The decline in consumer discretionary spending and shift in consumer demand for healthier alternatives appear to be continuing to hurt the performance of the John Keells group subsidiary, Ceylon Cold Stores PLC (CCS).
The interim results released to the Colombo Stock Exchange showed that the company’s earnings have fallen by 65 percent to Rs.2.51 a share or Rs.238.9 million during the April-June quarter (1Q19) from the same period last year.
CCS has interest in beverage, frozen food and retail sectors. The CCS share closed at Rs.920 during yesterday’s trading.
The group top line rose 13 percent year-on-year (YoY) to Rs.13.9 billion but the cost of sales increased at a faster rate of 19 percent YoY to Rs.12.7 billion.
The gross profit fell by 25 percent YoY to Rs.1.2 billion and the operating profit fell by 53 percent YoY to Rs.457.9 million.
Once seen as a corporate leviathan, almost immune to economic headwinds, has since of late been grappling to regain its lost momentum but with limited success.
The financial results and the tone of the recent commentary by the group key executives reflect that the company has been slow to respond to some of the rapid shifts in consumer tastes, particularly with regards to healthier alternatives.
CCS’s beverage sector under the Elephant House brand is the country’s biggest and for the year ended on March 31, 2018, the business volumes declined by 16 percent YoY. Apart from the weaker discretionary spending by the consumer, the sugar tax imposed on carbonated drinks in November last year too has had an adverse impact on the sales as the prices had to be increased.
In April 2018, the company introduced it sugar-free CSD variant ‘Go Sugar Free’ with no calorific sugar content and a range of fruit juices under the brand ‘Fit O’.
In a quite a surprising move, the company also introduced three flavours of ready-to-drink milk under the Elephant House brand and recently entered into the bottled drinking water market.
The group’s manufacturing business, which houses beverage and frozen confectionaries such as ice cream, fared poorly as both revenues and profits declined.
The segment revenue for the quarter was Rs.3.1 billion, compared to Rs.3.4 billion recorded for the same period last year, while the net profit fell to Rs.434.3 million, from Rs.698. million.
The segment’s finance cost rose to Rs.20.2 million from just Rs.508,000 as the company invested Rs.850.7 million during the three months.
The company is set to begin the commercial operations of its Rs.4.2 billion new state-of-the-art ice cream manufacturing facility in the Seethawaka BOI zone, in 1Q19.
Meanwhile, the company is also re-evaluating its earlier plans for the installation of a new bottling line due to the lower capacity utilisation in the current facility, after the volumes fell in response to the sugar tax.
The group’s retail business reported a top line of Rs.10.9 billion, up from Rs.9.0 billion but the profit fell sharply to Rs.95.6 million, from Rs.277.1 million.
CCS operates 80 ‘Keells’-branded supermarkets managed by the subsidiary, Jaykay Marketing Services (Private) Limited.
During last year, the company developed a new brand identity for its supermarket chain to epitomize its fresh produce after extensive research and with support of an international consultancy.
The segment incurred a finance cost of Rs.43.5 million, up from Rs.1.6 million a year ago.
CCS spent Rs.1.1 billion of capital expenditure, almost double from a year ago.
Jaykay Marketing Services (Private) Limited is spending Rs.3.2 billion in a 225,000 square feet centralized distribution centre to enhance operational processes and particularly to strengthen the supply chain, while preserving the freshness of its supplies.
As of June 30, 2018, John Keells Holdings held a 70.66 percent stake in CCS, while the related party Whittal Boustead (Pvt.) Ltd held another 10.70 percent stake.