Can a Hovis and Kingsmill combo stop the rot in sliced bread?

After years of speculation and six months of rumours, Kingsmill owner ABF has finally confirmed plans to buy Hovis, in a move designed to reshape its ailing UK Allied Bakeries business.

In a category where the top three brands take 82% of all branded plant bread sales [NIQ 52 w/e 22 February 2025], plans announced on 15 August to combine Hovis (28.2%) and Kingsmill (6.9%) would create a “profitable and sustainable” baking giant to rival current market leader Warburtons.

“Supporting the Hovis and Kingsmill brands with well-invested and efficient operations will also enable innovation and growth,” says ABF CEO George Weston. “This solution will create value for shareholders, provide greater choice for consumers and increase efficiencies for [supermarket] customers.”

So what’s gone wrong? How would a merger help? And what are its chances?

Caught in the middle of a squeeze on margins and a structural decline in the sliced bread market, Allied Bakeries currently loses ABF around £30m a year, with some analysts estimating accumulated costs and losses to its owner of as much as £750m.

That’s despite “many years of focusing on reducing cost”, as Allied Milling & Baking CEO Sarah Arrowsmith puts it.

Meanwhile, Hovis’ private equity owner Endless LLP is in a similar bind. It bought Hovis in 2020 in a deal valuing the manufacturer at a reported £75m. Since then, the baker has made a loss most years, with its latest accounts showing a £40m slump in sales and pre-tax losses of £4.7m.

Source: NIQ, 52 wks to 22/02/2025

Own label role

Of course, the market is not just about branded sales. With Kingsmill sales in freefall, the vast majority of Allied sales these days are on the own-label side. Even in the case of Warburtons there’s a complex inter-relationship with own-label partners. Trouble is, while bread volume sales are down 4.8% for brands they’re also down 1.9% for own label [NIQ 52 w/e 22 February 2025].

That wider decline, and the inability of both companies to capitalise on a growing market for sourdough and speciality bakery items through a lack of investment funds, has left the two bakers with few options but to slash costs.

But as fast as both cut costs, they could not always be contained. As well as the soaring cost of grain and energy following Russia’s invasion of Ukraine, the new minimum wage and increased National Insurance contributions – food manufacturing wage growth hit 7% in June, according to Bank of England estimates – means the pressure only grows. So a merger would definitely help.

Distribution efficiencies

Distribution will be a prime area for efficiencies. Allied operates six standalone distribution centres across the UK, including two in Northern Ireland, with further hubs attached to six of its seven bakeries.

Hovis operates eight bakeries, a flour mill and two regional distribution centres, spending £93m on distribution in 2024.

“Getting products from A to B cheaper and more effectively is likely to play a huge part in making a combined bakery business profitable,” says AJ Bell head of financial analysis Danni Hewson.

“Cutting back on the number of deliveries will impact fuel consumption and staffing requirements, and give a larger company better pricing power.”

Consolidating production would also cut bulk costs for raw materials, and create opportunities to find better batch efficiencies in bakeries. Given that much of Allied’s production is now own label, the merger will likewise offer the opportunity to push production in favour of higher-margin branded products once Hovis’ brands are brought in-stream, as cash is freed up for NPD.

“Scale can unlock meaningful supply chain synergies,” says Ben Black, executive director of fmcg specialist investment firm Verlinvest, with “the potential to reinvest in innovation, and preserve two great and much-loved British brands”.

Union response

Such notions of “efficiencies” tend to provoke wary reactions from unions, and this deal is no exception. The Bakers, Food & Allied Workers’ Union (BFAWU) has already warned uncertainty over the company’s future structure is “creating serious concerns” among workers over job safety and security, and Unite warned last week it would “not tolerate attacks on jobs, pay or conditions”.

But in the case of a merger, some movement is inevitable.

BFAWU general secretary Sarah Woolley says: “If what is being suggested about the viability (or lack thereof) of the two companies continuing separately is true, then we wouldn’t want to put potentially more jobs at risk by preventing the process.”

Woolley notes such discussions are “highly likely” in Northern Ireland, where both companies operate separate bakeries, in addition to Allied’s two distribution centres there.

Allied’s Arrowsmith declines to be drawn on any potential restructure.

“As you’d expect, we have a business plan – but we are not getting into the detail, not least because the two businesses will continue to trade separately during the regulatory review, so we will refine our view nearer the time,” she says.

Her reticence may be wise, since clearing the Competition & Markets Authority review is not a given, and regulators will think carefully about the pricing power of manufacturers of such a key staple as bread.

But if permission is not granted, one or other brand may be left to fail, and ABF will be hoping that makes the deal more persuasive.

“The results – or lack of results – have given both Allied and Endless the confidence that it’s possible to get the deal through an antitrust lens,” one City dealmaker tells The Grocer.

“It’s either shut Hovis completely, or let it merge with Allied: either way, [the number of big bakers] is coming down to two.”

Potential distraction

Cutting the big players down to two companies will likely benefit Warburtons too, especially in the short term, as Hovis and Allied become “distracted” by the deal.

“There will be some issues with retailers or missed listings, as they try to integrate two systems into one,” says the dealmaker.

“But in the long term, it should make a more disciplined market than it has been historically, and that means the two remaining companies will be braver when it comes to asking for prices [from retailers] that make an acceptable economic return.”

While market analysts seem largely confident in the deal’s chances of success, Shore Capital head of consumer research Clive Black cautions against second-guessing the thought process of a regulator that “we have seen too often is somewhat unpredictable and unreliable ‘boyfriend’”.

But given both brands are losing share in a declining market, and with strong additional competition from private label and Warburtons, Black adds: “We believe there is ample choice for bread shoppers following any Hovis/Kingsmill alliance, and so a firm basis for regulatory approval. Let’s see.”