Retailers take closer look at network expansion plans amid soaring inflation, construction costs

• Consumer spending hits new highs before economy experienced hard landing in March

Sri Lanka’s consumers splurged on foods and beverages and shifted more into modern trade from general trade in the six months through March 2022 amid strong consumer demand and changing consumer behaviour, but it all came to an abrupt halt with the hard landing of the economy, perhaps reversing any gains made thus far in the broader economy.

The soaring costs and commodities shortages in the construction field has also prompted the big box retailers in Sri Lanka to take a hard re-look at their store expansion plans going forward. 

John Keells Holdings (JKH), which has one of the largest processed foods and beverage manufacturing arms, witnessed between 30 to 40 percent increase in volume growth for the financial year ended March 2022 for its beverages and frozen confectionary products. 

But, the company now forecasts dourer outlook for its consumer foods from the massive jump in raw material prices as a result of the global commodities prices, which was later exacerbated by the steeper fall in the rupee in early March. The rupee devaluation sent Sri Lanka’s producer and consumer prices to the highest levels ever. 
“The volumes of all three businesses exceeded pre-pandemic levels, reaching the highest levels of sales in its history of operations,” JKH Chairman Krishan Balendra said. “The prevailing foreign currency shortage in the market however is likely to place further pressure on supply chains in the country, and unless the ability to establish trade facilities improves, there could be disruptions to our suppliers, and in turn, on the manufacturing and seamless distribution of our product portfolio,” he added. 

JKH’s consumer business represented by Ceylon Cold Stores PLC and Keells Food Products PLC reported a recurring EBITDA of Rs.3.48 billion for the financial year ended March 2022, up 5 percent YoY, as the margin pressures coming from the sharp rise in raw material costs prevented the operating leverage translating into profits.

Meanwhile, the group’s Keells branded supermarkets saw stronger sales due to both increase in footfall and online sales during the lockdowns, but the company said sourcing essentials and fast moving consumer goods had been a major challenge. . 

JKH said their inventory gaps in the supermarket business has reached a peak and forewarned that such gaps are likely to increase until economic stability is achieved and foreign currency liquidity is restored. 

Meanwhile, the company said it witnessed a positive trend of conversion from the general trade to modern trade in the recent quarters. JKH expects that trend to continue given the modern trade’s ability to ensure less disruption to its supply chains through better management of its inventory and working capital.

JKH in January commenced operations of its state-of-the-art distribution centre built with an investment of Rs.4.3 billion, the largest in the country. However, the company said it would closely review the store expansion plan considering the uncertainty and volatility in construction-related costs. 

During the financial year ended March 2022, the company opened 5 new Keells outlets bringing the total store count to 128—a moderation in the pace of new stores due to pandemic-related disruptions. 

“While the investment per outlet has increased significantly, the business will also benefit from higher revenue which will in turn positively impact the feasibility studies of prospective outlets,” an optimistic Balendra said.
JKH’s retail business generated EBITDA of Rs.7.55 billion in FY22, up 37 percent from a year ago. The supermarket business’s recurring EBITDA was Rs.5.2 billion, an increase of 26 percent.