Corporate Profile: Ranks Hovis McDougall

by Teresa Acklin
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RHM flour milling, baking groups benefit from Tomkins acquisition

   It is less than two years since Tomkins P.L.C. paid U.S.$1.388 billion for the U.K. flour milling and food products group Ranks Hovis McDougall, but the benefits of the acquisition are already emerging strongly for both the parent company and its recently acquired subsidiary.

   In the first full year since the acquisition, the milling and baking division produced profits of U.S.$33.15 million on a turnover of U.S.$1.023 billion in the 12 months ended April 30. Milling and baking is now the second-largest operating division of the Tomkins group (ranked by turnover) and comprises the flour milling, baking and retailing businesses of RHM. The largest division is food products, which includes the rest of the RHM businesses.

   Rank Hovis is one of the two largest flour millers in the United Kingdom. The company shares the top spot with Allied Mills, part of Garfield Weston's A.B.F. Group. Each accounts for about 28% of the U.K. market, while in third place is Spillers, part of the Dalgety group, with an estimated market share of 17%.

   For the milling division of RHM, the takeover was timely. It accelerated a fundamental reorganization and reinvestment program that had been agreed and begun by the old RHM board before the takeover but opened the way for even wider changes.

      Modern equipment introduced

   Until the late 1970s, Rank Hovis was operating mills that had either been built before World War II or rebuilt after the war using pre-war technology. As competition in the market increased, the need for the introduction of modern equipment and more cost-effective operations became more urgent.

   A program of reconstruction and replacement was begun in the mid 1980s. In the past 10 years, the number of U.K. mills has been reduced from 16 to 11, but with the same production capacity, while staff numbers have been cut by more than 50%.

   The company processes about 1.3 million tonnes of wheat per year. The two largest mills, in Southampton and Manchester, account for more than 40% of production with an output of at least 4,000 tonnes of flour each per week.

   RHM mills producing mainly bakers' flour are sited at Hull, Rotherham, Felixstowe, Tilbury, Barry and Glasgow, and three producing soft wheat flour are at Andover, Selby and Ramsgate.

   Some of the mills produce both types of flour. There are also three mills in the Netherlands.

   Apart from the capital investment, major changes have been made in production patterns and distribution. Many of these changes have been instigated by Peter Baker, Rank Hovis' managing director, who rejoined Rank Hovis in 1989 after five years in RHM Food Services as managing director of Chesswood Products Ltd.

   Virtually all transport and distribution is now contracted out while the investment in new technology has opened the way for the introduction of modern staffing methods based on high standards of training and the transfer of authority right down the production line. This means that each shift miller is in total control of production backed by the latest monitoring and communication techniques. BS 5750 standards are now applied throughout the production operation as well as at the head office.

      Administration consolidated

   The switch to contract distribution and the staffing changes at the mills have reduced the number of people employed in the business by 17% in the past two years to slightly more than 800.

   The next important move was to a single headquarters at the Lord Rank Research Center at High Wycombe in Buck-inghamshire, which improved communications. This will be taken a stage further when the administration center at Harlow is closed and its operations transferred to High Wycombe.

   A new computer system for all administration is now in operation. Use of the latest computer technology is essential for a business that has to cope with a variable and complex source of raw materials matched to a complete matrix of production capacities and markets. It must also take into account currency changes, the complications of the Common Agricultural Policy and, more recently, the implications on future markets of the General Agreement on Tariffs and Trade.

   The company uses about 25 different types of wheat. Nearly 80% comes from the United Kingdom; the rest is imported from other European countries — mainly France and Germany — as well as from North America for the still essential hard wheats.

      Vertical integration improved

   Under the new ownership, the relationship with other companies within the group has become closer and more commercial, important considerations since nearly 60% of Rank Hovis' annual 1 million tonnes of flour production goes to other RHM companies. Of this, British Bakeries takes the lion's share, but there is also a substantial demand from RHM Foods for pre-packs, the Manor and Kipling cakes business and Food Services.

   The biggest sectors in external sales are the medium-sized bakers, in-store bakeries and plant bakers, which each take a similar amount, while the small and medium-sized regional chains of High Street bakery shops account for a slightly smaller but still significant portion of the balance.

   The range of products demanded by customers, both internal and external, is already large and is increasing. Currently, the company produces about 200 grades of flour for 30 different end processes.

   With the benefits of the major improvements coming through, Mr. Baker said he thought the company was in a good position to take advantage of the developments in the marketplace. Competition in the flour milling and baking sector continues to be extremely tough, but while the market is not growing in size at the same rate of expansion as in the United States, there are ongoing opportunities for new products, he said.

   The plant bakers and in-store operations are increasing market share at the expense of the High Street shops, leading to an ever-increasing concentration of buying power. But the constant search for new products is in these outlets.

      Product range expanding

   Rank Hovis has traditionally been seen as a specialist bread-making flour miller largely because of its relationship with British Bakeries. But the company is working on widening its product range and services to meet the ongoing changes in the baking industry. Small baking operations are an important part of the changes and look to the larger companies for innovations in products and technology.

   An important asset in product innovation is the ownership of the Hovis and Granary flour brands. Hovis was developed in 1887 by Richard (Stoney) Smith, a miller who patented a process for mixing wheat germ with flour. To find a name, he staged a national competition. The winning entry was based on the Latin Hominis Vis — meaning strength of man.

   The Hovis business merged with McDougall in 1957 and was taken over by Joseph Rank Ltd. in 1962. The Granary brand was purchased by RHM in 1984 along with the process for production of malted wheat.

   These two brands provided the basis for new product development. Hovis and Granary flours are used in-house by British Bakeries but are sold increasingly to outside customers. At the same time, take-up of these types of bread in the supermarkets has increased as a result of work done by RHM on the keeping quality to make them more popular with consumers.

   Hovis flour is being used now for pizza bases and scones as well as in white and whole wheat bread, while Granary flour and malted wheat flakes are being used in an ever-changing range of bread and rolls. The use of pre-packs for home baking is declining, but more flour of all types is going for manufacture to meet the huge increase in Britain in the consumption of products such as pizza.

   The challenge for the company is to identify new product areas and develop the flours and processes to meet them. This involves working more closely with customers to anticipate changes rather than reacting to them.

   One major concern is the unpredictable pattern of supply and marketing of U.K. wheat. British farmers are reluctant to grow milling varieties of wheat because yields are lower and can be affected by the weather, and there has been a ready market for non-milling types. The farmers believe that, in general, the millers are not prepared to pay sufficiently high premiums to compensate for lower yields.

   In the past few years, the proportion of milling type wheat sown in Britain has been decreasing, and millers currently have to import 15% to 20% of their soft wheat needs from other European countries.

   Mr. Baker said there was a very real danger that continental millers, with their surplus capacity and aging mills, could try to move into the U.K. market. They could take advantage of their plentiful supplies of bread wheats and the relative cost advantage of transporting a high-value processed product like flour rather than low-value unprocessed grain.

   This could prove an even bigger source of competition than other millers in the United Kingdom.

   Diane Montague owned and edited the U.K.'s leading agribusiness trade weekly, Agricultural Supply Industry, for 22 years. She sold ASI two years ago and now concentrates on freelance writing and consulting.