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November 6, 2009

Icelandic food sector hopes to come in from the cold

In the wake of Iceland's financial meltdown, food manufacturers in the country have found themselves struggling with higher input costs. However, exporters have also flourished due to the weak currency. Gerald O'Dwyer reports.

In the wake of Iceland’s financial meltdown, food manufacturers in the country have found themselves struggling with higher input costs. However, exporters have also flourished due to the weak currency. Gerald O’Dwyer reports.

The exodus of the McDonald’s from Iceland may have captured international headlines but the rest of the country’s food sector is left facing uncertainty caused by debt financing challenges and escalating input costs.

Iceland exports about 95% of its fish production and over 65% of its red and white meat output, while it is dependent on grain, sugar, fruit and vegetable product imports.

For Iceland’s smaller domestic focused companies, including Kraekir, Salka and Samherji, the economy’s virtual collapse in autumn 2008 happened against a backdrop where the Icelandic kronur lost half its value to the Euro.

“Imported cereals, fruit and vegetables became prohibitively expensive, since these could not be sourced in Iceland. On the one hand the import costs for bakeries and food retailers rose by almost 50%, while on the other our food exporters were selling in foreign currencies, so when the weakened kronur was taken into account, they were showing a marked increase in their profits,” said Jón Asbergsson, the managing director of the Trade Council of Iceland (TCI).

However, unlike import-dependant domestic food retailing, Iceland’s food exporters – the likes of  Baugur, Alfesca, Hamidjan, Marel and MarNord – were cushioned against the full weight of the downturn by their international dynamic, while foreign currency earnings added an extra profit-gloss to their balance sheets.

Ironically, it has been the export-driven food companies that tend to be less concerned over local currency issues and more worried about decreasing revenues and profits in key markets in Britain and continental Europe, said Xavier Govare, the CEO of Alfesca.

“Consumer confidence in Europe is a big worry for us. The challenge is less about our operations in Iceland, but how we manage the downturn in our main markets. We are seeing low consumer confidence and spending in France, Spain and in Britain, and consumers choosing private labels over national brands,” said Govare.

The profitability of Alfesca’s operations is forecast to strengthen in the wake of the company’s takeover by a consortium headed by the French-controlled Lur Berri Iceland.

“The Icelandic market is such a small part of the overall business for companies such as Baugur and Alfesca that the negative impact is minor. Iceland’s food companies are more worried about the adverse currency fluctuations facing the falling value of the British pound against the Euro and US dollar. Britain is the biggest production and sales market for Iceland’s food companies and when the UK market suffers they feel the pain too,” said Jon Gudjonsson, an analyst with Icebank in Reykjavik.

While companies like Alfesca and Baugur responded to falling profits by engaging in root-and-branch restructuring initiatives in their international operations, in Iceland the smaller food companies were looking at divestment and unit closures to offset the worst  affects of the downturn, said Gudjonsson.

“Most of the Icelandic food companies that produce fish, red and white meats for the domestic market are quite small. Unlike Alfesca, they do not have the volumes or scale to really attract foreign investors. The problem they have is selling to a local market where consumer spending on these foods have dropped by 30% since October 2008. They are struggling, and access to credit is more difficult,” said Gudjonsson.

The bakery sector is the most affected of Iceland’s food segments, said Asbergsson.

“Icelandic banks have cut credits to importers. Iceland can satisfy its own domestic needs for dairy products, most meats and fish but we still import about half of the food we eat. The devaluation of the kronur was needed, but it significantly weakened consumer spending. Some essential foods, such as fruit and vegetables, saw a 30% increase in their retail price,” said Eirikur Blöndal, the director of the Farmers Association of Iceland (FAI).

The central bank’s decision to ease capital controls and permit inflow of currency directed at new investments is regarded as the first step to providing Iceland’s SMEs with access to new sources of funding, said Gudjonsson.

“It will enable the stronger Icelandic investment banks to link with international partners to invest more broadly in Iceland. The impact of this can be seen in New Kaupthing, which is looking to acquire a large holding in Hagar, the country’s biggest food retailer. Hagar is looking to refinance its debts under a more solid ownership base,” said Gudjonsson.

The relaxation of capital controls will be good news for some producers but may have come too late for other food companies.

Kraekir has been looking to bring in new owners to invest in its fish-products based business since late 2008, said Henning Johannesson, the company’s chairman.

 “Our lack of capital means we cannot invest as heavily as we need to. To grow and strengthen, we need to explore markets outside Iceland. Our aim is to become a mainly export geared producer,” said Johannesson.

Samherji, which sells to the local and export markets, is also open to private investment, but it may be too late to save its prawn processing units in Stryta, said Gustaf Baldvinsson, the company’s CEO.

“The operating conditions are difficult. It is not as easy as it was two years ago to secure credit, which means that if units are making losses we may not have the resources to invest to turn them around,” said Baldvinsson.

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