Raw material costs eat into ConAgra profits

- Last updated on GMT

Related tags: Price increases, Profit, Generally accepted accounting principles, Conagra foods

In line with other packaged food companies such as Unilever and
General Mills, ConAgra Foods has posted lower quarterly profit due
largely to higher raw material costs.

The company said it would continue to raise prices to try to offset higher costs, but that the effect of the price increases will be seen more in the second half of the fiscal year.

ConAgra, whose brands range from Healthy Choice meats to Chef Boyardee pasta, posted a profit for the first fiscal quarter of 2005 of $135 million compared with $194.9 million a year earlier.

Significantly increased input costs negatively impacted operating profit growth and profit margin, as did $8 million of costs associated with implementing efficiency initiatives. Profits for branded processed meats were significantly below prior year results, reflecting a combination of increased costs and competitive challenges.

However, the company expects price increases as well as the marketing and operating initiatives underway to accelerate the rate of operating profit growth for this segment as the fiscal year progresses. "Because we have taken some price increases and reduced operating expenses in several areas, our overall operating profit this quarter was solid, but it was not as strong as we wanted; this was mainly due to significantly increased input costs across the industry,"​ said ConAgra chairman Bruce Rohde.

In this respect, ConAgra's​ results follow the pattern of other food and beverage companies such as General Mills and Unilever, all of which have warned of lower-than-expected profits in the last few days. It would appear that the manufacturers are being squeezed between very high raw material costs, and retailers who are reluctant to pass on price increases due to intense competition.

In the current climate it is manufacturers that are bearing the costs, and this being reflected in the squeeze on margins of some of the biggest companies in the industry.

Food makers and ingredients firms across the world have been affected by rising prices for basic food commodities. In each of the last four years world grain production has fallen short of consumption, forcing a draw-down of global stocks for wheat, rice, corn and soybeans. Soybean prices recently hit 15-year highs and wheat and corn 7-year highs.

The difficulty for manufacturers such as Unilever and General Mills is that they have been unable to pass on these higher costs, and are effectively being squeezed by an increasingly powerful retail sector. The Wal-Mart business model in which the goal of cutting prices relentlessly is the ultimate objective has been copied extensively in both North America and Europe and, from a retail point of view, has been a stunning success.

But of course, suppliers and manufacturers have had to be squeezed relentlessly to cut wholesale costs in order to achieve such sustainable low prices.

Nonetheless, ConAgra believes there are green shoots of recovery. Sales for the quarter rose 8.2 per cent to $3.50 billion, and the company believes that the marketing and operating initiatives currently being implemented, along with appropriate price increases, will drive forward solid growth.

The group is also innovating. During the quarter the company announced its whole-grain flour, Ultragrain white whole wheat, its proprietary product, which is aimed at the industrial bakery sector. Ultragrain combines the nutritional benefits of whole grains with the taste, texture, and finished-baked qualities of refined flour.

Related topics: Processing & Packaging

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