Management Issues And Operational Plans Plaguing Hovis Bread Marketing Essay

Published Date: 23 Mar 2015

The acquisition of Hovis by Premier Foods in 2006 as part of a deal that included a number of brands from RHM Plc represented a decision to become the UKs largest food conglomerate. The strategy behind most large acquisitions usually is based on capturing additional market share segments and bringing into play economies of scale to leverage the new position as a means to pay the debt taken on to accomplish the above. In the case of Premier Foods, timing was not on its side as the global sub prime mortgage meltdown resulted in a recession that caused a pull back in consumer spending and a change in grocery budget allocations. Price was the new market leader, and Premier was stuck with a bread operation that had over capacity as well as high operating costs in a shrinking market.

The above factors created a negative operating environment for Hovis that needed additional investment to modernize operations in an economic climate where lending capacity had disappeared. This left the company in dire straits compared to its main competitors who entered the recession with modest debt and enough cash to refine their production operations to operate efficiently in a shrunken and more competitive market.

The investigation into Hovis uncovered management has made a series of decisions constrained by its inability to finance its manufacturing shortcomings. The short-term strategies of using advertising as the means to induce sales along with a number of questionable pricing decisions and product miss-steps have resulted in a loss of market share Hovis is trying to correct. As revealed in this study, these efforts have been less than successful and require long-term solutions represented by an investment in facilities.

Contents

1.0 Industry Context ……………………………………….……………………. 4

The UK Market and Category Definition …………………….………………. 4

Competitors ……………………………………………………………..…….. 7

About Hovis ………………………………………………….……………….. 7

2.0 Management Issues ………………………………………………………….. 9

3.0 Literature Review ……………………………………….…………………. 11

3.1 Understanding the UK Bread Segment ………………………………………. 11

3.2 Management Decisions by Hovis ………………………………..………….. 11

3.3 Following the Market Instead of Leading ……………………………………. 12

3.4 Competitive Steps and Hovis Approaches ……………………..……………. 13

3.5 Positive Company Moves and Decisions …………………………………….. 15

4.0 Research Aims / Questions …………………………………………………. 18

5.0 Research Design / Methodology …………………………………………… 19

6.0 Findings and Discussion …………………………………………….……… 21

6.1 Background Summary ……………………………………………………..… 21

6.2 Analysis ………………………………………………………………………. 21

6.3 Evaluating Management Issues …………………………………..………….. 22

6.4 Analysis of Research Aim and Objectives ……………………………..……. 25

6.4.1 Objective 1 ………………………………………………………………….. 25

4.4.2 Objective 2 …………………………………………………………………. 26

6.4.3 Objective 3 ………………………………………………………………….. 27

6.4.4 Aim ………………………………………………………………..……….. 29

7.0 Limitations ………………………………………………………………….. 30

8.0 Conclusion and Insights …………………………………………………….. 31

References …………………………………………………………….…………. 32

Tables and Figures

Tables

Table 1 - UK Bread Production Market Share by Value and Volume ………….. 5

Table 2 - UK Weekly Bread Expenditure by Place of Purchase ………………... 6

Table 3 - UK Supermarket Retailers by Market Share ………………………….. 6

Table 4 - Comparison of Qualitative and Quantitative Methods ………………. 19

Figures

Figure 1 - The UK Bread Market by Firm ……………………………………….. 7

Industry Context

Since 7000 BC bread has been a principal food for humans. From 1950 to 1980 bread volume declined, because more and more new foods appeared along with people changing their eating habits. It was not until the early 1990s that the decline started to stabilize and sales rose. The reason for this change was the promotion of the health benefits of bread combined with variety of offers, and increased consumer awareness.

In the early 2000s low carb and fad diets resulted in a downward trend concerning sales. There was a revival later in this decade as consumers returned to bread, but this reversed in the last 5 years as volumes shrunk due to the success of alternative bakery products and a decline in the consumption of bread at breakfast. This decline has since stabilised over the last couple of years. The recent UK recession (2007/09) caused shoppers to reassess their shopping habits that resulted in the UK grocery segment seeing a sharp increase in core staple products such as pasta, rice and bread as more in-home food preparation took place (e.g. more lunchboxes).

1.1 The UK Market and Category Definition

The bakery market has declined in recent years due to the recession, however it is still one of the biggest market sectors in the UK food industry. In terms of organization the baking sector is comprised of three principal divisions. In the UK approximately 80% of the bread manufactured are produced by large plant bakers, with an estimated 17% coming from in-store bakeries (ISBs) such as supermarkets. The remainder comes from high street retail bakers (The Federation of bakers, 2009).

Table 1 - UK Bread Production Market Share by Value and Volume

Bread is one of the core staple items in the UK diet, even in the face of strong competition with more and more newer bakery categories. There are two key reasons for bread retaining its place as a major item in the UK diet. First, based on the research from the Federation of Bakers (2009), bread provides people with carbohydrates, energy, vitamins, protein and calcium. It is also the main source of fiber. Secondly, according to the British food culture, bread is one of the important elements in its traditional diet.

Based on a Kantar WorldPanel study, about 99% of UK households purchase bread every day. In addition, the average UK family purchased over 80 loaves a year, and spends approximately 75.03 pounds on bread consumption. The following Table is shows the average UK household weekly expenditure on bread by place of purchase. This reveals the major ways households purchase bread products (through large supermarkets and local bakery or small stores).

Table 2 - UK Weekly Bread Expenditure by Place of Purchase

The following Table of the top UK supermarket retailers by market share reveals the spending patterns for UK consumers:

Table 3 - UK Supermarket Retailers by Market Share

1.2 Competitors

According to the National Statistics for UK Business (2011), there are 1885 enterprises engaged in the manufacture of bread. It revealed a very large proportion of bread is produced in a relatively small number of large plants devoted to this purpose. Based on the Bread & Bakery Products Market Report 2011, the top three bakeries represent about 80% of all bread sold in the UK (Jones, 2010). The top three companies in the sector are Kingsmill, owned by Allied bakeries; Hovis, which was acquired by Premier Foods; and privately-held Warburtons.

Figure 1 - The UK Bread Market by Firm

(Capstick, 2011)

1.3 About Hovis

The company's current advertising campaign celebrates the long history of Hovis using the slogan line "As the Good today As Its Always Been". This brings to mind the fact Hovis has been engaged in the bread business since 1886. The company's long history has made the name a British icon that has become a recognizable household name for most UK families (Andy, 2010). In terms of bread making, Hovis was the first brand to use 100% British wheat germ. This caused the bread to have a distinctive brown color and nutty flavor that catapulted it to fame. In the recent years, the company has suffered from a series of problems that resulted in a slow decline in its market share. 2004 was a difficult time for Hovis as it lost its market lead to Warburtons (Jones, 2010). Recently, the market share decline has stabilized, however it is still second to Warburtons who has extended its lead in a shrunken recession market.

Management Issues

In equating the management issues facing Hovis, there is litany of internal problems that were a part of the company prior to its acquisition by Premier Foods in 2006 (Murphy, 2007). The transaction made Premier the largest food brand company in the UK, where it is estimated 99 percent of households purchase at least one of the expanded Premier Foods brands monthly (Burch and Lawrence, 2009). In understanding the management issues faced by Premier Foods, and thus Hovis today, some background information is needed to set the context.

 

The acquisition, which was approved by the Office of Fair Trading (2007), recognized Hovis for periods in its history had been the leading bread maker in the UK. However, in the years just before the transaction it saw its market share slip to the point where it became second in the market behind Warburton in 2004 (Magnan, 2010). The failings of Hovis after its acquisition can be traced to lax management, investment and handling on the part of its former parent company RHM Plc (Jahoe and Acildilli, 2010). As shall be brought forth under the Literature Review, the failure to invest in modern equipment, updated supply chain processes and efficient use of resources (plant capacity duplication) increased operating costs as well as impacted quality. Product price increases the company made in 2010 caused Tesco to pull several Hovis bread lines in a dispute that is still ongoing today (Wilson, 2010).

 

The above represent highlighted areas that have and are impacting the brand today. As such these represent areas of management issues that are woven into a broader context that is presented as:

 

Resolving issues with the UK's number one retailer Tesco over its Hovis product placement.

Cutting overhead costs and increasing operational efficiencies that have been a long standing problem as a result of the lack of investment in the brand by former owner RHM Plc.

Recapturing Hovis lost market share.

 

The gravity of the above has impacted Hovis' penetration of the market and its standing with UK consumers in the face of fierce competition that has seen a steep decline in bread purchasing during the recent economic downturn (Russell, 2010). The serious nature of falling sales in the sector was the subject of a report that brought forth a number of critical issues (Mintel, 2009):

 

Food inflation and the recession have negatively impacted the bread and breakfast food segment in the UK as consumers have pulled back on certain purchases to stretch their grocery budgets.

The recent increased awareness concerning health and diets have put additional pressures on bread as a non-essential calorie, especially white bread that has seen a shift to whole grain varieties.

As a product produced in the UK, the impact of poor weather and increased wheat and flour prices has resulted in upward pressures on ingredients that has and is impacting profit margins.

 

Proof of the changing trends among UK consumers is that in 2011 the sales of wheat bread topped white bread sales for the first time in history (Black, 2010). The company has recently changed its branding mix to include more health oriented wheat grain brands, thus in this respect it is somewhat positioned for this shift in market tastes. However, as shall be developed, its underlying plant capacity, production and supply chain issues represent management challenges that have yet to be resolved, however, they are being addressed.

Literature Review

3.1 Understanding the UK Bread Segment

As briefly covered under the Industry Context and Management Issues, the nature and composition of the UK bread segment has been and is impacted by the changing spending characteristics of UK consumers, along with heightened competition among the major brands (DataMonitor, 2010). Warburtons has consolidated the industry lead it obtained from Hovis in 2004 to the point where in 2010 it held a market share of 32.5% to Hovis' 24.5% and Kingsmill's 19.8% (Bouckley, 2011).

 

In an announcement by Hovis management in 2010, they forecast increased external competitive pressures concerning the company's market share from rivals Warburton and Kingsmill over the remainder of the Year (The Drum, 2010). At the time of this announcement Hovis' market share was 25.6%, which dropped to 24.5% by year-end (Bouckley, 2011).

 

The above represents questionable management decisions on the part of Hovis that resulted in a market share drop. This statement is made in the light of Warburtons' making the decision to reduce prices throughout its bread line based on market conditions, slowing demand and consumer's moving away from bread products to stretch grocery budgets (Bouckley, 2011). Conversely, Hovis elected to address the situation by increasing advertising and marketing spending by an additional £6 million (The Drum, 2010). More disconcerting is the fact that Hovis management decided to raise its prices (Beckett, 2010).

3.2 Management Decisions by Hovis

The above decision concerning raising its prices not only saw a reduction in market share for Hovis, it also saw Tesco make the decision to remove several of its products from store shelves (Beckett, 2010). With over a 32 percent share of the UK food retailing market, Tesco's action represented a serious blow to Hovis' availability in the marketplace (Beckett, 2010). Tesco banned 11 of Hovis 18 bread lines as a result of the company raising prices. Tesco boss Sir Terry Leahy said the decision was a result of Hovis being out of step with industry pricing norms (The Sun, 2010).

Hovis management made a major blunder in not understanding the market and its retail outlets by raising prices during a recession. This was compounded by the fact Warburtons' was reducing prices in response to changing conditions (Bamford, 2011). The revenue impact on Hovis has been estimated to cost the company in excess of £10m (Bamford, 2011). In its defense, Hovis cited a dramatic rise in commodity prices (14%) that prompted it to seek price hikes as a means to offset these costs (Bamford, 2011). The issue with Tesco is close to being resolved, but its impact during the period allowed Warburtons and Associated British Foods Longsmill to make market penetration gains. In the words of an industry veteran interviewed by Bamford (2011) "Premier has a particularly poor trade strategy like they're stuck in the 1970s". He added "They see the customer as an enemy rather than a partner … When it comes to negotiations, its attitude seems to be: 'Here's the price, take it or leave it'" Bamford (2011). This statement is an interesting comment that whether it is true or not is an outside opinion on the company's management and thus represents a potential public view.

3.3 Following the Market Instead of Leading

The poor decision on the part of Hovis' management concerning raising its prices was compounded as it had to follow Warburtons lead and lower prices in the end. In a telling market evaluation conducted by investment analyst Martin Deboo, he stated the UK bread sector was in dire condition as a result of it having extreme over capacity (Bouckley, 2011). His analysis also delved into the relative positioning of industry leaders. In equating the standing of Warburtons, Deboo commented the company had worked its way into the position of being a market leader as a result of its attention to quality as well as efficiencies in production costs (Bouckley, 2011).

In looking at the prospects of Hovis, Deboo stated it and Allied Bakeries (Associated British Foods) were engaged in "… a slugfest for the number two spot …" (Bouckley, 2011). He added Allied Bakeries was in a better position for such a fight as its financial resources were stronger. The above reasoning was based on the huge debt load Premier Foods took on to acquire RHM Plc (Bouckley, 2011). The offshoot of this and the stressed condition of the UK bread sector is that Premier is basically stuck with Hovis and its problems.

Issues with Hovis in terms of its plants and dated equipment, as previously stated, can be traced back to its days under RHM Plc (Turner, 2008). In an interesting analysis on the fortunes of Hovis and Warburtons, consultancy director Paul Cousions of the firm Cousins Davis made the observation that Warburtons assumed the lead in the bread segment in the UK was not a case of the things it had done right, but "… what Hovis has done wrong …" (Turner, 2008).

3.4 Competitive Steps and Hovis Approaches

In response to outmoded plants and equipment, Hovis management has taken steps to address production system shortcomings (Incisive Media Investments, 2009). This represents a step toward the modern capacity of Warburtons that can identify every loaf of a production run as well as when it was baked as a means to ensure fresh delivery (Hills, 2012). Production runs and freshness are a key area impacting Hovis that suffers from plant over capacity as well as operational costs (Dawson, 2012). Plant over capacity has been a problem Hovis management was aware of when it acquired the company, along with the lack of investment in new equipment and processes by RHM plc (Litterick, 2008). What is unsettling is four years later; this is still an issue plaguing the company. During this period Warburtons has managed to modernize its facilities and has assumed the industry lead through attention to cutting production costs, increasing quality and lowering prices (The Times 100, 2011).

This same attention to detail, meaning production facilities, operational costs and modernization, has been the management approach of Associated British Foods Longsmill (Bruce, 2011). Its chief executive, George Weston, announced that a multi million pound investment is being made to increase plant efficiencies as opposed to adding capacity (Bruce, 2011). In summarizing the rationale, Weston stated "The new plant will lower the cost of production, and also with new plants it is easier to control the quality of the process" (Bruce, 2011). The issue is, Hovis management knew its competition was taking aim at its position as number two in the sector. This being the case it should have responded with definitive moves to lower internal costs, increase efficiencies and secure a stronger market position. Instead, the company raised prices, upset its relationship with the number one British retailer and, opted to close plants to save costs.

The rodent in the bread issue clearly demonstrates Hovis suffers from quality issues and outdated facilities (Belfast Telegraph, 2010). A man making lunch for hios daughters discovered a rodent baked into the corner edges of a loaf of Hovis bread he purchased from Tesco (Belfast Telegraph, 2010). This points to a quality control problem that was and is not an isolated instance. The company has also suffered from a recall of its 800g loaves of Healthy Oats bread reporting possible glass in the ingredients (Poulter, 2010). The issue was discovered after five customers called in complaints (Poulter, 2010). Significantly, the article reported the problem was traced to a fault in the production line as opposed to deliberate contamination or other possibilities (Poulter, 2010). This is the type of issues Hovis faces as a result of outmoded plants and production equipment.

In terms of plant issues, back in 2008 John Goldstone, Hovis Marketing Director, confirmed the company was aware of its management shortcomings in dealing with the actions of its rivals in addressing the market (Turner, 2008). In a statement to the press, Goldstone admitted the company "… had lost too much ground to its family-owned rival (meaning Warburtons)" (Turner, 2008). The company did respond to delivery and coordination issues by upgrading its supply chain in 2009 through collaboration with SAP (Bakery Info, 2009). The above modernized its software across the company's 23 bakery sites that vastly improved its capability to track every loaf produced (Bakery Info, 2009). The new capability enabled identifying the plant, baking time and delivery destination through a new bar code system (Bakery Info, 2009).

While the above indicates a positive direction on the part of Hovis, industry analyst Mark Whalley at DataMonitor provided a realistic picture of the company (Glaberson, 2011). Whalley (Glaberson, 2011) cited rising raw material costs and diminishing sales in the face of the recession as factors food companies need to address by implementing heightened efficiencies in operations. In going further, Whalley pointed to the first full year loss at Premier in 2010 that represents a telling picture of its failure to control and cut costs through internal management effectiveness (Glaberson, 2011).

3.5 Positive Company Moves and Decisions

In spite of the missed opportunities in either reading or responding to market signals and changes represented by the slowdown in bread sales, Hovis has managed to read some areas and act appropriately. The changing public taste with regard to healthier food options that saw wheat bread outsell white bread in the UK for the first time in 2010 (Black, 2010), was an area the company responded to properly. Hovis opted to move into the healthy food segment through increasing its emphasis in the wheat bread area to respond to the change in consumer tastes (Clark, 2011).

Interestingly, this was one of those areas Hovis managed to get right in terms of hitting the trend as it occurred. It introduced its Hearty Oats line at in 2010 as the wheat bread and health trend areas were rising dramatically (Poulter, 2010). The company did make a move in the healthier bread line back in 2008 with its Nimble White and Nimble Malted Wholegrain, with both priced moderately at GBP0.75 (just-food, 2008). The Nimble brand represented one of those times Hovis moved before the trend in the market, but it could not be ascertained if this introduction was a factor of trend recognition. Based on the fact that follow up releases in this area were not located, the analysis seems to suggest it was not connected to trend forecasting.

The realities of the actions by management has seen Hovis' revenue drop by 27 percent in the first half of 2012 (Gyton, 2012). The company's branded bread line sales fell 2.9 percent, plunging to £184.3m from a similar period a year ago (£189.7m) (Gyton, 2012). The milling operations side of Hovis business recorded an 8.3 percent drop in sales to £95.2m (Gyton, 2012). The only saving grace to come out of the period was that Hovis non branded bread sales rose 1.5 percent, recording a revenue of £68.8m (Gyton, 2012). In commenting to the press concerning the company's future, its chief executive officer, Michael Clarke, stated Hovis has and will be introducing plans to simplify its operations as well as improve efficiencies and effectiveness (Gyton, 2012). Clarke added he expects the results of these changes would result in savings of £40m by year end 2012 (Gyton, 2012).

The company has and still does rely heavily on marketing and advertising to push the brand (Joseph, 2012). Hovis plans an increase in spending in these areas as past efforts have seen more advertising spending contribute to a rise in revenues (Joseph, 2012). The first quarter of 2012 saw a 1.3 percent increase in its power brand sales such as Mr. Kipling cakes and related lines (Joseph, 2012). The results from these efforts, stated Michael Clarke the company's chief executive, is that there is a solid program to achieve growth (Joseph, 2012). In terms of the above the results are still out, however the reality is the company suffered an overall loss of £259.1m in 2011 on bakery sales that slipped by 3 percent (Cripps, 2012). The price wars as well as reduced consumer spending on bread products negatively impacted Hovis' profits by 90.4 percent in 2010 (Cripps, 2012). The company has indicated in its plans it will reverse this through aggressive advertising spending as the solution (Cripps, 2012).

In terms of management issues and direction for Hovis, the Premier Foods Annual Report of 2011 provided interesting insights. The company's management announced its plans for 2012 represented five priorities in stabilizing its business Premier Foods (2011):

 

Increase investment in all of the company's Power Brands through more advertising.

Strengthen the company's capabilities, with the emphasis on marketing as well as sales.

To get rid of business units or sell off plants to reduce costs and sharpen management focus.

Reduction of overhead costs.

Refinancing of debt load package

 

In terms of management issues and direction for Hovis, management indicated it would (Premier Foods, 2011):

 

Increase its marketing support.

Make additional improvements to its supply chain.

Eliminate plant duplication.

Engage in a new product launch for its Hovis Farmer's loaf.

As shall be brought out in the Analysis segment, the above plans seem to lack addressing important developments and areas in the segment.

Research Aims / Questions

In approaching the conduct of this study, the Research Aims and Objectives needed to be established. This was important as it provided the context to evaluate the information gleaned from the Literature Review as well as formulate a means to present this in a manner that resulted in understanding the issues and problems befalling Hovis. This being the case, the Aim of the study represents:

Has Hovis successfully identified and addressed the operational facets that have contributed to its fall as the UK premier bread company?

This will be underpinned by the Objectives, which are:

Objective 1

To identify the factors that led to the decline of Hovis' position in the UK as the leading bread company

Objective 2

To explore the actions and activities the company and management need to undertake to recapture lost market share and profitability.

Objective 3

To evaluate the inroads of competitors and what Hovis needs to do to react and respond to the assault on its brand positioning and consumer image as a leading baker.

As shall be examined under the Findings and Discussion segment, these aspects will be evaluated in light of the information uncovered in the Literature Review.

Research Design / Methodology

The manner that would guide the conduct of research represented the use of secondary sources. This approach was taken as it allowed for reviewing a broad base of materials to uncover salient facts and information. Hackey (2003, p. 71) advises secondary sources provide a way to access a broad range of information in a reasonable length of time. He adds this represents a means to acquire a consensus of approaches and views that aid in a balanced analysis and understanding (Hackey, 2003, p. 71). This allows for the researcher to interpret a wide array of information as obtained through books, journals, magazine articles, newspapers and the Internet (Hackey, 2003, p. 71). It is through this wide range of source materials the researcher can minimise bias and deduce the important facts.

The above represented the basis for the research design that employed qualitative and quantitative research as its methodology. In terms of the reason this direction was taken Shamoo and Resnik (2003, p. 25) advise proper research management is the underpinning for the achievement of reliable results to ensure objectivity and integrity. Qualitative and quantitative research was thus used as the methodology underpinning. As the means to understand this, Silverman (2006) provides a useful comparative that illustrates the benefits of each:

Table 4 - Comparison of Qualitative and Quantitative Methods

(Silverman, 2006)

Qualitative Research

Quantitative Research

Is Soft

Is Hard

Tends to be Flexible

Is usually Fixed

Can be Subjective

Can be Objective

Might be Political

Tends to be Value free

Can use Case Studies

Can use Surveys

Can be Speculative

Often used in Hypothesis testing

Is Grounded

Can be Abstract

By maintaining a simplified methodology approach, this allowed for concentration on the analysis of information, which was relatively straight forward as it did not entail theoretical constructs.

Findings and Discussion

6.1 Background Summary

The examination of Hovis with respect to the management approach to issues, and branding entailed looking within the company as well as its Premier Foods. As was revealed in the Literature Review, these two are interlinked as the overall strategy is set for divisions by the parent company. As will be uncovered, the overall plans and strategies for Premier Foods closely align with the individual objectives for Hovis in a number of areas. This includes specifically crafted strategies devised for the brand in light of its specialized needs and conditions.

 

As a result of the above where parallels or common strategies exist between Premier Foods and Hovis, they will be illustrated. As Hovis has under performed since its acquisition, righting the operations is a task that represents correcting a number of issues. What the company needs to restore shareholder and market confidence is a series of major forward moves to indicate progressive management and a return to brand prominence.

6.2 Analysis

In order to provide an organized framework for the analysis of Hovis, the Management Issues, Research Aim and Research Objectives represented the foundation to achieve this end. For clarity, these are restated again

A. Management Issues

Resolving issues with the UK's number one retailer Tesco over its Hovis product placement.

Cutting overhead costs and increasing operational efficiencies that have been a long standing problem as a result of the lack of investment in the brand by former owner RHM Plc.

Recapturing Hovis lost market share.

 

B. Research Aim and Objectives

The Research Aim represents "Has Hovis successfully identified and addressed the operational facets that have contributed to its fall as the UK premier bread company?"

Objective 1

To identify the factors that led to the decline of Hovis' position in the UK as the leading bread company

Objective 2

To explore the actions and activities the company and management need to undertake to recapture lost market share and profitability.

Objective 3

To evaluate the inroads of competitors and what Hovis needs to do to react and respond to the assault on its brand positioning and consumer image as a leading baker.

6.3 Evaluating Management Issues

The Literature Review provided a wealth of information that enabled ascertaining the approaches and aspects of management issues facing Hovis. These are important areas as they provide insight concerning how management operates or has operated in the past. In addition, by looking into management issues an idea of where the company is headed as well as its successes and or failures became apparent.

Resolving issues with the UK's number one retailer Tesco over its Hovis product placement.

This was selected as a management issue as the factors resulting in its occurrence provides telling insight because it reveals more than a singular issue. The raising of prices by Hovis during the recession caused Tesco to pull eleven of the company's bread lines off its shelves (Beckett, 2010). The comment by Tesco's chief executive Sir Terry Leahy explained the company's decision was based on Hovis' action being out of sync with the industry and economic situation (The Sun, 2010).

The realities behind the motive by Hovis were stated in an article written by Bamford (2011) for The Grocer. It stated "Premier has a particularly poor trade strategy like they're stuck in the 1970s" (Bamford, 2011). This appears to be a generic comment until one views it in the context of the full statement that added "They see the customer as an enemy rather than a partner … When it comes to negotiations, its attitude seems to be: 'Here's the price, take it or leave it'" Bamford (2011). Taken by itself, the above might be difficult to accept, but the fact Hovis bread was found to have a mouse in it, along with the glass in its Healthy Oats loaves points to quality issues.

As will be brought forth in the following, Hovis suffers from old plants and equipment that was a legacy of the lack of investment made by its former parent company. The issue is that in going through with the acquisition, Premier Foods did not take into account the necessity to have funds in reserve for upgrading facilities. This lead to operational inefficiencies that were a contributing factor in the Hovis price increases as a means to maintain profit margins.

Cutting overhead costs and increasing operational efficiencies that have been a long standing problem as a result of the lack of investment in the brand by former owner RHM Plc.

Plant inefficiencies and higher operating costs were realities Premier inherited when it acquired Hovis from RHM Plc. The company also suffers from over capacity and has had to close plants as a cost saving measure (Dawson, 2012). The problem is, Premier in paying for this acquisition did so just before the recession hit. This impacted earnings and put reinvestment possibilities on the back burner, if such was the case. While Hovis has made a commitment to new supply chain software (Bakery Info, 2009), this does not resolve the outdate plant and equipment issue.

In going back to when Hovis elected to raise prices, Warburtons took the opposite direction. It invested in a new plant not to increase capacity, but as a means to lower production costs, save on resources and reduce staffing (The Times 100, 2011). In a similar move, the chief executive of Associated British Foods, George Weston, stated their "… new plant will lower the cost of production, and also with new plants it is easier to control the quality of the process" (Bruce, 2011). Both of these two companies have made market share gains in the last four years at Hovis' expense, a telling factor in concerning Hovis' decision to forgo plant and equipment investment.

The Literature Review uncovered Hovis has opted to invest in marketing and advertising as the approach to drive sales. This tactic has met with moderate success, but it does not hide more important issues. As a result of Hovis' drag on revenues and operating costs, Premier suffered its first year of operating loss in 2010 (Glaberson, 2011). The decision on the part of Hovis to forego investment in plant and equipment was illustrated by industry analyst Mark Whalley of DataMonitor (Glaberson, 2011). He stated rising costs for raw materials, along with reduced sales in the sector put pressure on companies to reduce internal operating costs as the means to maintain profitability (Glaberson, 2011).

Recapturing Hovis lost market share.

The problem the company faces in capturing lost market share represents an uphill battle as its competitors are trimming operating costs and offering high quality offerings. Premier's 2011 Annual Report provides insights as to how Hovis will respond to its approach to regain market share. The company's cash position does not indicate it has the funds to invest in new plant or equipment, so its strategies are based in other areas. In referring to the plans for Hovis, the Annual Report stated (Premier Foods, 2010) it would:

Increase its marketing support for all brands.

Make additional improvements to its supply chain.

Engage in a new product launch for its Hovis Farmer's loaf.

These moves represent more of what Hovis has done in the past than anything new, striking or addressing the internal cost saving moves of its rivals who have invested in new plants as the means to meet future realities.

6.4 Analysis of Research Aim and Objectives

In looking into the Aim as represented by "Has Hovis successfully identified and addressed the operational facets that have contributed to its fall as the UK premier bread company?" the Objectives provided a framework to examine the above.

Objective 1

To identify the factors that led to the decline of Hovis' position in the UK and the leading bread company

Objective 2

To explore the actions and activities the company and management need to undertake to recapture lost market share and profitability.

Objective 3

To evaluate the inroads of competitors and what Hovis needs to do to react and respond to the assault on its brand positioning and consumer image as a leading baker.

6.4.1 Objective 1

To identify the factors that led to the decline of Hovis' position in the UK and the leading bread company

As uncovered in the Literature Review, there were a rash of management decisions made by Hovis that were not in keeping with the events and circumstances impacting the industry sector and its competitors. The most telling area is the company was not prepared internally to deal with the decline in bread sales brought on by the decision of consumers to slash their grocery budgets. This meant the high production capacity Hovis has left it with assets that under performed and contributed to increased operational costs it had to recoup from dwindling sales.

Hovis' competitors Warburtons and Allied Bakeries (Associated British Foods) were and are in a better financial position to deal with a changing economic market as they were not burdened with a debt load from a recent acquisition. Hovis was constrained in this area when Premier acquired RHM Plc as well as the fact its plants and equipment were outdated and outmoded. As a result, Premier acquired market share and product lines in its acquisition, along with a poor operational infrastructure. This latter aspect was a telling weakness that revealed itself as early as 2004, two year before the Premier acquisition. That year represented when Warburtons overtook Hovis as the leading bread line in the UK. Truthfully, Premier should have seen the indications from this event and made provisions to upgrade the company's plant and equipment structure after it was acquired.

Premier's approach for Hovis was to close plants and pour funds into marketing and advertising as the strategy to boost sales. This soft approach could not hide the looming operational redundancies and inefficiencies of operation that depressed profit margins. In opting to raise prices, Hovis was rebuffed by Tesco that removed 11 of 18 brands from its shelves. The combination of higher operating costs, and inefficient plants along with heightened capabilities in these areas on the part of its rivals allowed them to make inroads on Hovis' market share. The culmination of the above factors has contributed to the decline of Hovis' market share that will require drastic measures to reverse.

4.4.2 Objective 2

To explore the actions and activities the company and management need to undertake to recapture lost market share and profitability.

In evaluating the actions and activities Hovis needs to take to reverse its decline in market share and profitability, the preceding Objective identified problems that caused the decline. In reality, the solution is clear. Hovis needs to invest in new equipment to reduce internal operating costs, and improve quality as well as efficiencies. The above represents the tried and true approach used by Warburtons and Allied Bakeries (Associated British Foods) to eat into Hovis' market share that has proven successful.

These recommendations might seem simplistic, however they are based on actual strategies employed by the company's rivals. The current as well as indicated approaches to correct these issues have been indicated by management to be as follows (Premier Foods, 2011):

 

Increase marketing support for all brands.

Make additional improvements to the supply chain.

Engage in a new product launch for Hovis' Farmer's loaf, and

Close plants.

The above represent what the company has done since its acquisition that has not proven to be fruitful. These current efforts saw bakery sales drop by 3 percent in 2011 (Cripps, 2012). The only bakery brand that benefited from these tactics was Mr. Kipling's products that saw increases in sales as a result of increased advertising expenditures.

6.4.3 Objective 3

To evaluate the inroads of competitors and what Hovis needs to do to react and respond to the assault on its brand positioning and consumer image as a leading baker.

Warburtons, as a result of lower internal production and operating costs, was able to put pressure on Hovis by lowering prices to further squeeze the company during the height of the recession. While there was no supporting evidence found to confirm this speculation, it seems a reasonable strategy as Warburtons was aware of Hovis high overhead, excess plant capacity and aging plants / equipment. The fact Hovis raised prices, seemingly supports this contention. In fact, it was this price rise that resulted in eleven of eighteen Hovis products being removed from Tesco shelves.

A telling analysis by consultancy director Paul Cousions of the firm Cousins Davis helps to put the above into perspective. Cousions stated the gains made by Warburtons in the UK market was not a case of what it had done right, but more a case of "… what Hovis has done wrong …" (Turner, 2008). In an article by Bamford (2011) he stated Hovis' approach to the market was misguided. He wrote "They see the customer as an enemy rather than a partner … When it comes to negotiations, its attitude seems to be: 'Here's the price, take it or leave it'" Bamford (2011).

Throughout the research into Hovis, a rash of miscues, misguided management decisions, poor timing and ignoring of market conditions as well as competitor actions were uncovered. In the face of this, it is difficult to imagine Hovis' management could possibly be so inept, except if the above was a result of attempting to cover up its most glaring weakness, a shortage of cash. As seen, Hovis has invested in new supply chain software and advertising programs as opposed to the higher costs associated with plant upgrades and new equipment. The heavy debt burden resulting from the acquisition of RHM Plc and tightened lending policies during the recession seemingly explain this. This deduction has been made as it is hard to see a bank undertaking to finance a bread company in a recession market where sales volumes are dropping and its rivals gaining strength.

In order to deal with these negatives, Premier Foods will need to make a commitment to Hovis to reverse its position. Selling off excess plant capacity does not seem to be a viable option as its main competitors have already made new plant moves in that direction and other companies would not seemingly have the need for added capacity in a slow market. This means Premier will need to find a way to fund new equipment for Hovis internally using profits from other divisions. Selling off Hovis has proven to be a fruitless strategy as Premier efforts in this regard has not resulted in any offers (Jordan, 2010). Investment represents the only viable option as Hovis' increased ad spending and supply chain strategies have only been moderately successful. Advertising budget increases represent short-term gains, but in order to achieve long-term gains, Hovis will have to increase its production efficiencies and lower costs as price wars seem to be the new battleground.

Aim

Has Hovis successfully identified and addressed the operational facets that have contributed to its fall as the UK premier bread company?

Based on the facts uncovered in this study and the analysis of their outcomes, Hovis has not responded well to the realities of the market and its competitors. It is a safe assumption that the management of Hovis is aware of all of the issues, points and other areas uncovered in this examination as they are engaged with operations in the sector. This being the case the arena of limited financial resources must be cited as a major cause that has prevented them from taking a more successful approach to stemming market share losses and competitor inroads.

Regardless of whether this is true or not, Hovis has not made the needed management moves to re-position itself in the sector that calls for a defined commitment on the part of Premier Foods to fund it. With its parent company attempting to rid itself of Hovis through a failed offer to sell the division, top management apparently sees its conundrum. This represents invest, or continue to absorb losses.

Limitations

This examination has represented an intriguing as well as informative look into a broad range of areas, insights and facts concerning the operations of Hovis under the ownership of Premier Foods. In attempting to provide a a balanced as well as fair assessment of the situations, circumstances, market condition and competitive facets impacting Hovis, the Literature Review found a wealth of information. In terms of this data, it is safe to say the above was neither extremely difficult nor particularly hard to find. What was the case in this area represented weeding through large amounts of source materials to ascertain the answers to the questions posed by the Management Issues, Research Aim and Objectives.

The above represented time, which was the limitation that was the major issue facing this undertaking. In order to ensure the information collected represented a factual assessment of what was and is occurring, two or more sources, when available, were used to ensure validity. This was utilized as there was not enough time to review every piece of information available on the subject matter.

Conclusion and Insights

In the analysis of Hovis, it was uncovered under Management Issues as well as the Research Objectives the problems facing this company stem from internal aspects that existed prior to its acquisition. Hovis' problems are the lack of suitable or carefully considered investment in plant and equipment by its former owner. This restricted its capability to function in the sector. The above represents a fundamental underpinning that revealed its weakness when Warburtons overtook Hovis in 2004, two years before Premier acquired Hovis.

The above represents a highly important point as Premier Foods either missed this assessment in its due diligence or elected to ignore these shortcomings figuring its approach would solve this deficiency. Whichever the case, the results have shown Hovis as ill equipped to compete with Warburtons with this underlying problem. When the market retreated as a result of the recession, Hovis was left with over capacity in a shrinking market. This resulted in a spotlight shining on Hovis' internal deficiencies that its superior, though outmoded, manufacturing capacity could not overcome with economies of scale.

Premier, burdened by its acquisition debt, could not obtain addition funds during the credit crunch that was unforeseen as a coming event. This situation left Premier without the leverage to correct Hovis' manufacturing ills. The company has resorted to increasing advertising expenditures as its strategy to overcome the above, with mixed results. The reality is, this represents an interim approach that cannot mask the need to upgrade production efficiencies to compete in a shrunken and more competitive market. Premier's effort to rid itself of Hovis has not met with success, thus it is for now faced with the reality of needing to undertake the indicated investments in plant and equipment in order to stem losses from this division. As the solution is clear, the only question that remains is when and if it will do this, as its plans under the company's 2011 Annual Report did not state the above as a direction.