Letter reveals collapse of Mcerlain’s due to rapid rise in price of butter
Troubled bakery bought for £1.85m
THE soaring cost of butter was a key factor in trading difficulties at Co Londonderry bakery Mcerlain’s, the Belfast Telegraph can reveal.
The Magherafelt company was bought two weeks ago by Paul Allen, the managing director of crisps giant Tayto, after being put into administration.
A letter seen by this newspaper from administrators EY to the suppliers of the company also revealed that Mr Allen’s firm Hatch Bros paid a total of £1.85m for the business.
The administrators explained in the letter that the company had expanded rapidly over the last 18 months, investing in new machinery and staff.
But the peak trading period of Christmas 2017 failed to generate expected profits for the scaled-up business, leading to major losses and cash flow problems.
The letter said: “Adverse movements in the prices of key ingredients such as butter (exacerbated by forward contracts at peak prices) contributed to these issues and management did not implement sufficient controls to monitor costs during this period.”
Consumer prices of butter hit £4 for 500g last year, an increase of as much as 50% on the year before.
The cost growth has also hit food manufacturers like Mcerlain’s which rely on butter as a key ingredient. Prices are now around £3.15 for supermarket-own brands, £3.29 for Spar’s own local brand or £3.75 for brands like Golden Cow.
Michael Bell, chief executive of the NI Food and Drink Association, said butter supply had tightened across Europe as a result of climate conditions.
“Demand has increased and the price has moved up. This is a global cost movement and the price has been relatively stable at this high level for a while,” he said. “Historically, the cost of butter has made sharp movements up and down, but the next movement will be determined by supply-and-demand factors.”
Dankse Bank is the largest creditor of the company but agreed to provide funding throughout the sale of the business, which resulted in the rescue of 260 jobs at the company. Managing director Brian Mcerlain remains in his role.
According to the letter, corporate finance experts at EY had approached nearly 30 potential trade and financial buyers for the 50-year-old firm, which has customers including Waitrose and Marks & Spencer.
A total of 27 were identified and 15 then expressed an interest.
There were offers from two companies, with Hatch Bros the only company to make an offer based on buying the business as a going concern.
The letter by administrators EY to the suppliers of Mcerlain’s said the disappointing Christmas performance had led the company to commission consultants to identify ways of improving performance.
That ‘ turnaround’ plan was introduced in May and was to bring a return to profitability by August.
However, management accounts released in July showed the turnaround plan was not working as quickly as it was expected to.
The directors then started looking for an investor or buyer. EY had been appointed to carry out an analysis of the options open to the company, with Danske Bank saying it would continue to fund the company.
But according to the letter, EY’S process made it clear that the company required more support, while the July accounts showed “a material adverse variance against forecast profitability”.
According to the letter, EY was then engaged to support an accelerated sale, including preparing for potential insolvency.
Ways of keeping trade going were then discussed, with discussions then including a sale process.
However, the letter says that trading the business in administration without a sale was not in the best interests of creditors because “a number of key contracts would terminate on insolvency and it was uncertain which customers would continue ordering product”.
In addition, it was decided that shutting down the company altogether would result in even greater creditor claims as employee liabilities would be increased and assets would be worth less.
This week the company announced it was recruiting another 40 staff.
There are an undisclosed number of other suppliers who have been told their debts are not likely to be repaid, but who have been asked to continue working with the company under new owners.