Associated British Foods prices to rise as pound drives up costs

Associated British Foods (ABF) is weighing up price rises for its basket of grocery products to ease the pressures of rising costs caused by the devaluation of sterling.

Finance director John Bason told The Grocer today that the 15% slump in the value of the pound versus the dollar and euro would have inflationary effects on the UK economy.

He said any price rises would be on a product-by-product basis rather than across its entire range, which include Jordans and Dorset cereals, Patak’s and Blue Dragon sauces, Ryvita crackers and Kingsmill bread.

“The $64m question is how much and when,” he said as ABF posted its full-year results. “Our approach is to recognise the environment we are in and that currency has moved some of the cost inputs.

“Ultimately, retailers set the cost on the shelves but you will see some input cost inflation for us.”

Bason added that ABF was in constant talks with the supermarkets but refused to give details of timings or the discussions.

It comes after the public spat between Tesco and Unilever when the consumer goods giant tried to push through a 10% hike in its prices for Marmite and other brands. Birds Eye and Walkers have also asked the supermarkets for price rises to offset the jump in input costs.

ABF sources many of its ingredients in the UK, which reduces the effects of rising ingredient costs sourced from overseas, but spices in its Patak’s range and raw materials for its cereals are sourced internationally. However, Twinings tea is less exposed as a result of its international supply chain, with the UK factory supplying the British market.

“We produce a lot in this country so it is about some of the commodities that we bring in from outside,” Bason said.

CEO George Weston highlighted the opportunities present from the decision to leave the EU, with changes in legislation and trade agreements having the potential to benefit the group.

Bason added that the movement in exchange rates also made goods made in the UK cheaper for supermarkets to purchase over imported products.

“Import substitution is exactly what retailers should be looking at in this environment to take advantage of cheaper British products,” he said. “The positive knock on to UK farming and agriculture has to be there.”

The fall in sterling also opened up the opportunity to sell more foods outside the UK, in particular its UK-based brands Patak’s, Jordans, Ryvitta and Dorset, he said.

Shares in ABF leapt 6% higher to 2,633p in today’s trading after it flagged up expectations for profits to rise again in 2016/17 as sugar prices rise and group earnings benefit from the currency translation effects of overseas profits.

Revenues in the 53 week to 17 September rose 5% to £13.4bn and adjusted operating profits were up 3% to £1.1bn as Primark continued to open more stores, the sugar business improved and the grocery division put in a strong performance.

CEO George Weston said 2016 was a “turning point” for the AB Sugar business as it arrested the heavy profit falls in recent years as price increased. Sales in the division were down just 1% (and up 5% when stripping out currency movements) to £1.8bn, with adjusted profits up 3% to £34m. However, profits were up by 55% when stripping out substantial currency devaluations in Africa which hit Illovo business.

The grocery division, which includes Twinings, Ovaltine and Kingsmill, achieved revenue growth of 3% to £3.3bn against a background of food commodity price deflation. Allied Bakeries revenue held up in the face of heavy retailer discounting driven by a substantial increase in volumes and market share gains at Kingsmill, but pricing remained challenging.

“This has been a year of progress for all of our businesses with a substantial expansion in Primark’s selling space, increased margins in all of the food businesses and fundamental structural changes at AB Sugar,” Weston said.

“The recent decline in the value of sterling presents both benefits and challenges to the group. The diversity of our operations and our broad geographical footprint, combined with a strong balance sheet, equip us well to take advantage of these opportunities as they arise.”