campaign and we recently launched into the ready-to-drink segment. We delivered strong growth and maintained our market-leading position in Thailand despite increased competitor pressure.

In the UK, Allied Bakeries traded well with success for Kingsmill bakery snacks and rolls, and strong growth in the 50/50 range which was extended into sandwich alternatives including wraps and pitta pockets. The brand was supported by a strong advertising and marketing programme. Increased in-store promotion supported Burgen which introduced a new product line and Allinson continued to lead the premium wholemeal sector with a relaunch in August. Margins tightened, however, with the higher level of promotional expenditure and an extremely competitive market. Major progress was made with the capital programme to improve manufacturing efficiency and upgrade product quality. An extensive upgrade to the West Bromwich bakery was completed with a new bulk handling system, warehouse extension and improved site access. Roll production was consolidated there when the new plant came on stream, as planned, in March. Installation of a new bread plant and bulk handling system in Glasgow was completed during the summer and production is building following successful commissioning. For the third year running Allied Bakeries was named the Branded Bakery Supplier of the Year by The Grocer magazine.

Jordans Ryvita had a very successful year with good sales growth across the range and a substantial improvement in margin. Growth of Ryvita was achieved by a combination of very successful crispbread advertising and the launch of new products. Jordans benefited from advertising on Country Crisp and Frusli together with the introduction of new products in the range. International revenues increased substantially with the launch of Country Crisp in the Benelux countries and strong growth of Ryvita in Australia, Norway and South Africa.

Elsewhere in the UK, Silver Spoon performed well despite significant cost inflation. Granulated sugar for domestic use continued to decline but was offset by further growth in caster and icing sugars for home baking and substantial volume growth for the Billington’s and Allinson brands. Westmill’s performance was weak, affected by declines in the Chinese and Indian restaurant trade in the UK and strong price-based competition in branded rice where profitability was defended through effective buying and strong action on supply chain costs. AB World Foods made good progress in a competitive trading environment and recovered higher commodity costs through price increases. Blue Dragon was relaunched in the year with new products and packaging, and Patak’s continued to grow, particularly in its international trade.

At ACH in the US and Mexico, price increases were implemented in the first half to recover higher commodity costs, particularly in vegetable oil and spices. Commodity costs continued to rise and, with consumers increasingly looking for value, further price increases became difficult to realise and margins were compressed in the second half. Stratas made good progress in streamlining its operations and reducing overheads with a resultant improvement in profit.

Difficult trading conditions for George Weston Foods in Australia led to lower revenues and a substantial reduction in profitability. Much greater promotional price activity on everyday staples by the major supermarkets has had a significant impact on a number of categories and supplier margins have been reduced as a consequence. Our Australian bakery business was particularly affected and also saw a switch to lower margin, private-label and in-store bakery bread. The floods in Queensland in January severely damaged our flour mill at Moorooka. Alternative sources of supply for the local market were quickly secured and the plant resumed full operation by the end of the financial year. The cost of restoration is included in the group’s central costs. Our New Zealand bakery business continued to perform well with strong sales growth, primarily due to the launch of Ploughman’s, a premium bread, and despite the challenges of the Christchurch earthquakes. The meat business was also impacted by retailer price competition with a higher proportion of sales being subject to promotional discounts. Commissioning of the new factory at Castlemaine, Victoria is progressing, albeit at a higher cost than expected, and the old plant in Melbourne was closed in August. In the coming year, much work will need to be undertaken to deliver the planned efficiencies from the new plant.