Brandless McBride is jilted at the supermarket altar

Last week, McBride CEO Miles Roberts had the unenviable task of telling shareholders that pre-tax profits had fallen by more than a third. Preliminary annual results to 30 June showed a 38% dip in pre-tax profits across Europe, from £31.9m to £21.4m. In the UK the performance was even worse, with a 47% drop in pre-tax profits to £15.7m.

As the biggest European producer of own-label household and personal care products, it would have been fair to think McBride would perform well as shoppers feeling the pinch cut back on expensive branded products. However, the reality has been quite the reverse. Private-label goods performed behind the UK market, falling 3% in value and 4% in volume for the year. So why has it gone so wrong?

The biggest problem has been cost. Many of the chemicals McBride uses are directly linked to the price of oil. This has led to a huge rise in costs, which Roberts says the company has had enormous difficulty trying to pass on to retailers.

Massive cost increases
“Last year we, in common with the whole world, experienced massive increases in raw material costs, and the process of seeking to pass on a proportion of these was very protracted and difficult,” he says.

The extra costs ran into “many tens of millions of pounds”, according to Roberts, an amount that “easily” exceeded annual profits. The ramifications are severe. Following a period making acquisitions, the company is now planning to consolidate a number of factories and slash its 2,500-strong UK workforce by a tenth. In an attempt to bring the books back into order, McBride will close its Coventry factory and scale back its Warrington presence to move to a new site in St Helens.

It hopes to save £1m a year in overhead costs through the shake-up, although it is believed the redundancies will incur a one-off £2m charge. “Market conditions are very challenging and we have to look, unfortunately, at every possible way of maintaining our competitiveness,” says Roberts, who is not ruling out further job cuts in the drive for efficiency. “It has been necessary for us to invest in significant extra capacity and then rationalise a number of other facilities into it,” he adds. However, the sheer scale of cost increases means even the proposed job cuts may not be enough to reverse McBride’s fortunes, according to one analyst.

“The most successful companies are those that strip costs out year in, year out. McBride has been pretty efficient at doing that historically, but clearly this year the degree of inflation has just swamped it,” he says.

The time-lag problem
A fair portion of the blame is being levelled at inexperienced supermarket buyers. Accustomed to seeing prices move in only one direction, they stand accused of being unresponsive to requests for more money. The delay in securing even a partial price increase costs companies such as McBride dear.

“It’s not so much a total inability to pass on costs, because if it was it would have been bye bye McBride,” adds the retail analyst. “The problem is companies [like McBride] have to deal with price increases for six, eight, 10 weeks before they can secure an increase themselves.”

Roberts will not be drawn on what proportion of the extra costs McBride has managed to pass on to retailers, but says the protracted negotiations over the past year have absorbed much of the time and energy of senior management and led to a 4% decline in UK organic sales, as well as the fall in profits.

The company’s preliminary results report says the poor performance reflects lower promotional activity for the year, but Roberts is more candid. “We have had to seek price increases and it has taken a lot of management time,” he says. “Obviously, we would rather be focusing on growing private-label share at a time when the outlook means consumers are more likely to want private label. The reason for the decline in organic sales is primarily a reduction in promotional activity, which is partly related to the price increase discussions. It is a great shame, but without those increases we would not have a company.”

Like a lot of exclusively own-label suppliers, McBride lacks bargaining power. But it appears to have been harder hit than most food manufacturers, says Darren Shirley, retail analyst at Shore Capital.

“If you have got a coherent and solid argument for how your cost base is going up, in the main, price increases from suppliers are going through to retailers,” Shirley says. “We haven’t really seen any of the own-label food guys really worn significantly on margins. They’ve all talked about it being a challenge and there has been some trade-off in terms of volumes, but in terms of a failure to pass on prices, of all the stocks I cover, McBride is the one that has suffered most.

“All its cost base is oil-related, so it has been between a rock and a hard place, particularly because the cost pressures have been coming through at a time when the consumer is struggling. So the retailer has been trying to keep costs down to keep volumes up,” he adds.

Indeed, it is a dilemma that has hit manufacturers of both branded and private-label cleaning products across the board. McBride’s main UK competitor Jeyes, which manufactures both, reported an annual loss of £1.75m for the year to 31 March 2008. In the previous year it made a loss of £957,000. The directors’ report says Jeyes is attempting to source cheaper raw materials, but it too is planning job losses.

Even McBride’s attempts to create scale have come to nought. In the past few years McBride has gobbled up several other manufacturers of household and personal care products, including Dasty Italia, Darcy Industries and Henkel’s European private-label household products business. It is a sign, according to Roberts, that the little fish in the pond were drowning as well.

“Those companies have come to us and said, ‘Look, can we join you because life is very tough’. The UK probably has the most consolidated retail grocery market in the world and that gives the four big retailers enormous power over the supply chain,” says the retail expert. “As a result we probably have a more efficient manufacturing base than many other countries around the world.”

But for McBride, market conditions remain uncertain. And Roberts remains anxious.

“We are dedicated to private label – we only work for the retailers and all our investment goes towards that,” he says. “We would hope that in these exceptional circumstances we can successfully pass on these external costs, but there has been a lag and substantial uncertainty in our raw material prices remains. We haven’t passed on various costs. We haven’t been able to.”