Food makers hurt by packaging, energy costs

By Ahmed ElAmin

- Last updated on GMT

Related tags Costs Kraft foods Cadbury plc Cost

Announcements by Danone, Kraft and Cadbury indicate how much the
rise of oil prices is affecting packaging and energy costs for food

While most big food groups, like Nestle and Danone, have managed to keep overall sales growing strongly in the first half of 2005, profit margins have slipped or are under pressure due to the steeprise in oil costs.

The oil costs has affected plastic packaging prices and the cost of the energy needed to run the plants and transport goods to the marketplace. Higher oil prices and their impact on manufacturing,distribution and packaging would hit all companies.

This month Sweden-based paper company Ahlstrom beceme the latest food industry supplier to announce price increases for flexible packaging and label papers.

The company said oil prices meant it would have to raise prices at between five and 12 per cent no later than 1 December, depending on different products and regions.

Such price increases are impacting food companies' margins.

Danone today released its sales figures for the first nine months of the year stating that it had a "severe hit" from input costs, mainly due to the price of plastic used for packagingits products. The company said its overall operating margin in the first half was reduced by 0.75 per cent.

In its beverages and Asian divisions higher input costs took a two per cent bite out of margins.

The company said it did not expect the impact to continue as the high prices were not expected to increase at the same rate.

"While we have had a hard two years of price rises we would not expect such a big jump next year because they are already high,"​ company executives said during an analystconference call.

Meanwhile Kraft Foods yesterday cut its full-year earnings forecast due to high energy, packaging and other commodity costs. The company reducing its third-quarter earnings forecast by 11 per cent.

The company said he rising cost of PET resin, used in plastic packaging, was up "substantially". Plastic-related costs are Kraft's second-largest inputs after cheese.

Kraft said its energy and commodity costs rose by $200m in the third quarter, with year-to-date costs up by $600m. The company said such input costs are now expected to rise by $800m this fiscalyear, from an earlier estimate of $600m.

The company is thinking of raising its prices for products, but has to balance this with maintaining market share in the face of increasing competition from private label companies, stated RogerDeromedi, Kraft's chief executive officer.

"Our overall top-line momentum accelerated in the third quarter behind new products, positive mix and strong developing market growth,"​ he said. "From a profit perspective,however, our price increases lagged the rise in commodity and energy costs, and our margins declined. The significantly higher costs continue to be a challenge for us, but we remain committed toincreasing marketing spending and maintaining appropriate price gaps to improve our top-line momentum in the near-term and build brand value across our portfolio for the long-term. At the same time,given that we expect this higher cost environment to continue, we are exploring additional pricing actions."

Cadbury Schweppes is another company hit by rising oil prices. The company stated earlier this month that high oil prices and other costs would affect third-quarter results.

However, unlike the other two companies Cadbury said it would be able to keep its margins growing, although not to the level previously targeted.

"Cost pressures have intensified in the second half, particularly in the US,"​ the company stated. "Oil price increases and hurricane-related disruption have resulted inhigher transport and PET resin costs. In addition, severe financial difficulties experienced by an important supplier to our beverage business in the US have led to significant price increasesfor glass bottles."

The group expects revenue growth for the year to be around the top end of its goal range.

"Despite intensifying cost pressures and significant growth-related investment, we expect a further improvement in margin in 2005, although we are unlikely to make sufficient progress to bewithin our margin goal range this year,"​ the company stated on 6 October. "We are making good progress on cash flow, and expect to see a significant increase this year."

Nestle, in its first-half results released in August said commodity prices were already beginning to bite into its margins.

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