AVI, which owns Five Roses tea and numerous other household brands in SA, said on Monday it may have to further increase selling prices in some categories to protect its gross profit margins.
The potential increases are aimed at softening the effect of higher international soft commodity prices, which have been an albatross around the neck of food producers over the past 18 months.
International prices on soft commodities such as maize remain elevated, driven partly by drought in Brazil, while the opening up of the US economy has increased demand for maize, which is used in the production of petrol.
AVI is also sensitive to a weaker rand/dollar exchange rate, which increases the cost of imported products, though there are benefits for its fishing business, which exports to China.
CEO Simon Crutchley expects the next six months to be challenging due to uncertainty over how the Covid-19 pandemic will affect spending patterns.
Speaking at the results presentation, Crutchley said AVI was looking to increase selling prices to ameliorate cost pressures arising from higher soft commodity prices and the weaker rand. Palm oil and glucose are some of the raw materials that rose in the year to end-June 2021.
The increase in input costs came amid sluggish consumer spending.
AVI revenue grew just 0.5% to R13.2bn in the year to June, with its fishing business, I&J, the only one that managed to grow sales in the reporting period.
“Prices for many of the key raw materials used by AVI’s businesses have risen over the last year,” the company said.
“Our consistent hedging practices for currency and commodity prices will provide some protection for the first semester of the new financial year, but it is likely that further selling price increases in some categories will be necessary to protect gross profit margins. This may have a negative impact on demand in those categories.”
The company competes with Tiger Brands and RFG Foods. Its fashion brands, including Kurt Geiger, target middle- to high-end consumers.
Demand for food and beverage brands were under pressure, as were its fashion brands.
AVI said demand for its snacking and beverage brands normalised, after consumers stocked up on basic foodstuffs in the previous comparable period. Sales of fragrance and beauty products were yet to reach pre-Covid levels.
Headline earnings per share rose 6.2% to R5, helped partly by lower finance costs. AVI declared a final dividend of R2.75, bringing the full-year ordinary dividend to R4.35 per share. A special dividend of R2.80 per share was paid to shareholders in April.
The share price was down 0.36% at R75.38 by the close on the JSE. The shares are down about 16% over the past five years, which is in line with other food producers.
Update: September 6 2021
The article was updated with more information and the share price.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.