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November 8, 2022

Associated British Foods says grocery inflation “here for a while yet”

“If you assume food-price inflation is yesterday’s story, think again, it’s here for a while yet” – CEO George Weston.

By Simon Harvey

Associated British Foods (ABF) has painted a bleak outlook for grocery prices as “wave-upon-wave” of cost pressures hit the consumer-goods giant.

For grocery alone, ABF anticipates as much as GBP300m (US$343.6m) of input-related inflation costs in its new financial year as the UK-listed firm reported results today (8 November) for the 12 months to 17 September. That would be circa GBP50m more than last year, finance director John Bason told analysts on a conference call.

The cost pressures are not unique to food, with inflation impacting ABF across its global business operations, which include UK bakery company Allied Bakeries and retailer Primark. For the fiscal year recently completed, the company estimated gross inflation increased costs by GBP1bn.

“It’s the scale of it and the persistence of it, which I think is the thing that we’re really highlighting now,” Bason said when asked to quantify a figure. “For grocery, two to 300 million [pounds] of inflation and I’d put it ahead of the previous year, probably by about 50 million or so.”

He added: “The reason we’re saying that, is that in some ways you kind of feel well, we’ve probably had the inflationary spike and it’s behind us, but certainly what we’re trying to say here is there is wave-upon-wave of inflation that’s coming through.”

CEO George Weston was even more impactful as he noted “the huge” amount of input costs the business has had to recover through price increases, with more in store for the new fiscal year.

“It’s not finished,” Weston said. “There’s just about as much increased cost in our pipeline now as last year, so if you assume food-price inflation is yesterday’s story, think again, it’s here for a while yet.”

Allied Bakeries struggles

Figures issued today showed food inflation in the UK alone hit an unprecedented 14.7% in October, while other countries are also experiencing double-digit figures.

Inflated energy and commodity prices, particularly wheat, partly as a result of the war in Ukraine, have also delayed a recovery in ABF’s Allied Bakeries business in the UK. Weston warned there would be more pain for consumers in higher bread prices.

The ABF chief had already outlined the pressure on bread prices due to higher commodities at the fiscal year mid-point and also on the back of the Kingsmill and Allinson’s brand owner losing a major contract with The Co-op.

Discussing the division today, Weston said: “We were making decent progress – we chucked two bakeries, we pushed price very hard and we were getting somewhere and then the Ukraine war started – wheat went up by another 45%. Energy went up multiple fold.”

He added: “We’re taking flour, we’re cooking it and then we’re distributing it. The cost base of the input-cost inflation was probably worse in bread than just about any other commodity that we’re involved with.”

ABF’s group revenue for the year to 17 September was up 22% at GBP17bn, with Primark making up GBP7.7bn.

Grocery sales rose 4% to GBP3.7bn with the benefit of pricing. Within that division, “Allied Bakeries sales were ahead of last year due to significant price increases, but losses increased with significantly higher costs for wheat, energy and distribution”, ABF said in the results commentary, noting the decline in profit margins as cost inflation outpaced pricing.

Adjusted operating profit for grocery was down 5% at GBP399m, while the margin dropped to 10.7% from 11.5%.

In reference to profit in bread, Weston said Allied Bakeries “went backwards, not forward, despite the actions that we’d taken to reduce our cost base, reduce our capacity and that’s where we ended the year”.

He added: “There are significant further pricing actions underway in discussion with our customers. We fully understand, we’ve understood for a while that pricing alone won’t get us to an acceptable level of profit.”

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