Spiralling commodity costs is proving a “mixed bag” for Associated British Foods, the UK’s group’s finance director has told just-food, with parts of the business benefiting from higher prices and other divisions facing pressure.
John Bason admitted rising wheat and edible oil prices were having an impact on margins at the company’s UK bread and US grocery operations but insisted the company’s sugar business in China was feeling the positive impact of the soaring price of sugar.
“We really benefit from these much, much higher prices in China. They went two years ago to a low point more like CNY3,000 a tonne – they are nearly at CNY8,000 a tonne now. We’re benefiting from that,” Bason said.
“The important thing when looking at ABF is that the impact of commodity price increases is quite a mixed bag. By and large on sugar, it’s favourable for us. On wheat, it depends on whether we recover the wheat cost input on our bread but then also we’ve also got a grain trader in a company called Frontier, which benefits from that. In food, it’s mixed bag depending on where you are in the supply chain.”
Bason was speaking to just-food this morning (9 November) after ABF published its full-year results for the 12 months to 18 September.
ABF’s grocery business, which also includes brands like Twinings tea, Jordans cereals and Ryvita crispbread, posted a 20% increase in adjusted operating profit to GBP229m (US$368.2m). Profits were helped by restructuring within the division and a recovery of ABF’s US bottled oils business.
Revenue from ABF’s grocery arm increased 7% to GBP3.41bn thanks to the benefit of currency translation on the company’s sales in Australia from its George Weston Foods business. At constant currency, sales were flat.
ABF, owner of Kingsmill bread in the UK, said today that its grocery margins would come under pressure in the year ahead amid rising wheat costs.
“When wheat prices go up 50%, you have to talk to the retailers in terms of looking for an increase in price. What happens to the consumer price is very much up to the retailer to determine but we are certainly talking to the retailers and negotiating an increase in our supply price,” Bason said.
Premier Foods plc, owner of one of rival bread brand Hovis, has seen a clutch of its lines delisted by Tesco, the UK’s largest retailer, after the grocer refused the manufacturer’s request to increase prices.
Bason said talks with UK retailers over price were always “tough” but said ABF’s negotiations were ongoing.
“The discussions always remain tough with major retailers but we’ve been here before. When you have an increase in 50% of the wheat price, you have to negotiate an increase. Negotiations with the retailers are progressing well on that.”
Bason admitted ABF was also seeing pressure on margins in the US on its edible oils business. “The pressure on these commodities is more than I would have imagined in the summer. We’ve seen the wheat price move, we’ve seen vegetable oil prices move. We’ll be moving the price of Mazzola oil in the US in January to reflect the movement in the commodity price,” Bason said.
The ABF finance chief acknowledged higher commodity prices would be a key issue for the company’s grocery business over the next year but said the group had traditionally proved able to ride the storm.
“We showed we were more than equal to the task in 2007/08. There’s just a little bit of deja vu about this. It’s part and parcel. When you get such big commodity moves, people understand why you are going for it and why you have got to recover that cost increase,” Bason said.