Food group sees consumer sentiment up in main markets

ANALYSIS:The next major concern for Aryzta is the re-emergence of price inflation and volatility

IF NOTHING else, yesterday’s strong set of first-half results from Aryzta gives proof to the dictum that economic trends are cyclical.

Having suffered during the recession as consumer demand weakened, the baked goods producer is seeing some signs of recovery as consumer sentiment picks up across its main markets.

While most of the revenue growth in the first half was due to the acquisition of two major US companies last year, the company also experienced underlying revenue and volume growth.

But while the full force of recession might be receding, the company is facing another potentially serious threat – the re-emergence of food price inflation and volatility.

Chief executive Owen Killian was upfront yesterday about the scale of the challenge.

While the impact of primary food price increases will probably not be seen until the next financial year, current trends suggest the steep and sudden elevation in prices will lead to double-digit price increases.

Not all of this will be passed on to consumers, but it does raise concerns about the impact on margins.

Aryzta is confident the company is well-placed to weather the storm.

It points out that bread is the lower component cost of a meal or product, and in the context of rising prices across food groups is relatively competitively priced.

Killian also pointed out that, unlike in 2007 and 2008, businesses are better prepared for price increases, and understand the macroeconomic reasons behind rising costs.

The company is also predicting that, as the economy improves, revenue growth will follow, offsetting some of the cost escalation.

Nonetheless, as Killian said yesterday, volatility is likely to become a feature of the industry.

How Aryzta handles this challenge will be of crucial concern to investors in the months ahead.