Time to tighten up on spending

08 February, 2008
As the UK economy slows, bakers may find trading increasingly tough, but the sector may be less susceptible than others, finds Hayley Brown
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With constant media attention fixated on spreading the message of a looming recession and crashing stock markets, both in the US and UK, many bakers may be wondering, "How does this affect my business?"
Analysts warn that 2008 is going to be "a tough year" for businesses, which will affect UK bakery firms in several ways: some bakers will find it increasingly difficult to secure loans; the average consumer in the high street will have less money to spend on bakery goods; and businesses that import and export will see their profit margins eroded as the value of the pound continues to fall.The number of negative trading statements issued on the London Stock Exchange during the last quarter of 2007 was at its highest level for nearly two years, according to new research by financial adviser Grant Thornton, while the number of positive trading updates dropped to 41% (down from 62% in the third quarter).This is potentially a worrying concept for the high street baker, as UK businesses brace themselves for tighter consumer spending. However, analysts say that the baking industry could be less affected than other sectors, particularly compared to luxury or non-essential sectors. For example, sales of Harley Davidson motorbikes in the US have been in sharp decline, but "with bakery goods being classed as 'essentials' it is arguably less susceptible than many other markets", says Plimsoll's senior analyst David Patterson.Simon Richardson, sales and marketing director at Rich Products, thinks that the predicted decrease in disposable income will not stop consumers buying quality products, but will make them more choosy when parting with their money. "Quality operators will not have to worry, they will still be able to ask higher prices for excellent products," he says. "Good baking is definitely on the up. It is the products that consumers feel are not as good value-for-money that will decline."He adds that the informal eating occasion market is showing no signs of slowing down and a new trend is starting to emerge for home-entertaining bakery products - for example, indulgent products such as cheesecakes, carrot cakes, eclairs and brownies. "Where people used to go out for formal meals, more are staying at home, inviting friends and family to eat with them," he says.David Bush, head of Grant Thornton's retail services team, notes that bakery and food retai-lers "have shown a greater ability to weather the storm of a slowdown in consumer spending, with five successive quarters of like-for-like sales increases". He says that it is likely many shoppers will cut back on spending on non-food items before food and drink.Some are now referring to the period of excessive consumer spending over the last few years as a "spendemic", with more than 10% of UK adults spending more than they earn on a monthly basis and relying on overdrafts and credit cards to plug the gap. A further 20% have no spare money at the end of the month, according to online price comparison firm uswitch.Factors such as gas and electricity companies raising their prices by up to 15%, record petrol prices, higher mortgage costs and the well-documented food inflation are all eating into the average person's disposable income, which currently stands at £157 a month according to the Office of National Statistics. As well as a slowdown in consumer spending, bakery companies - and indeed all UK companies - will increasingly find it difficult to secure credit over the coming months, as banks recover from recent crises and a period of nervousness triggered by the sub-prime mortgages in the US.David Patterson of Plimsoll warns: "Many bakery firms may look to swap unsecured loans for long-term debt, in a bid to stabilise the business. But in reality, this will not solve the problem - debt is still debt."Paul Morrow, MD of British Bakels, says that as the banks lend less money, the companies most likely to suffer are medium-sized businesses that have a turnover between £15m-£20m. "We are starting to see increasing job cuts, more companies are going up for sale and there are more management buyouts," Morrow adds. "Companies should look to slow down on capital expenditure, keeping the money in their businesses."The pound's value continues to slide; last month it reached its weakest level in four years and an all-time low against the euro. As a result, bakery and ingredients companies have seen almost a 9% rise on certain imported goods.For example, because there are no UK producers of enzymes, these need to be imported from Europe and, as such, profit margins are "eroding" says Martin Churchill of Sonneveld, especially as many companies are locked into six- or 12-month contracts.Despite this, Plimsoll's research shows that two-thirds of com- panies are well-placed to deal with any economic downturn over the coming months. Patterson says: "The majority of UK bakery businesses are in good shape and the task for them will be to monitor their outgoings and reduce debt with interest rates being unpredictable at the moment."He adds that, throughout 2008, companies will be looking to cut costs. Expensive investment projects could be put on the back-burner until things are on more of an even keel. "Bakery companies should look to tighten their belts and rein in unnecessary spending," he says.



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