Can slimmed down Northern Foods grow again?

As Manchester factory shuts with loss of 700 jobs, Susie Mesure asks if the surgery is radical enough

Almost 700 workers at Northern Foods' quiche-to-sausage roll factory in Trafford Park, Manchester, learnt yesterday that they would be out of a job by Christmas after the struggling food manufacturer unveiled plans to shut the loss-making site.

The scale of the job losses exposes the quandary facing Pat O'Driscoll, Northern's chief executive, who is conscious that she could find herself similarly unemployed should her latest attempt to turn around the food maker fail. In a strategic U-turn three months ago, she put 40 per cent of the company up for sale, including the pastry division that is home to the Manchester bakery.

Ms O'Driscoll hopes the disposals, which should bring in proceeds of £200m, will bring an end to Northern's long history of disappointing the City by enabling it to focus on making products where it dominates the market. These include pizzas (it makes the Goodfella range), biscuits (Fox's is the biggest premium biccie brand) and ready meals (a category it pioneered back in the days of Christopher, now Lord, Haskins).

Announcing the decision to slim down, Ms O'Driscoll said Northern's "yes culture", which saw it bend over backwards for the good of its customers, was gone for good. Yesterday's harsh blow for the workers in Trafford Park, which makes own-label quiches, hot pies and sausage rolls for Tesco, was the first sign that she meant business.

The GMB union seized on the news as further evidence of the big supermarket chains abusing their power. Jude Brimble, a GMB national officer, said it was another example of Tesco "throwing its buying power weight about by depressing prices. There is such a thing as corporate social responsibility and Tesco need to start practising this." The union intends to refer the case to the competition watchdog, which recently ordered an inquiry into Britain's £100m grocery sector.

As supermarkets' profits have grown, the fortunes of their suppliers have dwindled. The power the chains have over food makers such as Northern was exposed in the Competition Commission's last investigation of the industry in 2003 when Safeway was on the block. Evidence given by suppliers claimed that supermarkets simply ignored the industry code of practice imposed after the investigation in 2000, continuing their "predatory practices". Suppliers told the commission that supermarkets gave them chapter and verse on how to run their business, controlling every last detail down to which logistics groups to use to make their deliveries.

Tesco refuted the GMB's claims that it was to blame for the closure of the Trafford Park bakery, insisting the decision to close the site lay with Northern. A Tesco spokesman said the group would have preferred Northern to keep making its quiches and pies, even asking them to move the business to another site. "Over time we have been as supportive as we can be to improve the performance of the site," he added.

In the old days, Northern would have just rolled over and agreed to shift the business to another factory, anxious to do anything to hang on to sales volumes. It was left with no option but to seek extra business as its share of its most lucrative pie - its contract with Marks & Spencer - crumbled first as the retailer's fortunes waned and later as M&S switched allegiance to some of Northern's rivals.

But saying "yes" brought its own problems for the food manufacturer: it found that making small quantities of lots of different types of product in each factory was expensive, complicated and time consuming. "This was precisely what got Northern in a pickle. They were too keen to do any business that came their way without asking whether it was profitable," one food industry analyst said.

Northern said the Trafford Park bakery, which is located on the country's oldest industrial park, clocked up losses of more than £3m last year. It is aiming for a "phased closure" of the site, which it acquired in 1991. The last sausage-making machine will be switched off in December, by which point 690 employees will have lost their jobs. Northern, which only three weeks ago agreed to a 3 per cent pay rise for the Trafford Park workers, said it would take a £12m one-off hit to its interim profits to shut the factory. This will include cash closure costs of £7m, which will be partially offset from any proceeds if it finds a buyer for the site.

"We sat down with our customer [Tesco] and tried to find a solution," Ms O'Driscoll said. Although the factory makes many of the snacks on the Government's hit list - pastry is high in fat and calories - she insisted sales of the products had not suffered as a result of any nationwide healthy eating drive. "The issue around the closure is a decision based on profitability and not to do with consumer trends," she added. Tesco backed this up, saying it enjoyed "strong sales" of pies and sausage rolls despite their heart attack-inducing qualities.

Once Northern has found buyers for the four businesses it had left to sell - it has already got rid of its chilled food distribution arm - it will be left cooking up five different types of products. Brands, which include Grassington's meat-free frozen food meals and Holland's Pies as well as Goodfella's frozen pizza, will comprise half of the group, with the rest of its sales coming from own-label ranges for supermarkets. It is, for example, Britain's biggest Christmas pudding supplier, making two out of every three puddings consumed each year. It also has a lucrative sandwich business and makes a range of ready meals for all the top four supermarket chains as well as M&S.

Stefan Barden, who recently gave up a job as Heinz's UK managing director to run Northern's chilled foods division, hopes the company can start to get creative again once it has fewer types of products to worry about. He sees potential in the burgeoning "ready-to-cook" market - bags of ready-chopped, posh ingredients that lazy home chefs can use to feel like they have done more than just heat up a ready meal.

The jury is out on whether even a slimmed down Northern Foods will look attractive to the City. Certainly the shares, which edged 1.25p higher to 82.75p yesterday, have yet to recover, making the company the worst in the FTSE 250 so far this year. With margins still under pressure, trading conditions showing no sign of easing and costs spiralling even higher, many analysts are still negative on the stock.

"In theory Northern will have fewer problems to solve following the disposals. But there's no guarantee even then it will get it right. Confidence in the company is very low because of the number of profit warnings over the last three years," one analyst said.

Ms O'Driscoll's future with the company is similarly uncertain. In the 18 months she has been at the helm, she has already ripped up the company's strategic plans twice and issued three profit warnings. Her initial hopes of delivering profits of £200m on sales of £2bn within two years of joining - dubbed her "two by two by two" plan - lie in tatters. "This is her last chance of proving herself," the analyst added.