Rising costs knock Wimm-Bill-Dann margins
more premium products to reverse an early drop in profits last
year, but an array of rising costs look likely to continue
pressuring the firm in 2005 making higher margin products crucial,
reports Chris Mercer.
Wimm-Bill-Dann's sales (WBD) rose by 26 per cent to almost $1.2 billion in 2004 and were led by the firm's core dairy business, notably cheese, which still makes up around three quarters of those sales.
And a late surge at the end of last year, together with increasing sales of higher margin juices and dairy desserts, meant the company has managed to pull net profits up eight per cent to $23 million after suffering a 10 per cent drop in the first nine months.
WBD also benefited from more successfully translating rising costs into price increases for customers. The increase in average selling prices in dairy kept pace with the rising cost of raw milk at almost 17 per cent, whilst average selling prices in WBD's juice segment went up by almost 14 per cent.
Even so, costs continue to present the main challenge for WBD and these still managed to cut profit margin in the dairy business from 27 per cent to 25.
The group blamed raw milk prices as well as rising transport and personnel costs as the main problem; something other companies in the region could also be affected by.
Sergei Plastinin, WBD chief executive, said: "We remain focused on improving our profitability and tightening cost control. At the end of last year we laid the foundation for the beginning of our structural reform and abolished the Centre regional division in Dairy."
Plastinin said the merger of its juice and water businesses announced at the start of 2005 would also help to streamline operations and provide savings.
WBD's water business, which made up less than 0.5 per cent of sales in the first nine months of 2004, could no longer be tolerated as a separate enterprise even though it has more than doubled sales in the last year.
At the same time, the firm said it would launch a separate baby food business in recognition of the "ever-growing role of the baby food market". WBD's baby food sales have blossomed over the last 18 months, now making up 13 per cent of the group's total dairy sales.
Plastinin said the company also wanted to focus further on premium juices and desserts. "Yoghurts, dairy desserts and juice containing dairy drinks grew at a slower pace than we initially anticipated. However, we believe that the consumption of these higher margin products will intensify in 2005 and beyond," he said.
WBD is also set to benefit from an upgrade to its milk processing plant, Kiev City Dairy Plant No.3, to meet rigid EU quality standards and extend product shelf-life; giving the firm a bigger platform from which to launch higher margin products.
The success of such products over the next few years was highlighted last autumn by Datamonitor analyst John Band as crucial to WBD's success. "WBD really ought to be starting to turn its investment into profits within that time, and it needs to start selling more premium products to offset the high milk prices," he said.
