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Mexican packaged food companies to feel profit squeeze as inflation continues

Mexican packaged food companies are set to feel bigger profitability pressures over the next year as commodities price inflation and slowed growth continues, said credit rating agency, Fitch Ratings.

The report cites corn flour and tortilla manufacturer Gruma as one example of a Mexican producer whose profitability is below its peak levels in 2019 to 2020, with rocketing corn prices.

“Initiatives to offset inflation on raw materials, mainly corn, and labour costs in the US have not been fully passed to customers,” the analysts added.

For Mexico’s packaged food sector overall, the average earnings before interest, taxes, depreciation and amortization (EBITDA) margin will likely fall to 11.9% at the end of 2022, down from 12.3% at the end of 2021, Fitch said.

“These companies have generally been able to pass through higher costs to consumers to sustain margins. We expect higher raw materials and labour cost pressures to be mitigated somewhat with price increases, operating efficiencies and hedging strategies,” said the analysts.

Grupo Bimbo and Sigma Alimentos show more resilience than others

However, for some Mexican food makers, including Grupo Bimbo and Sigma Alimentos, “profitability [has] proven to be more resilient,” Fitch said, with “greater flexibility to absorb inflationary headwinds thanks to hedging policies, price increases and operational efficiencies [demonstrated]”.

The analysts attributed both companies’ resilience partly to their operations in Mexico, “which contribute close to 55% and 46% of their consolidated EBITDA for Bimbo and Sigma Alimentos, respectively, and have higher margins than their operations in US and Europe”.

Nevertheless, the analysts forecast an EBITDA margin dip for both Grupo Bimbo and Sigma Alimentos not dissimilar to the overall market. For Grupo Bimbo, the Fitch prediction is a fall from 12.1% in 2021 to 11.9% in 2022, and for Sigma Alimentos a fall from 10.2% in 2021 to 9.8% in 2022.

Ongoing investment: Sigma partners with Live Green Co

Despite the seemingly more difficult environment, both companies have continued to invest in recent times.

Sigma partnered with Chilean startup, Live Green Co, earlier this year to focus on replacing chemical food additives such as methylcellulose and other gums and emulsifiers with natural alternatives. The deal – which follows Sigma’s purchase of a minority stake in the company last year – will utilise Live Green’ so-called ‘Charaka’ algorithm to sift through uses for different plant ingredients globally.

Meanwhile, Grupo Bimbo last week posted what it called “exceptional” second quarter results thanks partly to 2021 acquisitions of Cerealto Siro’s bakery plant in Medina Del Campo, Spain, and of bakery operations for Brazil’s Aryzta.

Profit squeeze follows ‘stable’ Mexican decade

The predicted downturn follows a stable period for the Mexican packaged food sector over the past decade, in which demand for basic food products have been historically “resilient and relatively inelastic,” even during periods of economic pressure, the analysts said.

However, today’s global economic outlook is “unique” in terms of recent history, the analysts stressed, with already-stretched supply chains following the coronavirus pandemic worsened by the Russia-Ukraine war.

They also highlighted “a combination of very high inflation and sharply reduced growth unseen in developed markets since the 1970’s.”

All-time corn and wheat price high

In particular, corn and wheat prices – which are among the main raw materials for Mexican global food companies – are “likely to stay historically high in 2022,” the analysts said.

Wheat prices increased from US $6.28 per bushel at the end of 2020 to $11.63 per bushel in mid-June 2022. The US Department of Agriculture (USDA) expects the season-average farm price for the remainder of 2022 into 2023 to reach $10.75 per bushel, Fitch added.

Meanwhile, corn prices continue to rocket, up from $4.74 per bushel at the end of 2020 to $7,74 per bushel in mid-June 2022, with USDA predictions for a season-average farm price of $6.75 per bushel for 2022-2023.

“Pork prices too have been volatile and remain higher relative to last year,” Fitch added.

Energy and labour costs soar

Beside raw materials costs, higher energy and labour costs are contributing to shelf prices for food products made by Mexican companies, the report says.

“The impact on the labour market under a scenario of more permanent inflationary pressures and continued economic deceleration would mean a more pronounced impact on consumer incomes that what we have seen,” the analysts said.

“Food companies would also face increased profitability pressures from weakened consumer demand.

“While hedging policies have mitigated cost pressures, the renewal of these hedging contracts will be more challenging and costly in 2023.”