Bread and Butter Problems: ABF's Allied Bakeries Review Signals Strategic Crossroads

The recent announcement that Associated British Foods (ABF) has placed its UK bakery division, Allied Bakeries, under strategic review has sent ripples through investor circles. With the company citing “very challenging market conditions” as the catalyst, the move underscores a critical inflection point for a division that has long been a symbol of British culinary heritage. Yet as ABF’s interim results reveal, Allied Bakeries’ struggles now threaten to overshadow the group’s broader resilience, leaving shareholders to ponder whether this iconic brand portfolio can be salvaged—or if it’s time to cut losses.

The Numbers Tell a Troubling Story

Allied Bakeries’ woes are not isolated. The division reported an increased operating loss during the first half of 2025, driven by a 2% sales decline in ABF’s grocery division to £2.09bn. While other brands under the grocery umbrella (e.g., Ovaltine, Ovaltis) managed “good sales growth,” Allied Bakeries’ inability to stem losses has become a drag on margins. The grocery division’s operating profit remained flat at £227m, with its margin inching up to 10.9% only due to strong performance elsewhere.

The broader group’s financials paint an even starker picture. ABF’s total revenue fell 2% to £9.51bn, while adjusted operating profit dropped 12% to £835m. A £16m loss in the sugar division and weak performance in the US cooking oils business (Mazola) compounded the challenges. Yet it is Allied Bakeries’ prolonged underperformance—now formally under strategic review—that has investors most anxious.

The stock’s 6% decline on the review announcement reflects this sentiment, eroding year-to-date gains to just 1.5%. Analysts argue the delay in providing clarity—ABF plans to update on Allied Bakeries’ fate by H2 2025—fuels uncertainty.

Why Is Allied Bakeries Struggling?

The UK bakery market is a battleground. Price competition, supply chain volatility, and shifting consumer preferences have squeezed margins. Allied Bakeries’ reliance on mass-market bread (e.g., Kingsmill) leaves it vulnerable to discount retailers and private-label brands, which now account for over 50% of UK bread sales. While its Speedibake division supplies private-label products, this has not insulated it from price wars.

Moreover, the division’s operational challenges persist. Despite investments like the new Scrocchiarella manufacturing line in Bradford—a nod to foodservice growth—the core bread business remains stagnant. As one analyst noted, Allied Bakeries has become an “unwelcome problem child,” lacking the dynamism of ABF’s global divisions like Primark or Ingredients (e.g., AB Mauri yeast).

Strategic Options: Sale, Restructure, or Sunset?

ABF’s CEO, George Weston, has emphasized the group’s “strong balance sheet” and flexibility to act decisively. Possible paths include:
1. Divestiture: Selling Allied Bakeries could free capital for higher-growth areas. However, buyers may demand steep discounts given its losses.
2. Restructuring: Closing underperforming plants or consolidating brands could reduce costs, though this risks job cuts and brand dilution.
3. Operational Overhaul: Focusing on premium products or innovation might revive demand, but this requires time and investment.

Analysts at Shore Capital argue that a sale is increasingly likely, given the division’s drag on ABF’s valuation. Yet without clarity on timing or terms, investors remain skeptical.

The Bigger Picture: ABF’s Diversified Resilience

While Allied Bakeries stumbles, ABF’s core strengths remain formidable. Primark’s adjusted operating profit rose 8% to £540m, buoyed by its US expansion and omnichannel strategy. The Ingredients division, too, delivered solid gains, offsetting UK woes. This contrast highlights ABF’s reliance on global growth engines versus legacy UK businesses.

The company’s capital management also signals confidence: £422m in share buybacks completed, with another £169m planned. The flat dividend of 20.7p per share underscores a focus on stability amid turbulence.

Conclusion: A Crossroads with High Stakes

Allied Bakeries’ strategic review is a pivotal moment for ABF. With the division’s operating loss expected to persist in 2025 and the UK market offering limited upside, a sale or restructuring appears inevitable. However, the delayed timeline and lack of specifics risk further investor anxiety.

Crucially, ABF’s broader portfolio remains robust. Primark’s £540m profit and Ingredients’ resilience provide a cushion, but Allied Bakeries’ fate could determine whether the group’s valuation rebounds. If the review leads to a swift, decisive outcome—such as a divestiture at a reasonable price—the stock could recover. Persistent uncertainty, however, may keep shares under pressure.

For now, investors must weigh the 6% stock drop and 12% profit decline against ABF’s financial flexibility and global growth. The review is not just about Allied Bakeries—it’s a test of ABF’s ability to evolve, shedding underperformers while nurturing its high-flying divisions. The next six months will reveal whether this iconic British brand can adapt or if it becomes a relic of the past.