Bid talks continue at Geest

PREPARED foods group Geest admitted today that margins remain under intense pressure following unprecedented pricing pressure. The company has taken an axe to costs, cutting 10% of managers in the autumn as part of a recovery strategy following a massive profits warning last July.

Finance director Mark Pullen refused to talk about the progress of bid talks with Icelandic chilled foods group Bakkavor. The company tabled a £496m offer for the firm in December. Bakkavor, which bought Birmingham-based Katsouris for £102m in 2002, wants to strengthen its foothold in the prepared foods market.

Geest employs more than 10,000 staff around the K and produces items ranging from pasta dishes, pizzas, desserts and ready-made salads. The result of a tie-up between Bakkavor and Geest would result in a giant in the pre-packed meals market, supplying the likes of Waitrose, Morrisons and Marks & Spencer.

Pullen admitted that the company said it still faces tough challenges. Speaking today ahead of annual results in March he insisted that it remains on track to deliver sales growth on a like-for-like basis of about 5%. But although earnings are within expectations these are the revised forecasts following last July's warning.

{1} Supplying the major retailers has proved a double-edged sword for Geest and others in the industry. Intense pressure from the supermarkets to cut prices, particularly from Marks & Spencer, which moved to renegotiate deals with its food and merchandise suppliers as part of its own war on costs.

Pullen told This is Money that pricing pressure was coming from all retailers. He added: 'They're all always looking for better value, we expected price cuts of about 1%-2%. In fact it's been 2%, so at the top end of our expectations. We will endeavour to provide the value they want, whether we can do it as fast as they want is another matter.'

Geest has also been affected by rising raw material prices, which have severely squeezed margins. Pullen said that efficiency improvments during 2004 will have generated savings of about £22m, about 10% more than it anticipated in July, though these have been offset by selling price reductions and the rising costs of raw produce.

Another £16m worth of productivity gains are expected to be made by the end of 2005.