Cargills turns cautious over expansion of supermarkets

Industry’s biggest Cargills Ceylon Plc has turned cautious over its aggressive roll-out of supermarkets in the country partly owing to the implications of the Budget 2013 move to impose VAT from 1 January 2013.

The Company said yesterday: “Macro-economic implications of the 2013 Budget on our retail segment require the Group to take stock of its future investment and expansion plans.” Apart from this, higher interest costs and utility expenses were other reasons for this caution on the part of Cargills.

Given what it previously described as “the mounting consumer demand from regions,” Cargills in December 2009 kicked off an aggressive expansion of rolling out 100 supermarkets.



In FY12, it opened 31 new outlets, including several in the newly-liberated areas of north. Via this strategy Cargills took modern trade deeper into regional communities.

Capex in Cargills retail segment in FY12 was Rs. 1.47 billion, up by 30% from the previous year.

The original target was to have 240 operating Cargill Food City outlets by the end of 20013/14. In the Annual Report for 2011/12, the Company said an investment of Rs. 1.2 billion has been budgeted for this expansion drive in the forthcoming quarters.

However, given the serious implications of the Budget 2013 move of imposing 12% VAT on those engaged in retail trade with over Rs. 500 million turnover per quarter, analysts feared Cargills could apply brakes on its expansion.

Meanwhile, Cargills yesterday reported improved top line performance for the first half and second quarter though substantial increase in interest cost attributed to new acquisitions saw a sharp 40% dip in bottom line.

In a statement accompanying interim results, Cargills said the Group reports a strong performance for the first half of the financial year, despite challenging market conditions and reductions in consumer spend. Transaction growth in the Retail sector was below expectation while a decline in the consumption of branded FMCG goods continues. The trend was more evident in the urban markets where the increase of fuel and utility prices has had a greater impact than in the regions.

Despite these setbacks, the Group turnover during the six months period saw an increase of 20.5% to reach Rs. 27.9 billion. Gross profit of the Group recorded a growth of 24.2% during the six months period, largely reflecting the performance of Retail, Restaurants and Manufacturing segments that continue to hold the Group in good stead, countering losses incurred by two of its newly-acquired businesses.

The Group recorded an overall growth in operating profit of 17.2% for the 2nd quarter and 19.2% for the six months period. However profit after tax for the period has declined by 39.6% due to the substantial increase in interest cost attributed to the new acquisitions.

“We are particularly pleased with the performance of our dairy segment. Our investments in capacity expansion and new production lines see an unrivalled product portfolio and supply strength towards long term market leadership in the dairy segment. Investments have been made into state-of-the-art UHT milk production which would substantially increase production volumes while the added capacity of the yoghurt line and a diversified cheese category positions our dairy segment towards long-term growth,” Cargill said.

The continued growth of the soft alcohol market is reflected in the performance of the brewery business. Brewing capacity has been doubled since acquisition in early 2011 and the expansion drive is on schedule to reach 400,000 hectolitres capacity in the near term to meet the rising demand.

Recent acquisitions and investments have resulted in an increase in Group debt and a corresponding increase in the finance cost. Finance costs increased by 136.9% during the period compared to last year and amounted to Rs. 608.8 m. The average rate of interest payable by the group has shown an increase of approximately 70% over the last 12 months whilst the quantum of bank borrowings at the end of the period has almost doubled compared to 30 September 2011. The increased borrowings of the group have been utilised to fund new acquisitions and investments, to expand production facilities in the Soft-Alcohol and Dairy sectors and to invest in freehold property as per the future expansion plans of the Group.

Higher interest costs and utility expenses have had a direct impact on the Group’s profit margins. This, together with the macro-economic implications of the 2013 Budget, on its retail segment requires the Group to take stock of its future investment and expansion plans.

“While the growth of our core businesses would remain on course, the Group would certainly review its risk appetite to ensure optimum and sustained value creation for our shareholders and the communities we serve,” Cargills added.