Associated British Foods (ABF) warned today that a recovery in profit margins in its food divisions would be delayed as price rises would not be enough to offset the increase in energy and commodity costs accelerated by the war in Ukraine.
“All our food businesses are experiencing increasing inflationary pressures in many areas, including raw materials, commodities, supply chain and energy,” the group said in its half-year results statement.
“As a result, we now expect a greater margin reduction in these businesses than previously expected for the full year . . . the full effect of margin recovery is now anticipated in our next financial year.”
Over the 24 weeks ended 5 March, revenue in its Grocery division rose 2% to £1.82bn despite retail volumes returning to more normal levels after the Covid lockdowns last year. It also noted that the business had faced operating constraints this year as a result of supply chain disruption and Covid-related absences, and a hit from Allied Bakeries exiting a contract with the Co-op in April last year.
The unit’s operating profit fell 9% to £175m after margins were reduced by high levels of input cost inflation, especially in Allied Bakeries. ABF stated that price rises have already been implemented and more are in hand to mitigate subsequent cost increases.
The company highlighted that its Twinings Ovaltine business had performed well, driven by Ovaltine revenue growth in Switzerland and Germany and some recovery in Thailand. In Twinings, further new product launches of Wellbeing teas offset a reduction in the retail sales of other teas from Covid-elevated levels last year.
Allied Bakeries sales were “well below” the same period last year, whilst Westmill saw strong restaurant and takeaway trade. Meanwhile, the Patak’s, Blue Dragon and Al’Fez brands were said to have performed “strongly” but their margins, and at Jordans Dorset Ryvita, reduced with the later phasing of price increases.
However, the wider group still expects profits to rise in its sugar business and Primark clothing chain, which has benefited from the easing of Covid restrictions across Europe.
Group adjusted pre-tax profit for the six month period jumped 109% to £666m on sales up 25% to £7.88bn, largely reflecting the reopening of Primark stores.
NAM Implications:
- ABF appear to need further price increases to cover pipeline costs that have arisen since the last round.
- A pointer for all businesses may be to anticipate yet-to come inflation more aggressively.
- i.e. 10% inflation seems imminent…
- …with 15% no longer appearing extreme.
- (We have lived with, and survived this level before…)
