Hovis saw its trading profit rise by nearly 26% last year despite a fall in value sales, but 2011 may prove more challenging as pressure from high wheat costs builds.
In its results for the year ended 31 December 2010, parent company Premier Foods said value sales at Hovis, including bread and milling, had fallen by 7.3%. Trading profit increased by 25.8%, thanks to distribution efficiencies, lower restructuring costs and reduced marketing spend.
Total value sales for bakery fell by 6.1% to £516m, due to a 22.1% decrease in sales of supermarket own-brand products, but branded sales increased 1.7% to £376m, helped by the launch of the new Hearty Oats loaf.
Investec analyst Martin Deboo said Hovis had been "reasonably successful" at passing on rising wheat costs in the last quarter of 2010. "The big question is whether it will be able to recover the further increase in wheat costs we are now seeing. For Rank Hovis, this has traditionally been easier to achieve, given tight industry capacity. But that may now change following capa-city expansion by competitor Whitworths," he said.
"In bread, life may be even more difficult. We think there is too much capacity in UK bread baking. Premier also finds itself up against a privately owned competitor in Warburtons and a large diversified conglomerate in ABF, who are able to take a longer-term view on pricing."
This could make it more difficult for Hovis to pass on rising wheat costs early, as happened in 2008 when wheat prices reached similar highs.
Across its entire business, Premier saw sales fall 3.5%. Net debt was reduced to £900m.
In other news, Premier has announced plans to invest £4-5m to modernise and automate its Hovis bakery in Avonmouth. A consultation with the 300-strong workforce over possible job cuts has been launched.