Chief executive Stefan Barden's £50m factory reveamp has been shelved, but does Northern have another ambitious plan up its sleeve? James Ball reports
After two years spent steadying the tiller, Project Golden was going to be Northern Foods CEO Stefan Barden's first gear change since he took the helm of the business in February 2007.
The £50m plan formed the bedrock of a strategy aimed at revitalising the ageing Fox's biscuits manufacturing facilities one of Northern's three biscuit factories was to close, with a new automated factory built to boost capacity.
But in this recession, as many companies have learnt, almost nothing goes according to plan. The Project Golden announced this week is a much more modest affair than was first mooted. Factory closures have been postponed for at least 18 months, and £26.5m will be invested in automation at the existing sites.
What's behind the climbdown, and can the scaled-back project still live up to its Golden billing?
Workers at Northern's Uttoxeter biscuit factory, previously considered the most likely candidate for closure, are breathing a sigh of relief at their reprieve this week, as the company formally announced its plans for the next 18 months. Unions and employees in Batley and Uttoxeter held spirited local campaigns throughout the early months of this year to encourage the company to keep production in their town, but Northern continued to drag its heels on a decision. This week, any announcement on closure was pushed back for at least 18 months, the only decisive action being the news that the £26.5m investment in plant will lead to 300 redundancies and create 80 new skilled jobs.
Barden insists the new schedule doesn't mean Project Golden is any less ambitious and it will still allow the company to produce more of its successful Fox's biscuits range, cut costs, and allow the company to innovate.
"Project Golden is exactly on-plan," he insists, bullishly. "Since we first mooted this idea, the exchange rate plummeted from 1.46 to 1.09 and we entered recession so we've moved to a two-phase approach. All of our automation plant will be portable it's mainly robots so the new plant doesn't commit us to any particular sites. It's a move that reflects the direction food manufacturing is moving in, and the investment should be cash-generative within 18 months. Rationalising the sites is now a completely separate decision, but one I believe we're still very likely to take when we look at it in 18 months or so."
Barden believes the new technology will address "pinch points" that have taken some of the shine off a stellar performance by the Fox's brand in 2009, sales of which are up 36% year-on-year [Nielsen MAT 03 October 09]. At present, he says, Fox's simply can't produce enough of certain lines to match demand, which limits the scope for promotions and other aggressive market share-grabbing tactics.
It will also enable Northern to increase its rate of NPD over the next two to three years, with the recent hiring of five senior food scientists from Heinz, Unilever and Nestlé accelerating moves in this direction.
The approach seems canny, allowing Northern to make cost savings and reduce headcount with a lower cash outlay than the original schedule. But it's a much more cautious move than the original grand plan, especially from a company known for bold gestures the mothballing of the Fenland Foods factory after Northern walked away from the £45m-a-year M&S ready meals contract a prime example.
The cautious approach isn't about weaknesses in Northern's own financial position, insists Barden a claim supported by its balance sheet. Net debt is down 10% year-on-year to £222m, and while the company does have a pension deficit of more than £70m, trustees have not asked for extra payments and negotiations are not due until 2011. Analysts also note Northern's balance sheet compares favourably with others particularly debt-laden behemoths Premier Foods and Bakkavör.
The real reason for the two-phased approach, Barden explains, is prudence. Now is not the time to take risks and opportunities may just emerge in the next year or so, he believes.
"Splitting Project Golden reduces our operational risk and maintains our cashflow at a much better level," he says. "And at some point, even if not in the next three to four years, you would expect rationalisation in the biscuits market."
It's another in a series of hints from Barden that Northern is on the acquisition trail. In particular, rumours abound among food sector dealmakers regarding the future of United Biscuits. UB was purchased by private equity group Blackstone Group in 2006, and despite assurances Blackstone is still committed to the company, many speculate UB will soon be on the market with Northern a likely bidder. "Northern's actions are consistent with a company looking to buy," says one City source. "They're focusing on cash generation, which is crucial to securing lending, and are shoring up their own balance sheet. They're in a better buying position than a lot of businesses out there, even if they don't have the best balance sheet in the sector."
He adds, however, that acquisition or not, Northern will need to modernise and address over-capacity and old sites, just like everyone else in the industry. He also believes it's possible Northern is just paying down its debt to make itself a more attractive proposition for investors and so build up its share price. "Although it's been known for lots of small and mid-cap deals over the years, Northern isn't known as a big deal maker," he says. "But it's certainly making noises in that direction right now."
Word from union sources reinforces the possibility that Northern is waiting to see if there's scope to buy out rivals over the next few years before considering the future of its sites. Though Northern publicly suggests a decision will be taken on rationalisation in the next two years or so, union officials say management has indicated no closures are likely for at least three to four years.
This is a welcome suggestion to both Unite and the Bakers, Food and Allied Workers union, who represent Northern employees at the Uttoxeter and Batley sites respectively, but national officials remain cautious about the future.
"It's very positive that there's a stay of execution for workers in Northern's factories," says Unite national food and drink officer Jennie Formby. "Our concern now is to ensure the 300 redundancies announced are entirely voluntary."
Union officials also suggest Northern may reduce the number of agency workers used to minimise job losses in the short term, and continue to lobby to keep existing sites open but this seems unlikely, even if Northern Foods is on the acquisition hunt.
Project Golden might not glisten so brightly as once it did, but that doesn't mean Northern's no longer one to watch. Like its trademark mafioso panda Vinnie, Fox's looks set to muscle in on its' rivals turf.
Northern to back Fox’s as like-for-like sales pick up (10 November 2009)
Northern to postpone ‘Project Golden’ factory closure (9 November 2009)