Having seen European sugar prices drop quite considerably last year, there was always likely to be a stand out takeaway from the first half results from Associated British Foods, which were published earlier today.
ABF's AB Sugar division saw a 12% decline in revenue (at constant currency levels) to £938 million, which was down from £1.08 billion the previous year.
Adjusted operating profit at the division was down 24%.
'The reduction in profit reported by AB Sugar this period was the result of significantly lower EU prices which adversely affected our UK and Spanish businesses," the group said in a statement. "These lower prices were the result of the end of the EU sugar regime, the consequent removal of domestic sales quotas and an increase in sugar supply.
"AB Sugar has spent a number of years preparing for this, primarily in the reduction of its cost base and importantly we believe that British Sugar, at current exchange rates, is the lowest cost producer of sugar in the EU."
Assessing The Performance
The performance in Sugar was a blip in what was otherwise a solid set of results for ABF on paper, with its Grocery division, home to Twinings and Ovaltine, posting a 9% increase in profits, its Agriculture arm also seeing profits up by 9% and its Ingredients division posting an 11% profits rise.
However, there are indications of a slowdown in its Primark retail division, long held up as the group's strongest (and fastest-growing) investment opportunity.
While revenue at Primark was up 7% to £3.477 billion, and profit rose by 4%, the division posted a like-for-like sales decline of 1.5%, which it largely attributed to 'unseasonably warm weather' last October.
Seven new Primark outlets opened in the period, in Bielefeld, Münster and Stuttgart in Germany, Charlton and Staines in the UK, Loulé in Portugal and Le Havre in France. It is also continuing its advance Stateside, with a recently-signed deal to pen a store in Sawgrass, Florida, next year.
In a conference call with analysts, Associated British Foods confirmed that like-for-likes across Primark's Continental Europe division were down 4% to 5%, with cannibalisation an issue in the Benelux countries, and 'work to be done' to lift its Germany sales, according to Barclays European Food Retail Equity Research.
'The company is confident that better weather coming through will be helpful,' the bank added. 'In terms of the weaker-than-expected H1 LFL, this needs to be seen in the context of the impact of the weather in the final week (Ireland shut for three days/ LFL down by half, parts of the UK closed etc).'
It noted that the group's intentions Stateside, which will see the business 'test an entirely new demographic and retail format', are a 'strong indication in our view of the group's vision to build a scale business in the US'.
Buck The Trend
As Sofie Willmott, retail analyst at GlobalData noted, Primark has thus far been able to buck the trend in textile sales, which is increasingly moving online. However, the group's international division has, perhaps, not been as fruitful as might have been anticipated.
"At a time where major retailers such as Marks & Spencer, Next and New Look are reviewing their large store portfolios with the intention of reducing costly physical space which is unprofitable due to weak footfall, Primark has continued to open stores, albeit at a slower pace than in recent years." she said.
"The retailer is clearly aware of changing shopping habits, decelerating the rate at which it is opening stores and will be considering how other retailers closing locations may affect its position in a town with the view to extending ranges to fill gaps created by store closures and relocating stores as better premises become available."
Willmott described Primark's international performance as having "not been quite as promising", noting that the weather impact on sales underlines the need for "retailers must be prepared for all eventualities to mitigate the negative impact this element can have".
But as it faces into the second half of the year, Associated British Foods will be keen to address the business' like-for-like performance, particularly given the cold Spring in the UK and Ireland.
In recent years, Primark has been the 'golden child' of the ABF business, and with its Sugar business finding the going more tough, management will need to ensure that the textile operation retains its lustre.
© 2018 European Supermarket Magazine – your source for the latest retail news. Article by Stephen Wynne-Jones. Click subscribe to sign up to ESM: European Supermarket Magazine.
