Keells Food June results offer insights into red-hot inflation seeping through food supply chains

• Company seen fully passing through surging costs to defend margins

As the June quarter earnings season is slowly getting underway, Keells Food Products PLC (KFP) reported some solid top and bottom line performances, offering some key insights into the cost inflation, which is seeping across food supply chains and how the packaged food producers are navigating the shift in consumer habits in response to soaring prices.  

The market leader in processed foods reported of Rs.1.60 billion revenue in the three months to June 30, the company’s first fiscal quarter, up 81 percent from the same period in 2021, reflecting higher consumer spending on food stuff as people were forced to cut down significantly on non-food expenditure in the face of soaring inflation.
Unlike during other times, the strong toplines of companies do not necessarily suggest they are better-off, instead it is a sign of full pass through the gigantic cost increase the companies face throughout their supply chains. 

For instance, KFP’s direct cost rose as much as its revenue at 81 percent to Rs.1.22 billion reflecting pass through effects through upward price adjustments as guard of its margins. 

Sri Lanka’s producer prices rose by 76 percent in May hitting a fresh high while food production costs soared by 102 percent signalling the doubling of shelf prices of all food items. In fact this was reflected in more than 80 percent increase in food prices in the consumer price index in June.  

“Given the challenging operating environment as outlined earlier, the cost of raw materials essential for production escalated during the year, with chicken, palm oil, and casings increasing by 25 percent, 37 percent and 20 percent, respectively,” said KFP Chairman Krishan Balendra in his annual letter to shareholders in May.

“In response to escalating costs, KFP adopted price increases across selected items, to the extent feasible,” he added. 

The manufacturer and distributor of Keells Krest and Elephant House range of food products ceased its Ezy rice product recently in response to the “persistently low volumes and limited opportunities to drive market activations due to the non-conducive environment that prevailed in recent years on the back of multiple challenges beyond the company’s 
control”.  

In response to the developing market conditions, KFP, similar to its sister entity Ceylon Cold Stores, is increasing its product range through smaller packet sizes which offer lower price points due to the diminished purchasing power of consumers.

KFP reported earnings of Rs.4.12 a share or Rs.105.1 million for the April-June quarter, compared to 80 cents a share or Rs.20.5 million in the corresponding period in 2021. 

However, it remains uncertain if the company would be able to maintain the momentum as the ongoing demand destruction policies could further crimp discretionary spending by consumers.

John Keells Holdings PLC together with John Keells PLC controls 89.95 percent stake in KFP.