Bakkavör, a leading private-label supplier of ready meals, packed salads, and pizza, has highlighted the challenges faced by the UK food and drink industry. With wage and energy inflation, along with rising interest rates, the company expects pricing to continue to impact volumes. The UK, being its largest market, has experienced a 1% drop in volumes in the first half of this year, resulting in a 20 basis points decrease in the adjusted operating margin, which now stands at 4%. However, the company’s in-country revenue has increased by 7.6% to £913.7m, driven solely by pricing.
Despite adjusting inflation expectations to the lower end, Bakkavör anticipates ongoing pressure from energy and labor costs. CEO Mike Edwards expressed concerns about the cost-of-living crisis, which is disrupting both consumers and retailers. Meanwhile, CFO Ben Waldron highlighted the impact of unlocked energy hedges, costing £25m this year alone. Labor inflation is also a significant concern, with the UK national living wage increasing by 33% since March 2019. Bakkavör expects rates of pay to remain inflationary, while cautiously hoping for a future ease in the situation.
Pricing Outlook and Recovery
Bakkavör has incurred £91m of inflation this year, adding to the £230m in 2022, representing a significant increase in the company’s cost base. However, the company has managed to recover £79m through pricing, achieving an 87% price recovery ratio. While Edwards stated that there won’t be further price increases for this year, Bakkavör remains open to discussing and recovering new inflation with customers. The company also serves categories like bread, fresh fruit, desserts, and ready meals. Desserts, being a discretionary purchase, have experienced weaker performance compared to the rest.
Impact of Extreme Weather Events
Bakkavör faces supply challenges due to extreme weather events in Europe, such as heavy rainfall in Spain affecting melon crops and poor yields. The company also anticipates potential tomato shortages from Morocco due to extreme summer temperatures. CEO Mike Edwards addressed the issue, emphasizing the need for the strength of their supply chain to navigate these challenges posed by global warming.
Overall, Bakkavör reported a 7.9% increase in group half revenue, reaching £1.09bn. Adjusted operating profit saw a 2.1% increase, while profit before tax grew by 0.3%. For the second half of 2023, Bakkavör expects low single-digit revenue growth, but anticipates continued pressure on volumes. The outlook for adjusted operating profit has been upgraded to at least match last year’s figures, reaching £89.4m.
