Private label demand hinders Goodman Fielder’s progress in first half

Posted by Daniel Palmer on 25th February 2009

Australia’s largest food manufacturer, Goodman Fielder, has posted a 21.9% drop in profit despite a 12.2% increase in revenue in the first half of the financial year.

The hit to profit was due to the extreme volatility of commodity costs and changing consumer purchasing patterns that have led to greater interest in private label goods.

“Although international commodity costs are now retreating from an extended period at record high levels, little benefit was realised in the period due to time lags inherent in purchasing contracts and in clearing higher cost inventory of grains and oils. The high commodity costs impacted margins and added $120 million to the company’s cost base,” Goodman Fielder explained.

“The continuing severe economic conditions have caused an erosion of consumer confidence and this has resulted in a drift to cheaper alternatives such as house brand products. This has impacted margins and had a negative effect on earnings which the company continues to combat by maintaining brand support and bringing new products to the market.”

Goodman reported that internal cost savings were being “vigorously” pursued, which is to lead to a 5% cut in their workforce for the full year and continued restructuring costs.

“The drive for increased manufacturing efficiency has seen the completion of the first stage in the closure of the Mascot (NSW) oils processing facility and the relocation of spreads processing to our Brisbane plant. The construction of the new packaged food plant at Erskine Park in Sydney’s west is proceeding well and the plant is expected to be commissioned by the end of this calendar year. This will result in the full closure of the Mascot facility,” the company advised.

Goodman Fielder reported that their accelerated research and development program was already producing results with new product launches such as Lawson’s premium bread – which they said had quickly won 5% of the market. It is now being produced at plants in Queensland, New South Wales and Victoria and will soon be available in all States. A new Helga’s variant was also launched in NSW and, based on its initial success, it will be rolled out nationally later in this calendar year. In addition, the Country Life health bread range was reformulated and repackaged during the period.

To create even greater research and development capability, a new product development centre is being established at North Ryde in Sydney as part of the new corporate office development and will be operational later this calendar year.

Despite the success of some of their new bread launches, their Fresh Baking sector – which contributes the most to Group Revenue – was the only division to see a decline in revenue for the half (-1.2%).

The food company believes the coming months could put pressure on margins as competitors fight for shelf space and bid to clear excess inventory. “We anticipate a softening of demand during the remainder of the financial year as our trading partners reduce inventory to preserve cash and to take advantage of falling commodity costs,” they explained. “As well, we expect a competitive pricing environment as industry participants endeavour to clear higher cost inventory.”

The falling commodity prices would help counter this pressure, however.

“The company anticipates improved trading conditions in the second half of the financial year, with further improvement in the F’10 year. Net profit after tax for the current year is expected to be in the range of $170 million to $185 million,” the manufacturer concluded.

Investors have not responded with the same optimism, however, with Goodman shares taking a 15% hit in early trade.