More evidence of rising raw materials costs affecting profit margins

.

A recurring theme of business news stories from the UK and abroad is the impact of rising raw material costs on the profitability of manufacturers. There was another good example today when food supplier Uniq announced its latest results

Uniq is a food manufacturer. In fact, it is one of the main suppliers to Marks and Spencer, who account for about a third of Uniq’s sales in the UK.

The financial broadsheet newspapers have given widespread coverage to Uniq’s announcement of its financial results today.

It blamed rising food ingredient prices, which it claims are rising by between 8-10% per annum, for worse than expected results. Higher wheat, milk and vegetable oil prices were signalled out for particularly high cost inflation.

A useful exercise for students is to compare the current official rate of consumer price inflation (circa 2.5%) with the much higher cost inflation being suffered by many businesses. What can they do about it? In the case of Uniq, the problem is that its customers are the major grocery supermarket chains who have strong bargaining power over their suppliers. So if raw material costs rise in the food manufacturing supply chain, it is likely to be the food processors like Uniq that bear most of the pain in terms of lower profit margins.

Another interesting feature of Uniq’s announcement was its decision to scrap the final dividend for shareholders.

According to the Guardian:

“The move to axe the final dividend will save Uniq £5.1m, most of which will be ploughed into its under-performing desserts business. Eaton explained that the company thought it was best to preserve cash against the worsening economic backdrop. He cautioned that when he took the helm in 2005 “we saw it as a three year turnaround; now we see it as a five-year turnaround.”

Uniq is going through a strategic turnaround currently, focusing on its core food manufacturing operations and selling-off non core businesses.

There is some good business studies content in this article on the company in The Times today.