Food sector in a pickle

THE Mid-East conflict is weighing heavily on food and beverage (F&B) companies.

Oriental Kopi Holdings Bhd, one of the leading F&B stocks on Bursa Malaysia, has seen its share price drop by some 15% since the onset of the war, significantly higher than the FBM KLCI’s dip of 1.2% in that period.

While rising energy costs affect most sectors, the food industry confronts a more layered set of pressures. These include spiked fertiliser and grain prices, supply-chain disruptions and surging packaging costs.

“There is no place to hide,” says Tradeview Capital chief executive officer Ng Zhu Hann.

“It will be hard for F&B companies to absorb the higher costs if the situation persists.”

Poultry and livestock producers face rising feed costs.

F&B retailers are seeing landed merchandise costs go up. This is the total cost of getting a product from the factory to their tables and shelves.

Then, there is weaker consumer spending as consumers tighten their belts. Resin prices have almost doubled, impacting the cost of packaging, while freight cost increases are nudging up distribution costs.

Bottled mineral water manufacturer Spritzer Bhd’s share price has tumbled by almost 20% from the start of the conflict. Resin accounts for 40% to 50% of the company’s material cost.

“If elevated resin prices persist, any average selling price hike on the Spritzer brand may likely be a full pass-through.

“For now, management is considering temporarily absorbing some cost inflation to preserve or gain market share, especially if smaller players are forced to cut output or exit,” notes UOB Kay Hian (UOBKH) Research.

Meanwhile, Farm Fresh Bhd says it is grappling with higher packaging, logistics and electricity costs, which together account for about 10% of its total cost base.

The group has also been affected by disruptions to the resin supply chain over the past 10 to 14 days, impacting production of its one-litre and two-litre plastic bottle formats, which contribute about 12% to 13% of revenue. Its share price has slipped more than 10% since the conflict began.

F&B retail operators like Oriental Kopi are vulnerable as café spending is more discretionary than retail staples.

MBSB Research trimmed its earnings forecast for Oriental Kopi by 4.8% for a base case that assumes the conflict lasts about six weeks and oil averages around US$90 per barrel.

Tradeview Capital senior analyst Tan Jia Hui, who covers Oriental Kopi is of the view that the risk of  higher input or logistics costs for the company due to the Middle East war is quite likely.

This is despite the management maintaining they “do not see any immediate impact” and “think costs are manageable”.

“Any sustained increase in shipping costs or imported raw material prices could gradually feed through into the company’s cost base,” she says.

Tan adds Oriental Kopi’s ability to pass through cost increases is “limited and constrained” in the near term, given its exposure to price-sensitive mass-market consumers. Also, the company is more likely to prioritise preserving customer traffic and brand positioning and absorb part of the cost pressures.

The greatest margin pressures, according to Fortress Capital Asset Management chief executive officer Thomas Yong, will be felt by mid-stream food manufacturers.

These companies process raw commodities into intermediate or finished food products but lack strong end-consumer brand loyalty. Some of the local listed food manufacturers include Three A Resources Bhd, Guan Chong Bhd, Apollo Food Holdings Bhd and DXN Holdings Bhd.

“These players are squeezed from both sides: upstream commodity costs are rising, but downstream customers (supermarkets, distributors, or institutional buyers) resist price increases and typically possess huge bargaining power,” he says.

For a company like Guan Chong, the dynamics are more nuanced, notes Yong. The company processes cocoa beans it sources from its own facilities such as the major one in Ivory Coast. Its profit margins depend more on its ability to manage bean procurement costs than by direct Strait of Hormuz exposure.

“However, higher energy costs at its processing plants (especially in Germany) coupled with rising freight rates and packaging costs are not immaterial,” says Yong.

Tradeview’s Ng says chocolates are largely discretionary and not a daily necessity.

“People buy chocolates when they travel. If global demand cools and travel is restricted, demand for chocolates will naturally decline,” he says.

Some of the most consequential input‑price pressures for the food sector are coming from fertiliser, animal feed and plastic‑packaging resin.

This will affect poultry and livestock producers given their heavy reliance on feed such as corn and soybean meal.

To keep a lid on costs, firms may resort to shrinkflation – smaller pack sizes, lighter portions, or reduced serving sizes without commensurate price reductions.

It’s not a new phenomenon, but the ongoing war could further drive this trend.

For the first one to two months, players may still be shielded through existing inventory and pre-contracted input costs. Perhaps this is why research houses appear relatively sanguine on the F&B sector’s near-term outlook.

Recent reports suggest that the impact of the Middle East conflict has been manageable so far, with limited direct operational disruption and only gradual cost pass-through expected.

While higher logistics and input costs may build over time, the immediate impact has been described as “more noise than damage” by UOBKH Research.

More broadly, RHB Research points to resilient domestic ­consumption and supportive policy measures as key buffers, suggesting that earnings visibility for consumer names remains relatively intact in the near term.

This is also probably why UOBKH Research is calling for a “strong buy” for Oriental Kopi, noting that the recent selldown of the stock has been overdone.

But for one privately owned restaurant chain, the reality of a new cost dynamic is setting in.

Leslie Gomez, the founder and managing director of The Olive Tree Group, which operates a homegrown portfolio of 31 ­restaurants and bars across six states and two countries, tells StarBiz 7: “We are beginning to feel early cost pressures, mainly from fuel and logistics.

“It has not fully hit food pricing yet, but we expect a gradual increase over the coming weeks as supply chains adjust accordingly.

“We are being cautious, cutting costs accordingly and minimising unwanted expenses.”