CEO of food producer and manufacturer AVI says the full costs of load-shedding suffered by manufacturers have yet to be reflected in the prices of food.
Simon Crutchley was speaking during the half-year to end-December results presentation of AVI, whose brands include Bakers, Five Roses, Rimmel, Willards, Green Cross and Spitz shoes.
“Manufacturing without a sustainable and credible power utility is a significant challenge. And I think to some extent, the full brunt of this current predicament is going to play out more significantly than most people anticipate.”
He said there were lots of costs attached to people using backup power solutions, particularly generators. These costs will find their way to consumers in raised prices, he said. “How this plays out I think is something that hasn’t yet been fully digested. We’ve had not a single day this calendar year of no load-shedding.
AVI spent R22m to fend off rolling blackouts in the six months to end-December. But Crutchley said it is hard to recover costs either as retailer or manufacturer, “in a constrained environment”.
In previous years it has invested in water storage facilities at manufacturing sites to mitigate power failures and will continue to do so. Load-shedding can reduce the availability of water.
He said many manufacturers in industrial areas could not use solar power as suggested by commentators due to a lack of roof or other space for panels and had to rely on generators — despite the expense.
The group saw increased revenue of 7.2% to R7.8bn but a poor performance from its I&J Fishing brands as the total catch allowable fell, load-shedding hit profits and it sold less abalone in China due to lockdowns. He would not answer a question in the investor presentation over whether it would sell the I&J business.
The fish business is an intensive user of electricity as the firm must cook and then freeze fish.
AVI operating profit increased 1.7% but operating profit, excluding I&J, was up 8.4%. Headline earnings per share was up 0.6% to 318.9c. It paid a dividend of R1.72.
AVI had a better time raising the prices of its tea and biscuits than fish and was able to ensure volumes bought did not drop too much. Food producers have to manage a balancing act of trying to raise prices to recover input costs, while ensuring they do not sell less as constrained consumers cut back.
AVI and other food manufacturers are grappling with high input costs stemming from higher soft commodity prices, though they have since come off their highs, as well as high fuel prices and a weaker rand.
Crutchley said the financial half-year required “ongoing care and attention to how we manage both price and volume”.
As coffee prices globally have almost doubled in the past 18 months, it put up prices of its Ciro instant and filter coffee 17.1% in the half year. Volumes sold dropped 7.2%, which was also seen in Europe as prices shot up. Coffee revenue was up 8.7%.
The owner of Five Roses put up tea prices 9.9% as it faced higher import costs and demand fell more than 14%, but AVI believes this will normalise as consumers become used to higher tea prices.
Bakers biscuits and snack prices rose 14.2% and volumes only dropped 1.4%. This demonstrated AVI’s pricing power, which is the ability to raise prices and keep selling almost the same volumes.
The retail portfolio, including the Kurt Geiger and Gant brands, was a standout performer as it lifted revenue 17.4%, boosted by price increases and December sales. Its fashion brands target predominately middle to high-end consumers.
Updated: March 06 2023
This article has been updated with additional information
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