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Goodman Fielder downgrades profit expectations

Australia’s largest baker and branded food manufacturer, Goodman Fielder (ASX: GFF), has released a trading update which is vague and somewhat confusing.

Rather than leading off with the real news, that earnings before interest and tax (EBIT) would be below consensus expectations, management chose to ‘butter’ (excuse the pun) the release up with a statement that Goodman Fielder had successfully negotiated a private label bread contract.

That was it! Not even a mention of who the contract was with – most likely Wesfarmers’ (ASX: WES) Coles supermarkets – and no financial details either, which basically made the statement redundant.

After the opening interlude of ‘good news’, management then got around to giving an update on trading conditions. This provided little context for readers given all the continuing, discontinuing and significant items that have been running through the company for a number of years now.

Goodman Fielder is now expecting EBIT, from continuing and discontinued operations (before significant items) for the financial year (FY) ending 30 June 2013, in the range of $195 million to $200 million. This compares with EBIT of $233 million in FY12, however FY12 included a 12-month contribution from the oils and fats division, which was divested late last year.

The rise of private label products has been a double-edged sword for food manufacturers. The loss of volume to private label has destroyed margins, however the winning of private label work has provided an incremental return on high fixed cost facilities.

Bega Cheese (ASX: BGA) has in recent times benefitted from a deal to provide private label dairy to Coles supermarkets, while up and coming health food producer Freedom Foods (ASX: FNP), has been under pressure for shelf space against the might of the supermarket giants.

Foolish takeaway

In the past, branded food producers have often been profitable investments. A strong brand can keep a customer coming back time and time again.

The situation in Australia, where food sales are dominated by two powerful supermarket chains, has significantly lessened branded food manufacturers’ power. Investors need to be aware of this structural shift, as the future profitability of the industry is likely to be significantly lower than in the past, which will no doubt affect the ability and size of dividend payments.

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Motley Fool contributor Tim McArthur owns a share in Goodman Fielder.

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