Food shock on its way

By Staff Writer

Juice, cereal price hikes loom

from Fin24.com 

By Nicole Rego


Johannesburg - Food and beverages producer Pioneer Foods is set to pass its "very high" raw material costs on to consumers as it plans to hike prices further, it said on Tuesday.
Between October and March, the first six months of its 2008 financial year, Pioneer implemented increases on its sales prices, which helped boost revenues in a tougher trading environment.

But it said it still expects input costs and its margins to remain under pressure for the rest of its financial year as food inflation is set to increase.

According to the National Agricultural Marketing Council's quarterly food price monitor report released in February this year, white and brown bread prices increased by 20% and 16% respectively year-on-year (from January 2007 to January 2008), while the wheat price increased by 81% year-on-year.

In its six months to end-March results presentation on Tuesday, it said that the challenging environment had put pressure on its operating profit margin;  it fell from 6.4% a year ago to 5.7% now.

While operating profit rose by 10.74% to R395.8m and revenue increased 25% to R6.98bn, the cost of goods sold escalated by 30% to R5.12bn, crimping margins.

Profit for the period went up by 8.5% to R224.1m.

"Revenue growth was driven predominantly by increased sales prices, as well as sustained volume growth in wheaten products, bread, pasta, rice, Pepsi and Weet-Bix,² said Pioneer Foods' financial director Leon Cronjé.

He said that the increase in selling prices was necessary as the cost of raw materials had increased substantially.

The downside to increasing costs is a reduction sales volume as consumers are feeling the pinch of high interest rates and inflation, which may impact revenue negatively, said Pioneer Foods CE André Hanekom.

Food inflation to rise further

But Hanekom said that "inflation is likely to increase before it declines", adding that Pioneer may introduce further hikes of up to 20% in its products in the second half of its financial year. This is to maintain its revenue growth and keep up with rising input costs.

Hanekom named some of the potential hikes that its South African consumers would have to face in the next six months.

He said the price of Pioneer's maize-based products could rise by between 10 and 12% on the back of cost increases (such as distribution costs, labour and energy costs), while juice could go up by as much as 20%. Breakfast cereal prices could rise by as much as 15% depending on what the competition does.

"The environment is getting more challenging; we need to work on margin improvement by passing raw material input-cost increases on to the consumer, driving efficiencies, growing capacity through capex [capital expenditure] spend and strengthening brand positioning," said Hanekom.

He said that through managing its profit margins in a difficult trading environment, the group is expected to achieve growth in earnings for the full year to end-September, despite slower volume growth caused by the price hikes.

By 16:00, Pioneer Foods' share price was trading 1.8% lower at 2 750c, in line with the all-share index's 1.2% fall.

Justmoney.co.za says:

With the pressures on day to day living expenses, now is the time to make sure that your finances are in order. Check that your savings accounts and bank accounts are delivering for you. Check whether your credit card is providing the best possible deal. Review your vehicle insurance, commercial insurance and life insurance. Consider whether a personal loan might be neccessary to consolidate your debt. The going is tough and the tough are saving.

 

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