The changing face of British Milling

by Emily Buckley
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The price of bread rarely makes the headlines in Britain, but when one company launched a loaf costing nearly $15 it got front-page coverage in national newspapers. The loaf was a specialty sourdough type sold by an upscale supermarket chain and proved to be very popular. What made this story even more surprising was the contrast with the usual reports in the milling and baking trade press bemoaning the fact that supermarkets continued to sell standard white sliced loaves at loss-leading prices, often as low as 30 cents and even on occasions, for as little as 10 cents. The extremes of price help to illustrate the unique structure of Britain’s milling and baking industry and the way in which it has evolved.

INDUSTRY STRUCTURE

The $4.5 billion bread market in Britain is highly competitive. As a result consumers can buy some of the cheapest bread in the western world. A survey by the Economist Intelligence Unit showed that the average price of bread in London was just $1 per kilo compared with more than $3 in Rome, $3.60 in Paris and nearly $4 in New York.

The London price is very much an indication of the high level of concentration of the British food industry at all levels, from the supermarkets where four companies handle over 70% of all retail food sales, to manufacturers and processors such as millers and bakers.

The U.K. flour milling industry is one of the most highly concentrated in the world. Just 33 companies operate 68 mills that produce around 4.5 million tonnes of flour a year from some 5.6 million tonnes of wheat. Average output per mill is just over 66,000 tonnes a year. This compares with France, where 643 mills produce 4.9 tonnes of flour with an average annual output of 7,614 tonnes per mill and Italy, which produces 4.7 tonnes in 357 mills averaging 13,100 tonnes per mill.

Not only is the industry highly concentrated, just three companies account for 60% of production. Archer Daniels Midland with 10 mills and RHM (the former Rank Hovis McDougall) with 11 mills, account for more than 50%, while Allied Mills, a subsidiary of Associated British Foods (ABF), with three mills, the other 10%. A further 20 companies including Heygates, Smiths Flour Mills, owned by Northern Foods, and Carr’s Milling produce significant amounts of flour while the rest concentrate on small, niche markets. The milling and baking sector is also highly streamlined with integrated millers and bakers accounting for 80% of wrapped plant bread production — RHM and ABF make up 70% of this sector.

SHIFTING DYNAMICS

ADM, the second largest flour milling business in the U.S. and the largest in Canada, and one of the world’s largest processors of wheat, soybeans, maize, oilseeds and cocoa, leap-frogged into second place after RHM in the milling league following the purchase in early 2003 of six of ABF’s mills. This left Allied with three mills to supply its own Allied Bakery business.

ADM already had a stake in the U.K. flour milling industry, having emerged in 1999 as the surprise buyer of four mills previously owned by Spillers Milling, part of the trio of old established companies that, along with Allied Mills and Rank Hovis, had dominated the British milling and baking industry for nearly 100 years. It already had some involvement in the U.K. food industry through its Arkady food additive business and a large oilseed crushing plant that it purchased from Unilever in 1990.

Long-term prospects of continuing pressures on margins and retailer concentration are likely to have been among the reasons behind the surprise decision by ABF to sell six of its mills to ADM at the end of last year for an estimated $104 million. The six mills were mainly used to produce third party flour. The three remaining mills in Manchester Tilbury and Belfast retained by ABF will provide around 80% of flour for the company’s Allied Bakeries business.

In the new line up, RHM has an estimated flour market share of 28% and ADM 23%.

Whether ABF wanted to sell or ADM wanted to buy has so far not been revealed, but it is likely to be some of both. ABF’s chief executive Peter Jackson said at the time of the sale, "The disposal of the British third party flour milling business leaves ABF with a very effective, integrated flour milling operation, streamlining flour supplies to Allied Bakeries in a very competitive market."

ABF obviously sees the integrated business as more profitable. It has kept the most up-to-date mills and hugely reduced transportation costs. The Allied Mills business has been transferred from the primary products division to the grocery division, alongside Allied Bakeries. Having moved into the U.K. milling industry in a relatively modest way in 1999, it was unlikely that ADM would be satisfied with a minority position for long. It either would have to buy market share or get out.

Ian Pinner, the youthful managing director of ADM Milling in the U.K., told World Grain: "When ADM acquired the four flour mills it is presently operating in the U.K. in 1999, it made the statement that it intended to grow and develop its flour milling interests in the U.K. when the opportunity was there and the timing was right. Since then it has proved that it can compete successfully as an independent in the U.K. flour milling market through the supply of quality flour ingredients to its customer base." Pinner says ADM is committed to the processing of agricultural products in the U.K. and having grown its flour milling business organically, the next logical step change in the business was expansion through either installation of new capacity or acquisition. The acquisition confirmed ADM’s commitment to flour milling.

ACHIEVING EFFICIENCIES

The rest of the industry is watching closely to see how ADM plans to operate in a very difficult market. Ian Pinner himself said that due to the overcapacity in the plant baking sector and the strong buying power of the retail chains, there is a limited ability to improve margins throughout the chain of supply. Milling companies, he said, will need to continue to focus on operating cost reduction and efficiency together with improvements in product development and customer focus in order to survive and compete.

 ADM has already started to restructure to reduce operating costs. Production units are being reorganized to dovetail with its regional and national business. The office in Bristol, inherited with the old Spillers mills, is being closed and the head office moved to the former Allied Mills’ headquarters at Brentwood in Essex. Job losses, according to industry estimates but unconfirmed by the company, will be around 100.

Looking at future developments, one industry observer thinks that ADM may introduce new ways of servicing its customers. The market is dominated by the powerful supermarket buyers and the industry needs to change its attitude by regarding buyers as customers. They are in business to buy as cheaply as possible, he said, but they also expect quality and service.

Another theory suggests that ADM may be planning to utilize surplus milling capacity by producing green fuels. As a leading producer of bioethanol and biodiesel, there could be opportunities in the U.K.’s virtually undeveloped market — although this would depend on changes in taxation levels, which at the moment effectively stifle any large-scale development.

The U.K. also provides a stepping stone to mainland Europe where the company has operations in France, Germany, The Netherlands and Ireland, mainly involved in oilseeds and cocoa processing and fermentation products for food additives.

MORE CHANGE AHEAD

So despite the problems in the milling and baking industry, there will certainly be more changes in the near future. RHM, which has kept a relatively low profile in recent months, has been reorganized into three divisions and a new managing director, Ian McMahon, recruited from ICI (Imperial Chemical Industries PLC), took over at the beginning of this year. Richard Hanson of Doughty Hanson has taken over as chairman. Whether the appointment of a new chief executive will put back the shelved flotation plans remains to be seen.

It is certain that the two large integrated miller-bakers will be looking at ways of tempering the price pressures of the retailers.

A recent report on the bread industry by the University of Stirling, Scotland, commissioned by the Federation of Bakers, said the U.K. bread market is mature, saturated and static but that there are pockets of growth as well as decline. It noted there is a ‘lack of passion’ in the plant bread category and producers must work to improve efficiency, reducing costs as well as being more innovative in promoting products to consumers. It expects retailers to add further ‘theater’ to their products by further developing in-store bakeries. All of which will put new demands on the millers in terms of products and service.

Flour Production by Type
Flour Production (‘000) tonnes

Total Bread-making flour
2,802
62.5%
of which:


White
2,457
54.8%
Brown
101
2.3%
Wholemeal
244
5.4%
Biscuit
540
12.1%
Cake
87
1.9%
Pre-Packed
146
3.3%
Self-Raising
20
0.5%
Food Ingredients
118
2.6%
Starch Manufacture
388
8.5%
Other
n/a
n/a
Other flour - Food
344
7.7%
Other flour - Non-Food
35
0.8%
TOTAL
4,481
99.9%

 

___14179___

 

EU flour milling comparisons

Country
Number of Mills *
Flour Production (‘000) tonnes
Average Production tonnes
Proportion of total output accounted for by larger mills (e)
Belgium
55
1,432,102
26,038
91%
France
643
4,896,101
7,614
48%
Germany
466
5,934,200
12,734
76%
Italy
357
4,680,000
13,109
45%
Netherlands
38
1,281,000
33,711
18%
Spain
256
2,550,000
9,961
76%
UK
68
4,478,000
65,853
88%

(e) estimated figures
Source: GAM and NABIM

 

 

 

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