CASE STUDY NOVEMBER 2019 ADVANCE INFORMATION

Copyright © ICAEW 2019. All rights reserved.

CASE STUDY

NOVEMBER 2019

ADVANCE INFORMATION

This material is issued prior to the examination session on 6 November 2019.

Candidates MUST bring this material with them to the Examination Hall.

ICAEW/CS/J19

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ICAEW\CS\N19 Page 1 of 43

DOUGHBY LIMITED: ADVANCE INFORMATION

This Advance Information is issued prior to the examination session so as to allow you to familiarise yourself with the information provided and to undertake any other appropriate research and analysis. The Advance Information is also published on the website: www.icaew.com/students.

You MUST bring this Advance Information with you to the Examination Hall, annotated if you wish, together with any other notes of your preparatory work. You must carry out sufficient and appropriate analysis work of your own in order to have a detailed understanding of the Advance Information. You should also undertake any additional research and analysis you feel necessary to enhance your awareness of the industry and market context and to enable you to clarify any technical terms or other issues of vocabulary. You will need to be able to refer back quickly to the Advance Information and your notes during the exam; you are therefore unlikely to benefit from taking large quantities of additional material with you into the Examination Hall.

At the start of the examination you will receive some additional material which will complete the description of the case scenario and state the Case Study requirements. Your answer must be submitted on the CBE software provided by ICAEW in the Examination Hall.

Assessment of the Case Study

The marks in the Case Study are awarded for professional skills, allocated broadly as follows:

Assimilating and using information 22.5%

Structuring problems and solutions 22.5%

Applying judgement 22.5%

Drawing conclusions and making recommendations 15.0%

Demonstrating integrative and multidisciplinary skills 17.5%

Of the total marks available, 15% are awarded for the executive summary and approximately 10% for the relevant discussion of ethical issues within your answer to the requirements. Ethical issues do not form a specific requirement but, within a requirement, may cover such topics as:

Lack of professional independence or objectivity

Conflicts of interest among stakeholders

Doubtful accounting or commercial practice

Inappropriate pressure to achieve a reported result.

You should be clear that marks are awarded for demonstrating your professional skills, not for reproducing facts from the case. In order to be successful, you will need to:

Demonstrate your knowledge of the case material and make use of your preparatory work;

Carry out relevant analysis of the problems and structure your proposed solutions;

Apply your judgement on the basis of the analysis that you have carried out; and

Draw conclusions from your analysis and judgement, and develop them into practical commercial recommendations.

Omitting any one of these elements will have a significantly detrimental effect on your chances of success.


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November 2019 Case Study: Doughby Limited

List of exhibits

1 About you (Viv Mores), your employer (Pine Andrews) and your client (Doughby Limited)

2 Bread and related products

3 Doughby: History and development

4 Doughby: Financial and operating history

5 Doughby: Management accounts for the three years ended 30 September 2018

6 Doughby: Review of the management accounts for the year ended 30 September 2018

7 Doughby: Bread Varieties (BV)

8 Doughby: Morning Goods (MG)

9 Doughby: Artisan and Specials (A&S)

10 Doughby: Customers

11 Doughby: Suppliers

12 Doughby: Strategic plan

13 Doughby: Competitors and marketing

14 Recent media coverage


Who’s who in the Doughby Case:

Pine Andrews (PA) Chartered Accountants

Viv Mores (you) Trainee ICAEW Chartered Accountant

Sundari Rai Partner

Doughby

Andy Marks Managing Director

Jo Bloggs Director of Production and IT

Di Peters Director of Purchases, Warehouse and Transport

Les Mendez Director of Sales and Marketing

Freida Delores Finance Director (an ICAEW Chartered Accountant)

Horace Baker Head of Bread Varieties factory

Meryem Kaya Head of Morning Goods factory

Fiorella Bianchi Head of Artisan and Specials factory


EXHIBIT 1 About you (Viv Mores), your employer (Pine Andrews) and your client (Doughby Limited) You are Viv Mores, a final-year trainee ICAEW Chartered Accountant, working in the business advisory unit of Pine Andrews (PA), a firm of ICAEW Chartered Accountants with offices across the UK. One of your clients is Doughby Limited, a baking company located on the outskirts of the city of Birmingham. Doughby operates from one site with three factory units. Its customers are a variety of retail organisations and trading enterprises in Birmingham and further afield. You report to Sundari Rai, a partner in the business advisory unit. Since you joined Pine Andrews, your work has included:

Reviewing the management accounts and financial statements of clients to identify trends and key issues, enabling clients to make informed decisions about their business

Performing financial data calculations, including contribution analysis, and further financial analysis for clients to assist the consideration of any business opportunities

Preparing financial and numerical calculations for clients, considering any assumptions provided with a critical professional review to enable the impact of future business decisions to be properly assessed

Offering clear evaluations to clients based on analysis of both opportunities and threats and the impact of both on profitability, the cash position and cash flow

Drafting reports for clients on all financial and commercial aspects of their business


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EXHIBIT 2

Bread and related products

Brief history of bread

The domestication of animals and cultivation of useful plants, including cereals, by prehistoric people began in the Neolithic period around 12,000 years ago. With the expansion of agriculture, they discovered that mixing cereal grains with water and cooking the mixture on heated stones resulted in what we might now describe as a crude form of porridge and flat breads. However, as whole cereal grains were difficult to digest, a new method had to be sought and the practice of grinding the grains between two stones to produce flour was subsequently discovered.

It is believed that in Europe the Romans were the first to build mills to grind cereal grains into flour, using animals or slaves to keep the millstones turning. Following the fall of the Roman Empire, the harnessing of wind and water power resulted in windmills and watermills for producing flour. Today, grain mills are mainly powered by electricity and the flour they produce is sold in bulk to bakeries, which turn it into bread and other baked products.

Bread and its commercial production

Bread is made with flour from cereal grains (such as wheat or rye). Cereal grains consist of three components: bran (hard outer layer), germ (reproductive component) and endosperm (the soft tissue that surrounds the germ). Wheat is the most common cereal for bread in the UK and is used to manufacture both white and brown bread. White bread is produced from the endosperm only, ie, the bran and germ have been removed. As these latter two components are the main source of nutrients, vitamins and minerals are often added during the production of white flour. There is no formal definition of brown bread: some varieties are made with a mixture of white and wholegrain flour, but others are actually white bread with the loaf’s colour enhanced with malt or brown sugar to give it a ‘healthy’ appearance. Wholemeal bread (included as a form of brown bread) is made from flour produced from the whole grain and contains more fibre. With the public’s increased awareness of healthy nutrition, sales of brown bread (including wholemeal bread) have improved while there has been a decline in white bread sales.

In basic bread manufacturing, the flour is combined with water at a specific temperature in a mixing drum and yeast is added to the mixture. (Other ingredients may be added for reasons of taste, appearance or shelf-life.) Mechanical arms knead the dough to the required consistency, activating the gluten molecules, which form long elastic chains. Gluten is a combination of proteins found in the endosperm of cereal grains, with wheat having the highest gluten content. As the yeast feeds on the grain sugars in the flour and multiplies, it produces carbon dioxide (CO₂) bubbles. These bubbles work with the elasticity created by the gluten to ‘leaven’ the dough, ie, make it rise.

The kneaded dough is placed in covered metal bowls in a temperature-controlled room. When the dough has risen sufficiently, it is placed in a machine that cuts it into sections of a pre-determined weight and transported by conveyor belt into a moulding machine. The moulding machine shapes these sections into balls of dough, which it then deposits onto a layered conveyor belt system that moves slowly through an enclosed humid cabinet (a ‘prover’). This enables the dough to ‘rest’ and rise further before being shaped into loaves by another machine and inserted into pans. These pans enter another prover before moving down a tunnel-like oven where the loaves are baked, tipped out of the pans onto shelves and partially cooled. If sliced bread is required, the loaves are moved into a slicing machine that produces slices of a consistent width. The finished loaves then enter the final machine that wraps and labels them before despatch.


The production process in a bakery is therefore very short and, because bread is produced for immediate sale by bakers, there is no significant work in progress or finished goods in inventory.

UK bread market overview

The UK bread market is highly diversified. This market is currently worth more than £3 billion and is one of the largest sectors in the food industry. It may be classified into three broad categories: bread varieties (BV); morning goods (MG); and artisan and specials (A&S). BV comprises two main types of bread: white bread and brown bread (sold as loaves), which can be sliced or unsliced, wrapped or unwrapped. MG comprises baked confectionery items such as Danish pastries, croissants, pains au chocolat, muffins, scones, tea cakes and brioches, which are often consumed as a component of breakfast. A&S products include artisan forms of bread made from traditional grains (such as spelt or rye) prepared and baked in traditional shapes (usually sold unsliced and unwrapped); and special breads, a category which includes organic, gluten-free, vegan loaves, as well as loaves baked according to the recipes and methods of other countries, religions or traditions.

In the UK, the Hovis brand commands the number-one position within the main bread market and is bought by more households than any other bread brand. Although white bread has traditionally been the UK's firm favourite, brown bread has been gaining popularity over the last few years. Hovis is the clear leader in the brown bread market with over 30% market share by value.

The main barriers to entry to the bread market can be the cost of automation for any significant production operation. The trend towards ethnic and artisan breads and linked products has allowed many small, local operators to gain a foothold without the cost of automation. Converting that foothold to a major production and selling operation is not easy.

In recent years, the move by large customers, mainly supermarkets, towards own-label products (or private label products) – ie, bearing the label of the supermarket on the product package – has been a major trend. This has applied to the larger customers of all major bakeries. Own-label products exist on almost all items sold by major supermarkets and retailers. They are products manufactured by the major brand manufacturers, and which are very similar to equivalent major brand items, but which are wrapped (or labelled) with the name of the retailer (the supermarket or organisation selling to the end consumer). Own-label products can allow the retailer to sell these items to consumers at a lower price than the price of the major brand item – regardless of the price paid by the retailer.

The importance of marketing

In a market of apparently homogenous goods, the importance of good marketing can make all the difference to a product and hence a company’s success or failure. As an example, the 1973 Hovis “Boy on a Bike” TV advert, directed by Ridley Scott (depicting a lad pushing an iconic bread delivery bike containing a huge basket of Hovis bread up Gold Hill – a steep cobbled street in the southern English town of Shaftesbury) has long been credited with its success. The 45-second film with accompanying brass band music and a strong male voiceover stamped the image of a wholesome brown loaf made by Hovis on the memory of the nation. It allowed the company, which originated in Macclesfield (in the north of England), and its brown bread “full of wheatgerm” to dominate the bread market for years. (This advert has recently been reprised, almost 50 years after its creation.)


EXHIBIT 3

Doughby: History and development Overview Doughby is a long-established baking business which currently operates from three factories on a site on the farming outskirts of Birmingham – which makes it a manufacturing operation in an almost rural setting. It serves a geographical area of approximately 50 kilometres’ radius. Birmingham is a major city in England’s West Midlands region, which has a history as, and remains, a manufacturing powerhouse. Birmingham has the second-largest metropolitan economy in the UK in terms of GDP. It is a cosmopolitan city which leads trends in food and other goods – being at the centre of a grouping of nearby cities and towns which have benefited from the influxes and influences of a rich diversity of cultures and tastes. It is a major conference and convention centre, and it is also laced by a network of canals, which nowadays are lined with fashionable cafés and characterful bars. History and development The business can trace its origins to a small bakery which was created in 1904 and baked bread for its local community at that time. The success of its current operations is the result of the continuing manufacture of good-quality bread and related products, made possible by the purchase of suitable premises, and the investment in appropriate automated production processes. Factories Within its current site Doughby operates three major divisions, with three separate manufacturing facilities (or factories). These factories each specialise in a different type of product:

The largest manufactures Bread Varieties (BV), which comprise mainly white and brown bread (see Exhibit 7).

The second manufactures Morning Goods (MG), which include pastries, croissants, tea cakes and other similar products (see Exhibit 8).

The third manufactures Artisan and Specials (A&S), which comprise speciality breads and other similar baked products (see Exhibit 9).

The company operates with an established environmentally-friendly ethos throughout its site. This includes having both wind-sourced and solar-assisted power-generating facilities, which reduce the reliance on conventional power supplies (The National Grid). These generate approximately 30% of all Doughby’s power needs. Similarly, all food waste generated is sold at a minimum price to the local farms which surround Birmingham, for their use as animal feed or compostable material. Some of these are also the farms which grow the grains used in the flour mills which supply Doughby. Suppliers The suppliers of flour to Doughby are two local flour mills, Shipton Flours and Warwickshire Mills (see Exhibit 11), both of which supply the full range of flours required for all manufacturing purposes. These flours are produced from a range of UK grains grown on regional farms. These are milled according to Doughby requirements. All flour is supplied to Doughby in bulk tankers from the mills and is then transferred into Doughby inventory storage for use in bread and other production. Additional ingredients such as sugar, milk and dried fruit are all obtained in bulk from local wholesalers. The water used in manufacture is supplied through the UK water network.


Customers Doughby products are delivered to its customers, throughout Birmingham and the West Midlands, on a daily basis – or as frequently as required. These customers comprise major retail outlets (such as supermarkets), large independent retail outlets, restaurants and coffee chains, as well as catering companies and organisations running their own catering operations, such as hospitals, universities or colleges (see Exhibit 10). Many of the supermarkets and large retailers, as well as almost all restaurant and coffee chains, are open seven days a week, although their opening hours can vary widely. Customers require freshly baked products, such as bread, to be available from early in the morning. As a result, Doughby factories, which operate 24 hours a day, are extremely busy between 02.00 and 06.00 each day, loading their freshly baked products onto the delivery vehicles ahead of the day’s deliveries. Delivery Doughby owns a range of vehicles which are used to provide a daily delivery service of all Doughby products which are ordered and need delivering according to customer requirements. Some of these are large articulated trucks, some are standard-sized trucks, some are large vans, and some are smaller electric vehicles (known as floats). Almost all delivery vehicles have temperature-controlled storage sections to ensure that products are delivered to customers in perfect condition.


EXHIBIT 4

Doughby: Financial and operating history (prepared by Freida Delores) Up to 30 September 2015 (2015) Revenue In the year to 30 September 2015, Doughby’s revenue was a mix of Bread Varieties (BV) – approximately 50%; Morning Goods (MG) – 30%; and Artisan and Specials (A&S) – 20%. The main BV customers, which include the branches of large supermarkets and other independent retailers in and around Birmingham, have remained loyal to us over many years. Similarly, our MG customers, which include established coffee chains and take-out food outlets, as well as a wide range of retailers, have maintained steady demand in terms of quantities of products purchased. There is little seasonality in overall revenue. In the four years up to 30 September 2015, the main change was within A&S, where overall demand grew consistently, with new customers purchasing our increasingly diverse A&S product range. In the year ended 30 September 2015, and since then, Doughby has earned more BV revenue from brown bread sales than white bread sales. Property, plant and equipment (PPE) As is the case with business operations such as ours, we have made a significant investment in property, plant and equipment (PPE) over the years. Our baking plant and equipment is constantly being upgraded, as is the IT system which drives all our operations. Year ended 30 September 2016 (2016) Revenue

BV sales increased from just over £40 million in 2015 to £42.6 million in 2016.

Following years of steady sales and sustained profitability, revenue from MG decreased slightly from £23.2 million in 2015 to £23.0 million in 2016.

We had strong growth in sales of A&S, up from £15.8 million in 2015 to £18.7 million in 2016. The small decline in MG happened despite the best efforts of our sales team, but it reflected the national shift away from goods which are seen to contain sugar. This follows campaigns by the UK government and various health bodies, throughout this period, against the high levels of sugar being consumed by individuals in the UK. Within the various business streams or categories of revenue, there were also trends which could be discerned:

In BV, brown and wholemeal bread (which are grouped together for analysis) registered an increase over the prior year of more than 13.9%, against a decline in white bread sales of approximately 1.7%. The effect of these two changes created the overall increase of 6.5%.

For MG, there has been a national change towards less obviously sugar-coated products and, despite a good Doughby marketing campaign, demand for these goods remained static or fell.

With respect to A&S, there was a noticeable, continued increase in sales of those items that appeared to have a more rustic appearance and were baked from more traditional forms of grain, such as rye and spelt.

The company achieved an overall gross margin of 23.7%, almost the same as in previous years.


The overheads of just over £19 million were also in line with previous years. In percentage terms, the operating profit looks low (0.9%), but the absolute figure of £766k was sufficient to cover the finance costs (£384k) and to provide a profit before tax of more than £380k. Bank transactions

The following transactions with the bank took place during the year:

On 1 October 2015, Doughby repaid an existing bank loan of £2 million.

On the same day, the company took out a new bank loan of £5 million to cover new investments in non-current assets.

The loan is secured by way of a fixed charge on the premises, plant and equipment of the business and a floating charge on the working capital.

The bank also established a new overdraft limit with Doughby of £1.5 million. The main terms and covenants of the bank loan and overdraft are: Terms o The loan principal is repayable on 1 October 2025 o Interest on the bank loan is at 6% per annum on £5 million, payable monthly o Interest on the bank overdraft is variable. It is currently set at between 8% and 10% per annum Covenants 1. Operating profit to remain above £500k each year 2. Debt/equity ratio (bank loan plus overdraft, divided by total shareholders’ equity) not to exceed 50% 3. Working capital (defined as current assets minus current liabilities) to remain positive 4. The company to provide a rolling quarterly cash flow forecast to the bank for its review

Covenants 1, 2 and 3 are calculated and measured annually by reference to the management accounts. If any of the covenants are not met, then the bank:

o may exercise its fixed charge and/or floating charge o has the right to recall or renegotiate the loan and the overdraft o may impose higher interest rates on both the loan and the overdraft o may set other new loan clauses or covenants it deems necessary.

PPE The company made investments of £3,336k in PPE. The majority (£2,477k) was invested in new IT systems and plant and machinery to update, integrate and control the production processes in all three factories. There was also an investment of £859k in upgrading part of the vehicle fleet.

Year ended 30 September 2017 (2017) Revenue The financial year 2017 saw a slower increase in total revenue (2.8%). This was caused by a significant drop in the price of wheat, and other harvested ingredients, owing to an unexpectedly good UK harvest. The reduction in these ingredient costs was passed on to customers by way of lower sales prices across the whole product range. The effect of this change gives an indication of some important aspects of our business:

The problem of unpredictable variations in the availability and the cost of key ingredients, such as wheat, caused by short-term weather changes and other factors. In 2017 there was a good UK and European harvest for wheat and related crops.


The rapid dissemination of all market information relating to wheat harvests, yields and cost prices to customers and suppliers. In this instance, the good harvests of wheat in 2017 created a glut, which drove prices for ingredients down – and therefore our costs.

The buying power of our knowledgeable customers who expect us to pass beneficial price changes to them as soon as possible – but who are more resistant to price rises.

However, Doughby increased its volume of sales by more than 5%, winning new customers and successfully marketing its bread and A&S product range.

The increase in total revenue of £2.4 million from £84.3 million to £86.7 million was a function of different performances in each of our business streams:

BV sales increased by 3.1% (£1.3 million) from £42.6 million to £43.9 million.

However, sales of MG continued to decline (more rapidly this year) by 6.6% (£1.5 million), from £23.0 million to £21.5 million.

There was excellent growth in sales of A&S of 13.6% (£2.6 million), from £18.7 million to £21.3 million.

Within the various business streams there were also trends that could be discerned:

In BV, brown and wholemeal bread registered an increase over the prior year of more than 8.3%, against a decline in white bread sales of approximately 3.4%. The effect of these two changes created the overall increase in BV in 2017 of 3.1%. This change reflects the shift in consumer demand away from white to other bread sales.

The decline in MG accelerated during the second half of our financial year, and we are reviewing this ongoing decline carefully. We believe that our marketing campaigns are appropriate, but there is a clear shift away from MG products, which appears to be difficult to slow. However, we are still earning revenue of £21.5 million from this business stream.

With respect to A&S, there was a continuing increase in sales of artisan breads baked from more traditional forms of grain such as rye and spelt. These traditional breads are becoming increasingly popular.

The revenue trends that we experienced during 2016 have continued in 2017. The company has maintained an overall gross margin of 23.7%. Other matters During this year, Doughby made a total investment in PPE of £2,297k. There was an investment in IT and plant and machinery of £1,331k. This included an £932k upgrade to the IT system which integrates the monitoring of inventory and controls the re-ordering of ingredients with suppliers as well as the delivery and distribution of sales to customers. Doughby also made an investment of £399k in A&S production and baking facilities to cope with expansion. Elsewhere there was an investment in new vehicles of £753k, and an investment of £213k in improved car park facilities, including electric vehicle charging points throughout the vehicle car park, for employees’ and visitors’ vehicles. Following a managed fall in the overdraft as at 30 September 2016 to £576k, the overdraft rose to £741k as at 30 September 2017. Although this was well below the negotiated limit of £1.5 million, we have remained aware of the constant need to monitor and manage the overdraft. I am attaching the management accounts for the three years ended 30 September 2018 (Exhibit 5). Following the management accounts there is a review of the year to 30 September 2018 (Exhibit 6), and a more detailed review of each business stream in the subsequent three exhibits.


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EXHIBIT 5

Doughby: Management accounts for the three years ended 30 September 2018

Statement of profit or loss

Years ended 30 September 2018 2017 2016

Note £000 £000 £000

Revenue 1 94,713 86,675 84,342

Cost of sales 2 (72,538) (66,107) (64,318)

Gross profit 22,175 20,568 20,024

Overheads 3 (21,343) (19,719) (19,258)

Operating profit 832 849 766

Finance costs (408) (397) (384)

Profit before taxation 424 452 382

Taxation (81) (86) (73)

Profit for the year 343 366 309

Statement of financial position As at 30 September 2018 2017 2016

£000 £000 £000

Non-current assets PPE 4 12,042 13,426 14,002

12,042 13,426 14,002

Current assets Inventories 1,477 1,334 1,128

Trade and other receivables 5 14,029 12,065 10,723

15,506 13,399 11,851

Total assets 27,548 26,825 25,853

Shareholders' equity Ordinary share capital 2,000 2,000 2,000

Retained earnings 9,945 9,602 9,236

Total shareholders' equity 11,945 11,602 11,236

Non-current liabilities 6% bank loan 5,000 5,000 5,000

5,000 5,000 5,000

Current liabilities Trade and other payables 6 9,667 9,482 9,041

Bank overdraft 936 741 576

Total current liabilities 10,603 10,223 9,617

Total equity and liabilities 27,548 26,825 25,853


Statement of cash flows

Year ended 30 September 2018 2017 2016

£000 £000 £000

Profit before tax 424 452 382

Adjustments for: Depreciation and loss/profit on disposals 2,611 2,779 3,010

Finance costs 408 397 384

3,443 3,628 3,776

Change in inventories (143) (206) (312)

Change in trade and other receivables (1,964) (1,342) (1,101)

Change in trade and other payables 190 428 (459)

Cash generated from operations 1,526 2,508 1,904

Taxation paid (86) (73) (66)

Finance costs (408) (397) (384)

Net cash from operating activities 1,032 2,038 1,454

Investing activities Purchase of PPE (1,273) (2,297) (3,336)

Proceeds from disposal of PPE 46 94 108

Net cash used in investing activities (1,227) (2,203) (3,228)

Financing activities Repayment of bank loan - - (2,000)

New bank loan - - 5,000

Net cash (used in)/from financing activities - - 3,000

Net change in cash and cash equivalents (195) (165)

1,226

Cash and cash equivalents at start of year (741) (576) (1,802)

Cash and cash equivalents at end of year (936) (741) (576)


Notes to the management accounts

Note 1 Revenue (all UK) 2018 2017 2016

£000 £000 £000

Bread Varieties (BV) 48,013 43,887 42,572

Morning Goods (MG) 20,337 21,513 23,036

Artisan & Specials (A&S) 26,363 21,275 18,734

94,713 86,675 84,342

Note 2 Cost of sales 2018 2017 2016

£000 £000 £000

Ingredients 48,297 42,811 41,448

Labour 9,633 8,918 8,709

Production 14,608 14,378 14,161

72,538 66,107 64,318

Note 3 Overheads 2018 2017 2016

£000 £000 £000

Administration and marketing 9,441 8,978 8,801

Transport and distribution 11,902 10,741 10,457

21,343 19,719 19,258


Note 4 Tangible assets: Property, plant & equipment (PPE)

Land & Plant, IT &

Buildings Equipment Vehicles Total

Cost £000 £000 £000 £000

At 1 October 2015 3,504 11,561 7,806 22,871

Additions - 2,477 859 3,336

Disposals - (713) (588) (1,301)

At 30 September 2016 3,504 13,325 8,077 24,906

Depreciation At 1 October 2015 1,013 4,622 3,452 9,087

On disposals - (594) (495) (1,089)

Charge for the year 88 1,833 985 2,906

At 30 September 2016 1,101 5,861 3,942 10,904

Carrying amount: 30 September 2016 2,403 7,464 4,135 14,002

Cost or valuation At 1 October 2016 3,504 13,325 8,077 24,906

Additions 213 1,331 753 2,297

Disposals - (217) (312) (529)

At 30 September 2017 3,717 14,439 8,518 26,674


On disposals - (186) (259) (445)


At 30 September 2017 1,199 7,427 4,622 13,248


Cost or valuation

At 1 October 2017 3,717 14,439 8,518 26,674

Additions - 765 508 1,273

Disposals - (101) (278) (379)

At 30 September 2018 3,717 15,103 8,748 27,568


On disposals - (44) (187) (231)


At 30 September 2018 1,297 8,929 5,300 15,526



Note 5: Trade and other receivables

2018 2017 2016

£000 £000 £000

Trade receivables 12,117 10,423 9,322

Other receivables 1,912 1,642 1,401

14,029 12,065 10,723

Note 6: Trade and other payables

£000 £000 £000

Trade payables 8,832 8,694 8,344

Other payables 835 788 697

9,667 9,482 9,041


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EXHIBIT 6

Doughby: Review of the management accounts for the year ended

30 September 2018 (2018)

Revenue This year saw a return to higher growth in total revenue (9.3%). However, some of this increase was caused by a dramatic increase in UK and European wheat prices in the later part of the year. Because of widespread awareness, and acceptance, amongst Doughby customers, these increases in ingredient costs could be passed on to customers.

The cost of UK wheat per tonne at 30 September 2018 increased by 20% on the previous year. This increase occurred in the last quarter of Doughby’s financial year. Supply of flour has been under pressure throughout Europe following the hot, dry growing season in 2018, which resulted in unexpectedly lower yields of wheat and other crops from UK and EU farms and a sharp increase in prices in July, August and September 2018.

There were also substantial increases in the cost of other ingredients as well as disruptions to aspects of packaging and product life caused by the shortage of CO₂ (Exhibit 14a). The effect was that Doughby production managers had to react swiftly to these changes, both in respect of prices and in the need to implement operational changes to mitigate their impact.

Doughby successfully managed to negotiate and pass on the higher costs through product price increases to customers. We also determined the necessary operational adjustment and negotiated a temporary agreement with customers to take account of the shortened shelf-life of some products

caused by the CO₂ shortage. Despite these issues, overall Doughby increased its volume of BV sales by more than 2% and has again won more new customers, particularly in the A&S product range.

Total revenue increased by 9.2% (£8.0 million) from £86.7 million to £94.7 million. Changes in each of our business streams varied:

BV sales increased by 9.3% (£4.1 million) from £43.9 million to £48.0 million.

However, sales of MG declined by 5.6% (£1.2 million), from £21.5 million to £20.3 million.

Doughby achieved excellent growth in sales of A&S, up 23.9% (£5.1 million) from £21.3 million to £26.4 million.

Although the continuing decline in MG is a nationwide trend, we have been looking at ways to minimise it. It is apparent that any products which contain sugar are suffering reduced demand. As a result, Doughby has reduced the levels of sugar in all its MG products, where appropriate replacing it with increased levels of dried fruit and artificial sweeteners.

The following changes occurred within the three business streams:

In BV, brown and wholemeal bread registered an increase over the prior year of 18.7% against a decline in white bread revenue of approximately 3.6%. The effect of these two movements created the overall BV revenue increase of 9.3%. Although this change reflects the continuing shift in consumer demand away from white to other bread sales, approximately 5% of the annual increase in brown bread revenue came from price increases in the last quarter.

The continuing decline in MG for the 12 months slowed slightly during the second half of our financial year, which we believe was the result of our clear MG marketing campaign being more effective in carrying our message of reduced sugar in our products. However, this continuing and significant decline in MG sales remains a major concern.


With regard to A&S products, there was an increase in revenue of £5.1 million as we continued to diversify and baked more specialist breads. These products are baked according to traditions used in other countries and to different recipes.

Despite the changes stated above, the company achieved an overall gross margin of 23.4% in 2018, very close to the overall margins achieved in the two previous years. PPE Doughby has made some additional investment in IT and plant and machinery (£765k) and vehicles (£508k). This has included a further upgrade to the IT system which integrates the operational and reporting systems, including higher levels of security controls, firewalls and recovery controls. It also includes a more integrated mapping and delivery system which has been installed in all vehicles and which provides two-way reporting from vehicles to the factories. Bank Since taking out the new loan of £5 million, we have complied with its terms and covenants. Doughby has a good working relationship with the bank and particularly its business client manager, Graham Blakely, with whom we have dealt for the past eight years. He knows our business and our senior people well. Doughby supplies the bank with its quarterly cash flow forecasts, and the bank monitors those forecasts against what happens to the bank overdraft. We have regular conversations and meetings, including one in November each year to go through a detailed review of our management accounts and our strategy and prospects. Owing to working capital pressure, caused by price changes from suppliers close to 30 September 2018, the overdraft has risen to £936k as at the financial year end. However, this is well below the overdraft limit, and Doughby has met all the other covenants to the loan.


EXHIBIT 7

Doughby: Bread Varieties (BV) – prepared by Horace Baker

White and brown bread This business stream has existed in one form or another since the business was created. Bread can be high in carbohydrates, low in nutrients, and its gluten and antinutrient contents may cause health issues for some people. Because of this, Doughby follows the same process as most bread manufacturers and enriches its bread with extra nutrients. Wholegrain or similar varieties may bestow several health benefits. In moderation, bread can be enjoyed as part of a healthy diet.

Doughby’s white bread is made from wheat flour from which the bran and the germ layers have been removed from the whole wheatberry (the whole wheat kernel except for the husk/hull) as part of the flour milling process. This is a process followed by most of the UK bread industry, and for Doughby it produces a light-coloured, but not entirely white, flour. The bread is enriched with extra nutrients.

Doughby brown bread flour contains 85% of the wheat grain from which some of the bran and germ have been removed. Although Doughby brown bread does not contain as much fibre as wholemeal bread, it is still a good source of fibre (and probably better than white bread) – but this fact is not emphasised by Doughby.

Also included under Doughby brown bread revenue is wholemeal bread made from whole grains that have been milled to a fine texture, giving a plain brown appearance. Wholemeal flour contains more fibre than white flour. Wholemeal bread also contains more natural vitamins and minerals than many white breads.

Doughby packaged wholemeal bread (which is sold mostly as own-label) is made by recombining white flour with the bran and germ removed during milling. This creates a longer-lasting flour, which therefore improves the bread’s shelf-life for consumers after purchase, but it does not provide the same nutritional balance as flour milled from whole grains.

Marketing

Although bread is a basic product with which most people in the UK are fully familiar, Doughby’s success in selling its BV products is heavily affected by its marketing campaigns. For a number of years, Doughby has used an animation campaign voiced by famous regional actors. Its marketing strapline spoken in a rich rural English accent – “A ‘thorough-bred’ manufacturer making bread thoroughly” – has fed into everyday language.

Recently the marketing campaign of the Federation of Bakers (the main baking industry body) has focused on the goodness to be obtained from bread and on campaigns to be “beach fit” for the summer months. This campaign is made on behalf of all UK bakers.

Pricing The pricing of its bread sales is a key factor in Doughby’s BV sales success. An important factor is that Doughby’s major customers, such as supermarkets, need to be able to sell a basic 800-gram sliced white loaf – the market standard loaf – to the final consumers for around (and preferably under) £1. Thus, they will only buy from bakers, such as Doughby, at a purchase price which allows them to sell at this price. These retail outlets use the price of a loaf of bread to emphasise to their customers that they are providing all goods at a better (or equivalent) price by comparison with any competitors. The sales price of an 800-gram loaf of bread is a well-known item for comparison between supermarkets – although such a loaf can sometimes be used as a competitive loss-leader for a specific supermarket. (A loss-leader is a product that is sold at a loss or below a normal profit margin level in order to entice consumers into a shop to purchase it and – hopefully – other products.)


Doughby maintains its own profitable price level for selling its 800-gram loaf to the supermarkets and its other customers that allows those customers to achieve the £1 target sales price.

BV revenue 2018 2017 2016

£000 £000 £000

White 17,657 18,321 18,963

Brown 30,356 25,566 23,609

48,013 43,887 42,572

BV cost of sales 2018 2017 2016

£000 £000 £000

Ingredients 24,140 21,206 20,724

Labour 4,417 4,259 4,154

Production 7,299 7,189 7,081

35,856 32,654 31,959

The growth of BV revenue has been due to increasing demand for Doughby brown bread. This is partially a substitution product for white bread, but it has also been given many positive reviews by consumers as being both tasty and of consistent good quality. In addition, there has been an effective long-term marketing campaign which has emphasised the same key message over time that Doughby bread is a quality product produced by a trustworthy baker. These factors have helped Doughby to overcome the decline in sales of white bread, a national UK trend which appears to be accelerating. Although the BV sales mix has altered between white and brown bread, the cost of sales does not vary significantly between them. The extra nutrient ingredients needed for white bread have offset the slightly higher cost of the brown bread flour. Labour on both processes is fully interchangeable and is not split between the bread varieties. It includes managerial and supervision costs. The production costs for the factory include: power for the plant and equipment; heat and light; depreciation of the plant and equipment; and all factory maintenance and cleaning costs. The gross margin for BV has been around 25% for the past three years despite the variations in ingredient prices. BV baking is a continuous process throughout the day, apart from the necessary halts for detailed cleaning to meet Food Standards Agency (FSA) requirements. Daily production volumes and schedules are determined by confirmed orders received from customers. The cut-off for BV orders which can be included for next-day delivery is midnight, although the majority of BV orders from larger retailers and customers are known well in advance. All weights and measures for ingredients and mixings are controlled by Doughby’s IT system. This also controls the timings for activities in the production process and the temperature for each step in the mixing, proving and baking process. Packaging has become a major issue for the company in recent years, but particularly over the summer of 2018. The ongoing issue is to find a form of packaging that maintains the freshness of bread over a number of days against the need to move away from plastic packaging to a more environmentally-friendly and sustainable system.

The CO₂ shortage over the summer of 2018 (Exhibit 14a) has allowed Doughby to discuss all packaging issues with its major customers. The most important criteria are holding current costs, maintaining packaging standards and, increasingly important, ensuring that environmental concerns are addressed. We believe that the development and use of a potato-starch-based wrapping will address all of these factors. The wrapping can be composted at home, being disposable with food waste, garden compost or in recycling bins. We tested it during September 2018 and will be using it for the next financial year.


EXHIBIT 8

Doughby: Morning Goods (MG) – prepared by Meryem Kaya Doughby’s Morning Goods (MG) business stream comprises the full range of baked confectionery items: Danish pastries, croissants, pains au chocolat, muffins, scones and brioches, many of which are seen as indulgent items to consume. Doughby produces these items in the second factory on the Birmingham site. In this factory there are separate production lines and schedules for each type of product. The majority of these items are produced and delivered to customers as batches of single items. Some are produced and then packaged in different quantities before sale – such as a box of small muffins or croissants, which might be sold as a pack of four or six items (mainly own-label products for supermarket customers). The production and baking process is highly automated with a complex range of mixing, proving, baking and filling machines and ovens to cope with the different products. For about five years Doughby has marketed its MG products with: “The Morning begins with Doughby Goods …”. It sells all of its products through retail customers. These comprise a range of supermarkets, coffee shop chains and take-out food outlets. A number of the well-known outlets, which have very little food preparation or storage space, operate using Doughby’s online inventory re-ordering and rapid response delivery system. This can mean that in some instances Doughby makes a series of deliveries in the course of a day to a specific outlet with a very high turnover. The figures shown in the following table depict the total annual details for all MG activity.

2018 2017 2016

£000 £000 £000

MG revenue 20,337 21,513 23,036

MG cost of sales

Ingredients 13,033 12,087 11,805

Labour 1,517 1,784 1,942

Production 3,823 3,838 4,182

18,373 17,709 17,929

MG business stream There is a continuing decline in the market for MG products – accelerated by a mixture of the movement away from white flour and related white flour products, and the healthy life / sugar reduction campaign.

There has been a steady decline in MG revenue over the last three years, although the volume of goods sold has not declined by the same percentage.

The gross profit trend is downwards – caused by reducing sales prices to encourage sales. In the financial year 2016 the gross margin was approximately 22%, but by 2018 it had dropped to approximately 10%. As a result of this pricing policy all costs appear to have increased by comparison with revenue.

Because of the decline in the MG revenue, Doughby has been reluctant to make any significant investment in plant and machinery for the MG factory in the past two years, but there have been regular investments in updating the production IT system to ensure that all three factories operate with the same system.

The weekly revenue range of Doughby’s MG customers is £2,500-£100,000 each per week.


The following annual information below relates to an average (the mean) of all customers and our largest customer amongst those, Jiffa (see Exhibit 10), for the year ended 30 September 2018.

MG customer information 2018 Average Jiffa

annual annual

£000 £000

MG revenue 415 5,129

MG cost of sales

Ingredients 266 2,946

Labour 31 346

Production 78 859

375 4,151

MG gross profit 40 978

Many of Doughby’s MG customers, particularly the supermarkets and large retailers, also purchase BV and A&S products.


EXHIBIT 9

Doughby: Artisan and Specials (A&S) – prepared by Fiorella Bianchi Doughby uses the tagline “Upper Crusty Baked Products” to market and sell its Artisan and Special (A&S) products. These items tend to attract the weekend ‘indulgence’ buyer. Artisan loaves are baked and then sold unwrapped, or in brown paper bags, with a ‘hand-made’ image. They are manufactured using a series of less conventional shapes, including larger squares and longer, tapered loaves. In the case of artisan bread, made with speciality wheats, or a special preparation process, an 800-gram loaf can be sold in local markets for more than three times the price at which a standard 800-gram loaf is sold in a supermarket. (This means that a retailer can sell an artisan loaf for approximately £3 to a consumer.) Similarly, Doughby can sell these loaves at a premium, by comparison with BV items, to its customers. A&S products include flatbreads, bagels and chapattis, as well as French and Italian bread products. The A&S business stream operates in a highly competitive and constantly changing market. Larger baking operations face mounting competition from an increasing number of small specialist bakers, who can grow in their locality by establishing a good reputation for well-made products. The growth of these specialist bakers has been remarkable. Almost unknown in the year 2000, they now represent approximately 10% of the total bread sales market in the UK. For many consumers there is an association of wholesomeness about an old-fashioned loaf of bread.

2018 2017 2016

£000 £000 £000

A&S revenue 26,363 21,275 18,734

A&S cost of sales

Ingredients 11,124 9,518 8,919

Labour 3,699 2,875 2,613

Production 3,486 3,351 2,898

18,309 15,744 14,430

A&S business stream The year-on-year increase in Doughby A&S revenues is a function of an increasing number of customers, an increase in volumes of all A&S items sold, and the ability to move prices upwards steadily as demand for these products grows. Throughout the UK, the market for A&S is increasing as discerning consumers prefer to buy what are seen to be better-quality bread products.

Marketing activity for A&S has remained relatively constant over the past three years. Doughby believes it has a successful and effective campaign for these products which identifies the local nature of the ingredients and the use of its authentic manufacturing and baking processes. This includes emphasising the significant amount of hand preparation, kneading and other traditional baking techniques by its skilled workforce. Although A&S output has increased significantly in terms of both volume and range as demand has flourished, Doughby is able to emphasise these verifiable key features of A&S production. The feedback from, and positive effect of, these validated A&S marketing campaigns are universally positive and contribute to its strong brand image.

Because of the expansion in the nature and growth of the A&S business stream, the investment in PPE in the A&S manufacturing process is equivalent to that in the BV factory.


Although A&S sales are made to all of Doughby’s customers, there are specific high-volume customers for A&S products who in turn sell to a growing consumer market. A&S customers range in size from very small individual retailers and market traders – who purchase a small number of products and who rotate around a series of local markets throughout each week – to much larger customers such as caterers and those operating a series of retail and food outlets. Some of these larger customers also act as a central purchaser and then as supplier to other, smaller commercial customers in a form of co-operative trading operation. In 2018, Doughby had approximately 240 separate customers for its A&S products. There has been a steady increase in new customers for A&S products, as well as more of the established BV customers who are now also buying these A&S products. Doughby’s A&S customers provide weekly average (mean) revenue and incur the weekly cost of sales shown below:

A&S customer information 2018 Average

weekly

£

Revenue 2,095

Cost of sales

Ingredients 884

Labour 294

Production 277

1,455

The pattern of sales for a customer for A&S products that operates throughout the 7-day week is that daily sales on a Friday, Saturday and Sunday are close to double the daily sales of the rest of the week.

Although Doughby sells its A&S products to established BV customers and to some MG customers, the majority of A&S customers buy only A&S products. Some are Doughby customers selling to consumers who see themselves as health-conscious and who do not buy BV or MG products. Some are Doughby customers who have a specific product made for them – a type of artisan or special bread which they sell to consumers who buy only these products. As a result, although Doughby has some large customers for A&S products, there are many smaller customers serving the local needs of consumers.

Doughby’s A&S products are delivered to small local businesses in the Birmingham area in the early hours of the morning, using electric-powered delivery vehicles designed to look like old bread vans from the 1950s. These brightly-painted box-shaped vehicles deliver products to the smaller businesses on a frequent basis each day. All deliveries are co-ordinated through Doughby’s online IT system.


EXHIBIT 10

Doughby: Customers Doughby is a well-established baker and supplier of baked products to a wide variety of customers across the region surrounding its site. Many of its customers are also long-standing businesses. Supermarkets Doughby produces both own-label and Doughby-branded BV and MG products for the two main regional supermarket chains, JusShop and UpMarket. They also purchase A&S products. Doughby’s supermarket customers stock their shelves with these products as well as using them in their in-store cafés. These cafés have become increasingly popular with early morning consumers who come in for breakfast (Danish pastries, etc) before they do their shopping. There is also a high demand at lunchtime for toasted sandwiches and filled rolls, while scones, toasted crumpets and other pastries are very popular at teatime in the afternoons.

Retail outlets

Jiffa is a Birmingham-based chain of retail grocery outlets which has an extensive network of smaller outlets and linked coffee shops in neighbouring towns and petrol stations. Jiffa buys only MG products from Doughby and is its largest customer for these products. Doughby also supplies a full range of products to Costwise Foods, a franchise chain of smaller grocery retailers with outlets in the suburbs of Birmingham and nearby cities.

Cafés, restaurants and small retail outlets

Birmingham has four public universities and is a major centre for the performing arts, as well as being home to the internationally-renowned City of Birmingham Symphony Orchestra. Hence, the city has an extensive number and variety of cafés and restaurants that cater to a large student population, as well as members of the public. Doughby supplies BV and MG to the Midlands-based café chain ‘Cha and Coffee’ that has outlets in the city centre, the high streets in nearby cities such as Coventry and Wolverhampton, as well as in Stratford-on-Avon, a location that is very popular with tourists, being the birthplace of William Shakespeare.

BV, MG and some A&S products are supplied to twelve independent restaurants located in Birmingham. There is a high demand for A&S products from delicatessens that have shops in the city and neighbouring suburbs. Two of the larger delicatessens, Saffron’s Foods and McOaties, also have regular stalls at Birmingham City Centre Fine Food Market; University of Birmingham Farmers’ Market, which is open to the public; as well as the major regional farmers’ markets, such as those in nearby Coventry, Solihull and Sutton Coldfield.

Catering organisations

Doughby has become an established supplier of BV, MG and A&S to a number of catering organisations in the Midlands. Most of these organisations cater food for a variety of events, such as weddings, anniversaries, birthdays and private parties. One of them, Meet & Eat, specialises in providing catering for conferences, office meetings – such as breakfast meetings, ‘working’ lunches and afternoon teas. It purchases a range of bread from Doughby, using both BV and A&S loaves in its sandwich preparations, as well as a limited quantity of MG products. Another, Exquisite Catering, is involved in corporate hospitality, providing food and drink at major sporting, musical and cultural events. It purchases Doughby MG and A&S products, which are easy to handle, for use in these large-scale, often outdoor, events.


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EXHIBIT 11

Doughby: Suppliers Doughby has a policy of using established suppliers which meet some important criteria, including supplying top-quality ingredients, being locally based, and sharing similar corporate values in terms of their environmental, social and governance (ESG) principles. All new suppliers are subject to a review to establish their suitability. The following are Doughby’s main suppliers of ingredients and services.

Shipton Flours (SF)

This flour milling business was started by a group of farmers and millers in 1869. Today the company still adheres to its traditional values of delivering a high-quality product that meets the specific requirements of its customers. Over the decades, innovations and investments have been made, resulting in the modern mills and milling techniques that are in use today. This has enabled SF to blend different wheats that are then milled to produce a wide variety of white and wholemeal flours to meet the different requirements of their consumers. SF sources its wheat from local farms, thereby reducing transport costs and food miles. For every consignment of wheat that is received from a farm, a sample is tested in the mill laboratory to ensure that it is the correct variety and meets SF’s strict quality standards. SF operates an integrated inventory, ordering and delivery operation using a linked IT system with Doughby.

Warwickshire Mills (WM)

Warwickshire Mills (WM) is a major milling organisation which emerged from the merger of several milling businesses in the 1960s and is currently one of the largest and most technically advanced in the Midlands. This has enabled the flour blending process to be fully computerised, as well as achieving high precision in flour particle size control. There is also an on-site bakery facility where small batches of loaves are baked in order to test the quality of batches of the flour to ensure that consistency in quality is always maintained. In addition to producing white and wholemeal flours, the mills also specialise in producing a range of flours for speciality breads. Doughby is fully linked to WM’s online ordering and delivery system.

In the case of both SF and WM, the milled flour is stored in silos on site before being funnelled into bulk tankers that transport the flour to their customers.

Gredient Supplies (GS)

This established UK company, based near the Birmingham airport, rail and motorway intersections, supplies bulk cooking ingredients to UK food manufacturers. Where possible, its products are sourced from UK farms or growers, or else from European suppliers where the origin of those products is known and verifiable. As well as products such as sugar and dried fruits, Doughby purchases many of the additives necessary in its production processes from GS. All purchases from GS are through the linked IT system operated by both companies.

Digital Integrated Technology (DIT)

This is a Birmingham-based technology company which was established in 2002. It supplies hardware and systems technology for business IT operating systems. DIT is responsible for all Doughby’s IT systems, including website and weblinks, together with the integration of all supplier and customer management operations. It provides a full back-up service to all its clients in the event of any client IT failure. Locally-based staff are available for support and consultation at all times. DIT advises and supplies Doughby with its hardware updates and manages and installs all system updates and upgrades. It runs all necessary IT training programmes for Doughby staff.


Aub Engineering Products (Aub)

Aub purchases or manufactures and supplies plant and equipment to manufacturing companies throughout the UK. It was responsible for supplying and installing the majority of plant and equipment in Doughby’s factories. It provides bespoke engineering design and equipment solutions to manufacturing companies. Aub employs nearly 300 workers, including more than 100 qualified engineers. It runs an extensive apprenticeship scheme and has won numerous regional awards for its outstanding employment practices. It is a founder member of the Birmingham Chamber of Commerce.

Fourway Commercial Vehicles (Fourway)

Doughby purchases nearly all its vehicles from Fourway. This company supplies and services all different types of delivery vehicles, including Doughby’s electric floats. It provides a 24/7 breakdown support service to Doughby.


EXHIBIT 12

Doughby: Strategic review (prepared by the Doughby board, October 2018) Opportunities

Continuing expansion of BV brown bread revenue

Accelerated expansion and broadening of the A&S business stream

Developing other new products which can create new market opportunities or help expand existing markets and customer base

Review of risks and uncertainties

General industry issues

General trend away from purchasing bread – especially by younger consumers. This is being addressed by a vigorous general marketing campaign by the bread industry trade associations. Doughby is ensuring that its marketing campaign dovetails into that general marketing campaign.

Future volatile price of flour and other ingredients given unpredictable changes in UK weather patterns. These sudden changes have had a turbulent impact on UK crop growth (such as wheat and sugar beet) and prices of ingredients, particularly in recent years. The effect of past changes in weather has meant both a glut (2017, causing a fall in prices) and a shortage (2018, driving prices up). Neither was predicted. Future changes in UK weather are similarly unpredictable.

Supply chain problems for the industry. This follows from the changeable weather and its impact on harvests, which can make it difficult for the suppliers of basic ingredients to meet demand and forces them to favour one customer over another. These same changes can cause Doughby to have similar problems with its customers, as part of their supply chain. Fortunately, Doughby’s policy of working closely with both suppliers and customers has allowed us to manage all the uncertainties and changes in supplies and prices. Our open working relationship throughout our supply and customer chain allows an honest transfer, and the acceptance of changes in prices, with appropriate notification. We are managing, and will continue to manage, these price uncertainties in our business chain.

Specific Doughby issues

Existing flour mill operators may have insufficient specialised flour for Doughby’s changing operations. This situation is arising because of the increased demand for specialised grains to be used in artisan bread manufacture. Traditional grains, such as spelt and rye, have become increasingly popular. Our main flour suppliers have warned us that farmers are under pressure to produce the necessary quantities of these grains to meet demand. This is particularly so if consumers expect them to be produced organically – a criterion which makes production more expensive. In addition, obtaining the necessary organic certification can take a farm many years. Doughby is actively in discussion with both mill operators and various farming organisations and farmers over a wider area to identify appropriate supplies.

The market change towards healthier foods is causing problems for Doughby because of the fall in: o White bread sales o MG sales

In both cases our initial reaction is to manage the decline with product substitution. In the case of white bread, we have been successful in substituting with brown bread sales. However, finding an appropriate substitute for an MG product is more difficult. We have had some success by marketing one of our A&S products – a fruit loaf made with spelt grain and rich with raisins, currants, dried apricots and other similar items – as the sort of product which, either when toasted or when eaten


fresh, is a natural accompaniment to tea or coffee. Unfortunately, the decline in MG products looks set to continue.

Competitors undercutting prices to key customers. The main price competition comes from large national baking organisations, which use their financial strength to drop prices of the supply of equivalent products – such as the 800-gram loaf – in an attempt to win customers and squeeze out the weaker competition. We are fortunate that our customers prefer to remain with a local supplier, and so in the past we have managed to withstand the impact of this tactic.

Larger customers continuing to request and require a move to own-label goods. This is also accompanied by an attempt by these customers to put pressure on us to supply them with their own-label goods at a lower price. There are a number of reasons why we are able to resist this:

o own-label production is not usually any different in terms of cost (ingredients, labour, production) from general production of a product

o packaging own-label products may be more expensive o any re-packaging is difficult and expensive o the despatch and distribution of own-label is subject to specific route planning, which

Doughby has to accommodate o our products are known for their quality, and customers make a positive choice of Doughby

products because of that. Without sufficient cost saving, which these customers want from own-label goods, it is difficult for them to offer lower prices to their consumers. This diminishes their reason for seeking own-label products.

Increased competition from smaller artisan bakeries. The growth of smaller artisan bakeries has more than mirrored the growth of the Doughby A&S product business stream. Sales of A&S products benefit from appearing to come from a hand-crafted type of production process – that which would exist historically in a small bakery. The rise in popularity of A&S products is a function of the ingredients used and the traditional manufacturing process. It is also a function of how they are marketed and sold. The best way of considering this competition is that in fact they are doing an excellent job of marketing and selling these items and that enhances the A&S market, which is growing year-on-year. Doughby is well established in that market.

Doughby is in the food manufacturing business and there is a constant need to be aware of all Health and Safety regulations affecting food preparation. In particular, this can apply to food additives. The failure to comply with the regulatory environment is a constant concern. All staff are fully aware of, and trained in, all aspects of careful food preparation and hygiene. We have specially designated staff to check that these standards are maintained.

Supermarket buying power. As large customers, supermarkets can be the major source of buyer power, because of their potential ability to negotiate better deals with other bread suppliers. With a product like bread, for many supermarkets their final selling price might be the main consideration. Most of Doughby’s larger customers are long-standing businesses with which it has established strong working relationships and which rely on and accept the quality of Doughby products. As a result, although it may appear initially that product substitution with another supplier is easily possible, the potential fall in quality has prevented that from happening.

Breaching the bank covenant conditions. Although Doughby monitors and manages its financial position carefully, we are always aware that circumstances may change, and this may cause us to breach one or more covenants. Fortunately, we have a rigorous monitoring process and we comply with all covenant criteria. We communicate regularly with the bank, and we meet our bank’s business client manager, Graham Blakely, on a regular basis to discuss our management accounts and Doughby’s cash needs.

Integrated IT and the possible failure of the system. For all three business streams, the Doughby IT and online system:


o allows customers to order goods for next day delivery; o controls the 24-hour production process; o selects and monitors the recipes and ingredients; o registers and orders all ingredient inventory from suppliers as required; o determines and plans the transport and delivery operation; o monitors the various employee and driver work plans; o produces all invoices for customers; o extracts all financial and management information for the company.

Any failure in this system would cause us serious disruption. We have a cloud-based system and a physical back-up facility with DIT, our IT provider and support organisation, to deal with any complete collapse. All data is subject to autosave. Access is password-protected through a strict hierarchy and is restricted. Doughby has a team of managers who are IT specialists. They are available at any time throughout the production process to monitor the system and diagnose and deal with any problems as they arise. The major risk is a sudden loss of control of the production process. Although there are manual overrides, it is difficult to switch from computer-based to manual controls in the middle of a production process.

Brand strength is critically important for Doughby. It has created strong brand loyalty, not only because of the quality of its products, but also because its financial and ethical values are well established and its ESG principles are deemed to be of a high standard.


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EXHIBIT 13

Doughby: Competitors and marketing Competitors Doughby has a range of competitors across all its business streams. In BV, the main competition is from the national bread manufacturers, such as Hovis and Warburtons, which use their nationwide network of large bakeries and their extensive distribution operations to give them huge economies of scale in supply, distribution and product pricing. There are also some medium-sized bread manufacturers that are based in the region and which can easily encroach on Doughby’s geographical market. Fortunately, in the supply of BV there are the major factors of quality of bread product and quality of service, which help Doughby to outperform these competitors in obtaining and retaining customers. In MG, competition has become fierce because of the shrinking consumer market. The competition in MG comes from the national bakers – especially where they have famous product lines such as Warburtons crumpets – but otherwise the competition for items such as Danish pastries comes from more regionally based and local baking operations. In the past two years there have been some corporate failures amongst these companies – but these have occurred mainly in the luxury end of this market, so this has not created any significant gaps for Doughby to exploit. Quality of product and service have helped to offset the competition. In the A&S product market, the competition from small artisan bakers is significant. New small bakers are constantly entering the market. Although many of these have excellent and original bread products – prepared and cooked according to their own secret recipe and process – a large number do not have the business acumen to survive in the long term. Many of these businesses start up full of enthusiasm, but without a fully-developed business plan, they lack the appropriate financial structure or controls to survive. A number of them manage to create a thriving operation and continue in existence but, because the market for A&S products is growing, they do not pose a significant competitive problem or have a discernible impact on the Doughby operation.

Marketing The umbrella organisations of the baking industry have developed and marketed an educational awareness programme on the benefits of bread. Individual bread manufacturing companies have therefore been using these overall messages but have customised them to make specific claims about the benefits of their own products.

For all of its products, Doughby has relied on a marketing campaign which focuses on its use of local ingredients produced regionally that are full of goodness. The local supply chain and regional customer base are emphasised using the main theme of a factory in a field producing top-quality products for local customers and consumers. Each of the business streams uses that theme and then adds a specific attribute of the product.

The marketing campaigns for all Doughby products are based on a similar overall theme of quality. Despite a similar overall theme over time, there is always a need for a fresh marketing focus, using a changing presentation or presenters, to compete with other bakers, even in a falling market. The company believes that its marketing campaigns have been effective and, for example, have slowed the decline in MG revenue.


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EXHIBIT 14a

THE FOOD GAZETTE August 2018

Carbon dioxide shortage in UK: A critical lack of (ingredient) gas for bakers?

From mid-June till the first week of July 2018, the UK experienced an increasingly severe shortage of

commercial supplies of carbon dioxide (CO₂). It is widely known that CO₂ is essential in the production of beer

and carbonated drinks, including the most expensive fizzy drink of all, champagne. However, most of us are

probably less familiar with another important role that CO₂ plays in the food industry, ie, in food packaging.

Bacteria and moulds that cause food to deteriorate require oxygen to develop and multiply, so depriving these

organisms of oxygen inhibits this deterioration. The use of Modified Atmosphere Processing (MAP) in the

packaging of foodstuffs enables the shelf-life of these products to be extended by removing the oxygen and

replacing it with CO₂ – sometimes mixed with inert gases – to create an anaerobic environment. Industrial

suppliers of CO₂ in the UK and mainland Europe produce the gas as a by-product of manufacturing ammonia, a

key component of fertilisers for the farming industry. It is therefore common practice for fertiliser plants to

close for essential annual maintenance in the summer months when there is low demand for fertilisers from

farmers.

The CO₂ shortage in the UK in the summer of 2018 began when an exceptional number of CO₂ plants in the UK

and mainland Europe were closed at the same time, either for planned repairs or because of unexpected

equipment failures. This occurred while there was increasing demand for beer and fizzy drinks in the UK

because of the unusually hot weather, as well as from supporters of the England football team enthusiastically

celebrating each stage of their team’s progress to the semi-finals of the World Cup.

In the bakery sector, the UK’s largest producer of crumpets, Warburtons, was forced to halt production at two

of its four factories for about a week in late June / early July when they ran out of CO₂ supplies. Some bakeries

attempted to address the CO₂ shortage by changing the gas mix in their MAP. But a consequence of this was a

reduction in the shelf-life of their products, and expensive changes had to be made to their supply chains that

had previously relied on longer shelf-lives. Temporarily amending the ingredients of some products to

compensate for less usage of CO₂ was also considered. However, any changes in ingredients (even if

temporary) that are not reflected in the ingredients listed on the products’ packaging require prior approval

from the Food Standards Agency (FSA). Owing to the urgency of the situation and the inevitable delay involved

in holding consultations with the FSA, this idea was abandoned.

This exceptional CO₂ shortage and its consequences have been described as ‘a perfect storm’ by some

commentators and dismissed as an unfortunate combination of circumstances. But others point out that less

severe disruptions to CO₂ supplies have been occurring in recent years. The question of what lessons have

been learnt and what contingency plans have been formulated in the bakery sector to minimise the risks of

future CO₂ shortages and their financial implications remains unanswered. Let’s see what happens next

summer …


EXHIBIT 14b

The Retail Trader December 2018

Has the Empire change sacrificed the Queen? Do buyers have all the moves?

Queen Bakes has run into a major problem with the own-label contract which it has with Empire – the

UK sandwich and coffee chain. The rumours which have swirled around this contract like the famous

Queen cinnamon roll have finally turned into the fully baked article – and it is a disaster for Queen. Its

troubled contract with Empire to supply own-label bread varieties and morning goods to Empire’s

many outlets may have reached a sudden, charred end.

The rumours had indicated that Empire was becoming unhappy with Queen because of the

incompatibility between their two IT systems. Ever since Empire upgraded its IT system linking all its

outlets to a central inventory and purchasing system in December 2017, there have been persistent

stories of outlets running out of products during the trading day – particularly the busy London outlets.

Empire appeared to suggest this was due to Queen’s systems not picking up and responding rapidly

enough to inventory indicators from the linked Empire system.

In reply to previous questions about this high-profile and significant contract, Queen has responded

with a statement from a spokesperson that “we are a pioneer in the development of own-label bread

varieties and morning goods for a wide variety of customers. The use of properly tested links to our

own updated stock keeping unit (SKU) systems by a range of satisfied customers meant that we are

confident in our inventory, ordering and delivery system.” Queen’s SKU update occurred in August

2017, and it claims that this update worked with Empire’s system at that time – and continues to work

with all of its other current customers.

This contract was due for renewal in January 2019 and, following nearly a year of operational issues

and pricing discussions, this impasse now appears to have been resolved. Empire has just announced

that it has found a different own-label supplier – Basil Breads – which it will be using from January

2019 for its sandwich bread and other products.

A leading financial analyst in the baking industry has described Queen’s position as “financially very

damaging and potentially fatal. It may be checkmate for Queen”. No spokesperson for Queen was

available for comment on this development.


EXHIBIT 14c

FOOD WORLD January 2019

Gluten-free: A food intolerance issue or a marketing success for food manufacturers?

Gluten is a combination of two proteins (glutenin and gliadin) found mainly in wheat but also in other cereals such as barley and rye. Coeliac (pronounced see-liac) disease is an autoimmune disease where the body’s immune system attacks itself when gluten is eaten. The Gluten Free Association states: “A gluten-free diet is the only treatment for coeliac disease. In a balanced and healthy diet, manufactured gluten-free products can play a role alongside naturally gluten-free foods.”

Around 1% of people in the UK are intolerant to gluten; a diagnosis of coeliac disease means it is important to remove permanently all sources of gluten from a person’s diet. This generally involves eliminating products containing wheat from their diet. For bread the problem is that the presence of gluten in wheat is essential for normal bread-making. Wheat is also the basis of a range of other commonly consumed foods, such as pastas, pizzas, pastries, cakes and biscuits. A diet free of gluten results in the elimination of a significant number of staple foods from the diet.

There are many foods that naturally do not contain gluten, such as fruit, vegetables and unprocessed meat and fish. Rice, potatoes and corn are all gluten-free and are good sources of starchy carbohydrate. In addition, a whole range of manufactured gluten-free products have been developed and, in the UK, these are now easily available in major supermarkets and other retail outlets. Manufactured gluten-free foods (e.g. pasta, bread) are an example of ‘free-from’ foods (these are defined as foods that are manufactured and targeted specifically at consumers who suffer from food intolerances and/or food allergies or who are following avoidance diets).

The introduction of EU legislation in January 2009 (effective from 1 January 2012) ensures that the labelling, advertising and presentation of all foods marketed for individuals with coeliac disease use the same phrases to indicate their suitability. From 2012 only two labelling terms are allowed to indicate the level of gluten on the product. The claim ‘gluten-free’ may be used for products which have less than 20 parts per million of gluten and the claim ‘very low gluten’ will be allowed for products which use a cereal ingredient that has been treated to reduce its gluten content (for example codex wheat starch) and contain gluten at levels less than 100 parts per million. This process of standardisation is intended to improve consumer health, enabling people with coeliac disease to identify with confidence those foods which are suitable for their condition. For most food manufacturers, and especially those in the baking industry, the need to comply with these definitions has meant the need for strict production controls and properly defined labelling of products. These can increase manufacturing costs and therefore prices for customers significantly. For some consumers the term ‘gluten-free’ has implied a healthier product for general consumption, and this has led to significant demand and uptake for these products by non-coeliac consumers, despite the higher prices. However, all consumers need to be aware that gluten-free products are not automatically healthier. For example, some gluten-free breads are high in sugar and are made from heavily processed grain and can be much higher in fat and calories – which may be a concern for consumers. Consumers who do not have a gluten sensitivity should factor this into their dietary considerations by choosing which is most important: taste; calories; number of ingredients; sugars and fats – and select according to their criteria, not just according to a label.


EXHIBIT 14d

BAKERY TRADER

The cherry and the icing slide off the cake for Better Bakers February 2019

The continued decline in popularity of sweet confectionery goods has been given as the reason for the

financial collapse of Better Bakers (BB). These were the bakers who specialised in supplying decorative

cherry and coloured icing baked pastries, and similar large tiered celebration cakes, to catering

organisations and wealthy private customers throughout the UK.

A spokesperson for BB said: “We had been operating on decreasing margins for the past three years.

We were being squeezed by our commercial customers, who were facing falling demand from

consumers, because of the negative sugar publicity and obesity awareness. It was very difficult to find

new customers in such a falling market. Despite a reasonable December and Christmas 2018 trade, there

was a noticeable downturn in January 2019 – possibly caused by New Year’s Resolutions for

consumers to lose weight and alter their consumption habits. As a result, demand for all cakes fell

amongst consumers, and our customers were the same. The financial pressures on us finally became too

much. Our bank – Neway Bank (NB) – called in its loan.”

A financial analyst at NB stated: “This is now a difficult sector – the supply of baked goods with a high

sugar content is a declining market. Producers need to have a strategy for coping with the change. They

need to analyse, control and trim their costs where possible, and they need to find appropriate substitute

products and customers in these difficult times.”

Our own economic correspondent, Louise Briochet, has provided additional, more cautious, analysis:

“This is a specific problem for BB. It is a specialist baker, and although it was well known with a good

nationwide reputation – particularly for its highly decorative wedding cakes (which even featured in

Royal Weddings) – it did not have a wide enough portfolio of products to survive in the business. It

seemed to lack a clear strategy to deal with this declining market and was relying on its existing

commercial customers, which sold its cakes through their retail outlets, to carry it through the downturn.

However, it simply had no basic products to enable it to survive the falling cake market and to find a

way forward.”

“However, as a footnote and by way of contrast, it has been noted that one of the top grocery

supermarkets in the UK is recording record sales of hot cross buns in the run-up to this Easter. The

reason for its success is some highly original NPD (New Product Development). The supermarket has

developed a range of distinctive flavoured hot cross buns, including ones with blends such as orange,

cranberry and jasmine made using bespoke sourdough, soaked fruits and double cream. Appropriately

enough, despite their premium price, they are selling like hot cakes and show that the right NPD can

still change the market and the demand for such products.”


EXHIBIT 14e

Financial News June 2019

Strong allergic reaction

In a dispute over poor labelling, Bambi – the chain of deli-bars which serves take-out burgers, sandwiches and

other hot and cold food – is the latest to try to defend itself against an accusation that its products adversely

affected a customer.

Bambi has issued an immediate statement saying that it “relies on the manufacturers and suppliers of its

products to maintain the highest and most appropriate production standards and to label all products sold in

accordance with proper labelling regulations.”

It has also stated that it “expects the consumers of products to read both food labels and notices on display

concerning all food products, to ensure that they only buy what it is appropriate for them to consume.”

The issue concerns hot take-out food ordered and eaten by a group of friends on their way home after a night

out celebrating successful exam results. One of them fell ill after eating a burger packed in what was claimed to

be a gluten-free bun.

Whatever the outcome of this dispute, the problem lies in all steps of a chain of responsibility and action. The

primary responsibility lies in product preparation and the avoidance of any possible cross-contamination. A

secondary responsibility is appropriate informative, readable and cautionary labelling or notices concerning

these products. This is followed by the need for separate storage and display in any retail outlet.

There is then the responsibility of the consumer to read all the labels and notices before purchasing and

consuming anything which might be detrimental to their health – regardless of their state of concentration or

euphoria – thus avoiding the risk of any strong allergic reaction.

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