Formed late last year out of the merger of Friesland and Campina, the new Dutch company said selling prices of basic dairy products are falling because of weakening world demand in the recession and intense competition between supermarkets in Europe.
The profitability of the ingredients business, which is subdivided into six operating companies producing various dairy-based ingredients for food, beverage and pharmaceutical applications, was hit hardest by the these trends in the first half of 2009.
While operating profit across the group fell 8 per cent to €110m in the first six months of the year, the ingredients business posted an operating loss of €45m, compared to a profit of €80m in the corresponding period last year.
FrieslandCampina said the declining fortunes of the ingredients business were caused mostly by the plummeting selling prices of products such as milk powder, caseins, and cheese.
Depressed selling prices and lower prices for raw materials and milk lowered the valuation of inventories putting further pressure on the profitability of the business.
Variation
Nonetheless, FrieslandCampina spokesperson Rob van Dongen told Food Navigator that performance varied across the ingredients business and that specialty ingredients actually held up well.
For example, the spokesperson said sales and profits from baby and infant ingredients resisted the downward trend in the first half of the year.
The strong performance of specialty ingredients could not prevent lower selling prices of basic products cutting into sales revenue. The ingredients business posted a drop in turnover of 16 per cent to €593m, despite the volume of products sold actually increasing compared to last year.
Outlook
FrieslandCampina expects the problem of lower prices to persist into the second half of the year as it predicts no significant improvements in the economy in that time.
“Selling prices of basic dairy products in particular are expected to remain under pressure, owing to sluggish demand,” said the company in a statement.
While FrieslandCampina said the global economic situation was largely responsible for falling consumer prices, the company also blamed the resurgence of intense competition between supermarkets.
The company said: “Supermarkets in Europe are again starting to focus on price competition, which is causing more and more pressure on selling prices of dairy products in the supermarket segment.”
Ingredients was not the only business to suffer from a reduction in selling prices. Sales in the cheese and butter division were down 20 per cent to €1bn and operating loss was €55m compared to a loss of €25m last year.
Results from the consumer products business were more encouraging but were not good enough to prevent the group from reporting an overall decline in sales revenue and operating profit.
Total revenue for the first six months of the year was €4.1bn, down 15 per cent on last year, and as previously noted, operating profit dipped 8 per cent to €110m.
However, net profits were up 30 per cent to €78m thanks to lower financial costs and sharing of profits from associates.