Credit rating specialist’s words of caution for industry

By Scunthorpe Telegraph | Posted: 24 Aug 2017

RISING input costs and the price sensitive food retail market will pressure UK packaged food companies’ margins and profitability in the next 12 to 18 months, according to credit rating giant Moody’s. 

Most companies have agreed price increases or reconfigured pack sizes but the impact on volumes remains uncertain, it said.

Demand could also be curbed by a fall in disposable incomes, although it expects overall volumes to remain stable due to the non-discretionary nature of food purchases. 

Lower profitability could result in credit quality erosion and potential rating downgrades, especially for those companies with negative outlooks on their ratings including Premier Foods Plc (B2 negative), Boparan Holdings Ltd (B2 negative) and UMV Global Foods Holding Company Ltd (United Biscuits, B1 negative), all with strong past and present links to northern Lincolnshire.

Analyst Eric Kang, assistant vice-president at Moody’s, compiled the report to show how the weaker pound and higher prices for raw materials are impacting. He said: “Branded companies will need to invest in innovation to protect their market share against private labels and newer brands. We expect continued private label sales growth as consumer perception improves and retailers focus more on private labels to increase their point of difference. 

“Newer brands will also continue to pose a threat to established brands because the latter have been slow to adapt to new trends, especially healthy eating.”

He said Boparan, the owner of 2 Sisters and Five Star Fish,  will be less affected by rising input costs due to contractual pass-through arrangements in its UK poultry business. 

“We also expect volumes to remain resilient because poultry remains the cheapest source of animal protein, however, the other parts of Boparan’s operations are more exposed to inflationary pressures,” he said.  

Frozen fish and seafood is leading the way when it comes to private label growth, up 1.8 per cent, which would suit many in Grimsby, with super brands Young’s and Saucy Fish Co built on strong support for retailer’s own label. Icelandic Seachill, currently being eyed up by Hilton Food Group, is behind Tesco’s fish counters, while Morrisons has its entire vertically integrated seafood operation in the town too.

Focusing further on Boparan, Mr Kang said: “The negative outlook on Boparan’s rating reflects our expectation that profitability in the other parts of its operations – including red meat, fresh prepared food, frozen pizza and biscuits – could deteriorate due to inflationary pressures.” He said credit metrics were already weak, with earnings to debt ratio hight at more than seven times.

Flagging up investment in northern Lincolnshire, he said: “The company has undertaken a series of measures to offset higher input costs and improve profitability. In the protein segment, this includes the upgrading and expansion of its largest poultry processing plant in Scunthorpe and the closure of one of the two red meat packing facilities.”

Moody’s expects UK speculative-grade food suppliers to maintain an adequate liquidity in the next 12 to 18 months, underpinned by good cash balances, access to external sources and positive free cash flow generation, albeit at low levels.



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