Foods confronts the cost of a weaker sugar market as Primark heads for separation

Associated British Foods has spent years living with an internal contradiction. On one side sits Primark, a retailer that built its name on sharp pricing, scale and a talent for drawing customers into stores without the expensive machinery of a full online model. On the other is a sprawling food empire whose assets range from Twinings tea to Patak’s curry pastes and Silver Spoon sugar, businesses that are steadier in temperament but far less likely to inspire market excitement. The plan to split the company in two next spring is intended to resolve that tension. Yet just as the demerger comes into view, AB Foods has been reminded that awkward legacies do not disappear simply because the corporate structure changes.

The sharpest reminder has come from sugar. In a trading update, the group warned that adjusted operating losses at the division will now come in at between £25 million and £60 million for the 2026 financial year, a materially worse outcome than previously expected. That is not a passing disappointment caused by a single poor quarter. It is evidence of a business caught between cyclical weakness and structural fragility, a combination that is particularly damaging in a company trying to persuade investors that its two halves will each flourish on their own terms.

The downgrade was accompanied by a 4 per cent fall in sugar sales at constant currency in the third quarter, but the larger story lies behind the headline number. AB Foods said the upper end of the loss range reflects the possibility of onerous contracts if gas prices remain high after recent geopolitical tensions, particularly the conflict involving Iran, fed through into energy markets. At the same time, the group has been hit by currency devaluation in Malawi and by a slower than expected ramp-up at its new Tanzanian facility, known as K4, in Morogoro, where rain has delayed production. None of this is catastrophic in isolation. Taken together, it presents a business with too many moving parts working against it at once.

There is also an uncomfortable truth in the company’s own forecast for what comes next. Losses in sugar are expected to deepen again in the following financial year, to more than £60 million. European sugar prices have come under heavy pressure, dragged down by oversupply and strong beet harvests. Production costs remain stubbornly high. Energy and fertiliser prices are still volatile. Weather, especially the distortions linked to El Niño, remains a material variable. These are not the conditions in which a troubled commodity business quickly regains its footing. They are the conditions in which management teams find themselves speaking more frequently about mitigation than recovery.

That matters because the demerger is not simply an exercise in tidying up a conglomerate balance sheet. It is a strategic wager on clarity. Primark is due to emerge as a separate listed company, while the rest of the portfolio will be placed into a food-focused entity that has been referred to as FoodCo. The argument is easy enough to understand. Primark, with more than 480 stores and annual revenues approaching £9.5 billion, has long looked like an asset the market struggled to value properly while attached to a collection of food and ingredients businesses operating on very different rhythms. As a standalone retailer, the case runs, it might command the sharper focus and cleaner equity story that investors tend to reward.

Yet the same logic cuts in the opposite direction for the company left behind. Once Primark is removed, FoodCo will no longer benefit from the retailer’s gravitational pull over investor attention. Its component parts will have to stand on their own. In that setting, sugar becomes harder to treat as a manageable complication and easier to see as a central challenge. A business that is expected to lose tens of millions of pounds this year and even more next year will shape perceptions of the whole enterprise, especially if wider market conditions remain adverse. The demerger may unlock value for Primark, but it also strips away some of the insulation that helped obscure the weaknesses elsewhere in the group.

AB Foods has not disguised the seriousness of the issue. Management said the performance of the sugar business remains a priority for both executives and the board, and further cost reduction measures are planned, particularly in Europe. Analysts at RBC Capital Markets were equally blunt, describing sugar profitability as very weak and pointing to the same blend of poor European conditions and elevated energy costs. Such language is not unusual in a difficult trading period, but it does suggest the problem is no longer being framed as a temporary dip that can be ridden out with patience alone. Cost cutting may soften the blow. It rarely changes the underlying economics of a market weighed down by surplus supply.

If sugar is the immediate source of alarm, Primark itself is hardly floating above the fray untouched. Like-for-like sales in the third quarter fell by 2.2 per cent, a figure that will have unsettled those hoping the chain might arrive at independence on an unmistakable upward trajectory. The drag was most pronounced in continental Europe, where comparable sales dropped by 3.6 per cent. That matters because the region accounts for nearly half of Primark’s sales and has been central to the retailer’s expansion story. AB Foods attributed the weakness to subdued consumer confidence across several European markets, and there is little in the broader economic backdrop to suggest a quick restoration of spending appetite among value-conscious households.

Primark’s problem is not that its proposition has stopped making sense. In a prolonged cost-of-living squeeze, low prices should still have obvious appeal. The difficulty is that the old certainties of discount fashion no longer apply as neatly as they once did. Consumers under pressure may still trade down, but they may also delay discretionary purchases altogether. At the same time, Primark is contending with intensified competition from Shein and Temu, whose speed and digital reach have redrawn expectations in fast fashion, and from more established rivals such as Inditex, the owner of Zara, which remains adept at balancing fashionability with operational discipline. Price alone is no longer enough to guarantee momentum.

That shift is visible in the way Primark now talks about itself. The company has been investing more heavily in marketing, product development and digital engagement. The launch of its mobile app is part of that broader attempt to sharpen customer relationships without abandoning the store-led model that has defined it for decades. Womenswear has been a relative bright spot, helped by new ranges including the By Coleen collection fronted by Coleen Rooney. This is encouraging, but it also points to a subtle repositioning. Primark still trades on value, yet it is increasingly being asked to think like a brand that must actively win attention, not merely wait for budget-conscious shoppers to arrive.

There are signs that the company understands the challenge. It has maintained annual profit expectations, and adjusted operating margins are still expected to land at about 10 per cent this year. In Britain, sales slipped by only 0.1 per cent, though the group said weaker consumer sentiment after the Iran conflict affected spring trading. In the United States, performance was described as mixed despite continued store openings, including the much-watched Manhattan site. These figures do not suggest a retailer in retreat. They suggest something more nuanced and perhaps more important: a business that remains viable and profitable, but no longer enjoys the uncomplicated growth narrative that once made it the unquestioned jewel in AB Foods’ crown.

The leadership transition adds another layer. Eoin Tonge, who took on the chief executive role after a period as interim boss following Paul Marchant’s departure last year, is presiding over a delicate phase in Primark’s history. He is tasked not only with overseeing the mechanics of separation but with convincing investors that the retailer can thrive independently in a harsher competitive climate. The recent report that Primark lost out to Marks & Spencer in the battle for a fulfilment centre in Lichfield is revealing in this context. The company said the site would have supported the expansion of click and collect rather than a wholesale move into home delivery, but the episode nonetheless underlined how intensely contested the next phase of retail logistics has become.

For years, one of the arguments in favour of keeping AB Foods together was that diversification conferred resilience. When retail weakened, food could steady the group. When commodity pressures hit ingredients, Primark’s cash generation could offset the damage. There was always some truth in that. But diversification also blurred distinctions that matter to investors. Primark’s growth ambitions sat awkwardly alongside a sugar division exposed to weather, energy costs, currency moves and European agricultural cycles. The demerger is therefore an admission as much as a strategy. It acknowledges that the market increasingly prefers focus to breadth, especially when breadth contains assets with persistently different prospects.

The risk is that separation clarifies not only value but vulnerability. Primark may benefit from a cleaner story, though it will need to prove that recent sales softness is a pause rather than a sign of maturing appeal. FoodCo, by contrast, will inherit the burden of demonstrating that a collection of reputable grocery and ingredients brands can generate dependable returns while managing a sugar operation whose outlook remains grim. Investors are generally patient with cyclical pain when they can see a credible route back to normal profitability. They are far less indulgent when recovery appears hostage to forces beyond management’s control.

That is the deeper significance of AB Foods’ warning. It is not merely that sugar losses are larger than expected, though that is serious enough. It is that the update arrives at precisely the moment when the group wants to persuade the market that a cleaner, simpler future is about to begin. Instead, the message is more complicated. Primark is still profitable but under pressure. Sugar is still strategic but deeply troubled. The coming split may well reveal that each business is better understood on its own. What it cannot do is spare either of them from the economic realities already gathering around them.