Parmalat puts profit drop down to private label expansion, economic conditions

Posted by Daniel Palmer on 6th March 2009

Parmalat, one of the world’s largest dairy companies, reported a 9.8 per cent drop in core profit this week, as supermarket private label expansion combined with the impacts of the global economic crisis to constrain growth. Higher margin products had helped revenue grow and the company said they were now likely to streamline their portfolio of products and explore any acquisition opportunities.

“In mature markets, unit sales levels were adversely affected by the growth of private labels and the resulting increase in competitive pressure, while in the emerging markets the economic crisis constrained consumer demand,” the Italian group stated. “An improvement in the product mix, due mainly to the healthy performance of easily digestible milk,flavoured milk and fruit-based beverages, helped boost net revenues.”

“The Group responded to the challenges it faced by using a successful pricing policy to offset the impact of higher raw material prices and a decrease in unit sales,” they added. “A positive shift in the sales mix also helped minimise the negative effect of a reduction in sales volumes.”

“In addition, in the second half of 2008, Group EBITDA benefited from a sharp turnaround in the EBITDA of the Australian operations (A$47 million), which were in line with the amount reported in the same period in 2007, and were substantially higher than in the first six months of 2008 (about A$7 million).”

In Australia 2008 net revenues totaled A$775.9 million, or 6.2% more than the 730.3 million booked the previous year, but EBITDA decreased from 61.6 million in 2007 to 48.1 million in 2008.

“The performance of the Australian SBU was heavily penalized by the cost of raw milk, caused by mandatory purchase price adjustments in the Australian market, especially in the first half of the year, and by strong competition from private labels,” Parmalat advised. “In the milk market, the subsidiary reported an 8.2% decrease in volume sales compared with 2007, when the data included volumes produced for trade labels.”

New flavoured and easily digestible milk products, which it launched with the support of advertising investments, were seen as a success.

The company was concerned about the prevailing market conditions constraining demand, although production costs should fall and suitable acquisition opportunities could arise.

“In the mature countries, (the economic conditions could) translate into an across-the-board reduction in disposable income and, consequently, a drop in demand and heightened competitive pressure on retail prices,” they noted. “In the emerging countries, these developments could be magnified by the greater vulnerability that characterises each of these countries.”

“In the meantime, we are already witnessing a global decline in commodity prices, starting with oil and encompassing all agricultural “soft commodities”. Insofar as the Group is concerned, this trend could produce lower prices in some markets, particularly in the case of raw milk, at least during the first half of 2009.”

“Moreover, Group companies will find that, in most cases, increasing list prices will be difficult, while maintaining sales volumes will require the widespread use of promotional and advertising programs tailored to take into account the levels of competitive pressure that exist locally. The challenging situation that exists on the demand side and the changes that have occurred in the competitive structure of categories in which we operate, particularly in those at the more basic levels, will require that we focus our efforts, as we have already started to do, on projects to increase manufacturing and commercial efficiency with the goal of improving our cost structure. In addition, programs are being implemented in all of our business activities to reduce general and administrative expenses,” the group concluded.