Strategic Report


16 Finsbury Food Group Annual Report & Accounts 2018


Chief Executive's Report


Corporate Governance


Financial Statements


" The aim is to continue our strategy of establishing efficient, cost-effective scale bakeries in our chosen product areas."


How was the year overall, and what were the performance highlights?


We've grown like for like sales and adjusted profit year on year, reduced debt further after significant investment, and grown the dividend payable. We've achieved this despite the volatile retail environment, and the unprecedented input cost inflation we have seen over the period. Our relentless investment and efficiency focus of recent years has enabled us to not only cope with this market environment, but also to maintain our margin. At the same time, we've also ensured we are not over-dependent on any one customer or product area. The true measure of success is that we have achieved underlying growth ahead of our market, and have demonstrated the growth available from premium, healthy and authentic on-trend innovation.


For example, we've introduced our own Free From brand in Europe, Wiso, which capitalises on the fact that people choosing to avoid gluten is now a lifestyle and health choice across North America, Europe and UK.


In addition, our Mary Berry cake brand launched in the final quarter of last year, with a number of product formats across a broad customer base. It's been hugely successful, with a significant level of sales for the Group, illustrating the potential of a licence with good consumer recognition and emotional engagement, plus of course, some very good products – all traditional, with an artisanal finish, and very much in keeping with Mary's credentials.


Another example of innovation is our artisan bread, which may be hand-crafted, require long fermentation, and baking in stone ovens. It was a slight trend we noticed a few years ago and decided could have a big impact, so we invested in capacity in 2016. We have now filled that capacity and are looking to invest further to meet growing demand.


These all show that on top of productivity and efficiency, we're very good at craft and innovation, and consumers are prepared to pay for great products that have a lot of craft. These examples are meaningful opportunities for Finsbury to achieve growth and sales, and are what we're good at. These successes, alongside hard work and ongoing investment, have allowed us to maintain a resilient performance for the year, one which we are proud of.


How do you maintain this resilience in the face of margins being squeezed?


Inflationary costs, larger customers and competitive markets all present a margin challenge to manufacturers across the market. Improving margins, or even maintaining them, is difficult in the short term. But strong, innovative, well-invested manufacturers of scale are an essential ingredient in helping our consolidating customers achieve their own strategies. Finsbury is striving to be exactly that – the leading speciality baker, providing our customers with brilliant bakery products at affordable prices.


While we continue to aim for this ambition, the shock butter price increase at the end of last year came on top of broader input price inflation in everything from labour and commodities to energy. We had to offset these increased costs with efficiency improvements, reformulation and cost recovery, to protect margins. At the same time, we had to take some big decisions, such as the decision to close Grain D'Or.


What happened at Grain D'Or?


The escalating butter price – triple what it was just a few years ago – ultimately led to uncompetitive pricing, lost contracts and widening financial losses at our London bakery, Grain D’Or. With the losses caused by the butter increase, we had to change our commercial plans. This precipitated the difficult decision to close the business in the first half, following extensive employee consultation. Thanks to the hard work of the Grain D’Or and wider Finsbury team, we were able to maintain good customer relationships, and we went out of our way with unions and employees to help them find alternative local employment. All in all, it was a necessary step back to take stronger steps forward.


What are these steps forward?


In particular, another year of record capital investment, at £12.6 million. The aim is to continue our strategy of establishing efficient, cost-effective scale bakeries in our chosen product areas. This brings the total capital spend of the last five years to over £50.8 million.


Our new IT platform is a sizeable investment for us. We have successfully rolled it out to three of our six manufacturing sites, with the remaining three sites due in the first half of the new financial year. IT and management information goes to the heart of all businesses, so this project is to define our business processes, and get them up and running in each of the sites, to provide managers with really good quality information. At the businesses where we've done that, we are seeing much better understanding of labour and waste costs by product. This allows us to gain further insight into the true efficiency of our manufacturing operations, and make informed commercial decisions.


We also commissioned the new £8.0 million cake line at our Cardiff bakery and began continuous seven-day operations. Our new line is completely up to date in oven and process technology, and much faster. So we're future-proofing an area where we are number one in the marketplace, with around 50% share – making sure we gain the process and quality benefits, as well as improve our cost effectiveness.


Finsbury has been described as a series of bakeries across the UK making different products. Is it a Group?


Yes. In recent years, we have acquired a collection of very good, but varied and historically independent businesses, making many different products for many different markets. It pays to diversify. But the truth is, they all have baking in common, and this is where being a Group is important.


We've moved in recent years to a Group divisional structure and brought in strong expertise in Group functional Directors, with the aim to derive scale benefits from a common approach across the Group. There's a lot of opportunity to define a way of working across the Group, which won't take away from the individual independence of our companies.


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