F&B players affected by rising paper price

PETALING JAYA: MIDF Research sees small to mid-sized food and beverages (F&B) players as those most affected by the rising paper price due to a weaker bargaining power and their limited ability to switch suppliers.
In comparison, bigger players like Nestle (Malaysia) Bhd and Fraser & Neave (F&N) have other means in mitigating rising input costs such as focusing on operating efficiency efforts to gain extra savings.
Having said that, the research house which is maintaining a “neutral” call on the F&B sector, expects F&B players to be pressured to raise their retail prices to maintain margins.
Wood pulp prices are on the rise hitting historical high levels, affecting manufacturers that use these goods as input materials.
To date, the international hardwood pulp price has rallied from US$200 (RM847) per tonne to US$690 per tonne mainly due to supply disruption as pulp mills in Indonesia and Brazil experienced lower production due to environmental concerns as well as maintenance shutdown.
MIDF Research said as wood pulp is the major input for paper, rising wood pulp prices are expected to flow through to the price of paper. This threatens the profit margins of paper-based packaging suppliers and as a result of cost-pass through, the end consumers mainly F&B manufacturers will also be affected.
Locally, the research house said paper and paper products prices have been on an increasing trend which is in line with the global trend.
“Our channel check with industry player confirms that as of this year, there were already two rounds of price increases by packaging supplier for packaging material of about +2% to +3% increases each time. Hence, it is also expected that packaging material supplier will further increase their product selling prices going forward”.
However, MIDF Research noted that Spritzer Bhd is less affected by the rise in paper-based packaging material prices.
The research house is maintaining a “buy” call on Spritzer with a target price of RM2.83, partly due to the stabilising polyethylene terephthalate (PET) prices as it uses plastic-based packaging for its products.
“Also, Spritzer has also revised upwards the selling prices for some of its products by approximately 5%. We are positive on the price adjustment as it will enhance average selling prices as well as profit margins. We believe that sales volume should remain stable due to minimal increase in prices.”
While MIDF Research estimates that packaging cost constitutes less than 10% of cost of sales, the ever increasing input costs will put pressure on F&B players to further increase prices.
“The gross profit margin for F&B players such as Nestle and F&N are on a downward trend with the latest recorded margin in Q2’17 at 36.6% and 32.3% from the peak of 42.6% and 36.1% respectively.”
MIDF Research said F&B players under its coverage recorded a decline in gross profit margin last quarter due to the inability to pass the rising costs to end consumers as a result of weak consumer sentiment.
“Nevertheless, we expect F&B players will continue to raise product prices next year albeit selectively to protect their profit margins.”