Greencore: rising commodity costs must be passed on
Convenience food group Greencore expects any “structural” increase in raw commodity prices to be passed on to customers and offset by gains in its own ingredients business.
“In the event of that happening, the ingredients division within Greencore would benefit and we’ve seen some evidence of that already,” said Greencore chief financial officer Patrick Coveney.
“If there is a long-term structural change in commodity food pricing, then that also needs to feed through into retail pricing. Our track record on margin delivery has been excellent in the past four or five years and we expect that to continue.”
Food analysts have reported processors’ concerns that long-term increases in ingredient costs attributable to issues such as growing demand for bio-fuels were structural, not cyclical. It is feared these increases would be difficult to pass on to customers.
“I don’t think anybody knows for sure whether it is structural or cyclical,” said Coveney. “You can certainly construct a very plausible argument that it is structural, but it has looked like a structural shift before.”
Coveney said sufficient spare capacity existed within Europe through the set-aside policy of land under the Common Agricultural Policy to cater for increased demand for biofuels. “So the capacity is there, but it will change the nature of the regulatory challenge.”
Following the recovery in its malt business for the half year to March 30, 2007, Coveney stressed this sector of Greencore’s business would remain core to its activities, unlike the heavily regulated sugar processing business, which it had now exited.
His comments came as Unilever warned of a “continued increase in input costs in a number of areas in foods, most notably edible oils, tea and (to a lesser extent) other agricultural commodities, such as grain and sugar”
It added: “Commodity costs impacted operating margin by €115M in the first quarter of this year. We are continuing to implement price increases to recover commodity cost inflation, and have more on the way in the year to come. We do not foresee significant improvement in the commodity cost environment.”
Announcing a 38% increase in profit before tax of euro 35.4M, on total sales of euro 633M for the half year to March 30 2007, Coveney reported that seven of Greencore’s nine business areas delivered sales growth at or above the UK average.
Greencore said it hoped new branded product launches in the coming months - including a noodle product to be launched in the second half of the year and other products aimed at the convenience store sector - together with a revitalisation of its own-label ranges would reverse a “modest sales decline” in chilled ready meals business in the second half of the year.
While the lion’s share of Greencore’s business comes from own-label products, it is striving to increase its proportion of branded business, with further launches under the Weightwatchers and Disney healthy children’s meals brands, plus own-branded products.
