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Associated British Foods is in talks over a deal to combine its bread unit Allied Bakeries with rival Hovis, as the industry struggles with a growing consumer preference for healthier and more convenient alternatives.
The FTSE 100 company said on Tuesday that it was in discussions with UK private equity firm Endless, owner of Hovis, about a “potential transaction” for its bakery unit, which produces Kingsmill and Allinson’s bread.
ABF said in a statement that Allied Bakeries “continues to face a very challenging market” and that it was evaluating strategic options. The company added that there was “no certainty” a transaction would be concluded.
A potential merger between the maker of Kingsmill and Hovis was first reported by Sky News.
The sliced and packaged bread market has been struggling as consumer tastes shift towards a broader range of baked goods, like croissants and crumpets.
Traditional bread makers are also losing share to so-called on-the-go options from bakery and fast-food chains, as well as healthier, higher-protein alternatives.
“There is a big change in the consumption of bread — a lot of people are on the move when they eat their breakfast now,” said Shore Capital analyst Clive Black, pointing to the growth of breakfast sales at Greggs. Consumer demand for healthier options like yoghurt has eaten into bread’s share of shoppers’ spend, he said.
Black added that industrial bakeries like Allied were highly energy intensive and expensive to shut down, which had contributed to an oversupply of sliced bread in the market. The industry has been hit hard by rising energy and labour costs in recent years.
ABF is a sprawling retail and grocery conglomerate, with a portfolio that encompasses fast-fashion retailer Primark, the UK’s largest sugar business and grocery brands including Twinings tea and Jordans granola. Its shares have fallen 23 per cent over the past year as it battles weakening sales in Primark’s UK business.
A merger of the makers of Kingsmill and Hovis would bring together two historic UK companies that have fallen on hard times. Allied and Hovis sales make up 40 per cent of the UK’s packaged bread market, according to analysts at Shore Capital.
Hovis, which traces its history back to 1890, made a pre-tax loss of £4.8mn last year, and Allied Bakeries, founded in 1935, made a £30mn loss last year.
In January chief executive George Weston told analysts there had been “no point” increasing capital expenditure in Allied Bakeries, and that despite repeated attempts to restructure and cut costs, it was still “cash negative”.
Weston said that Allied Bakeries lost “a chunk of business” with Tesco last year that had dragged sales down further. Sliced bread makers are seen as vulnerable to a broader consumer backlash against processed foods.
