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Bimbo, Femsa, Bachoco: the challenge of containing prices 100 days after the invasion of Ukraine

Daniel Servitje, president and CEO of Grupo Bimbo, gave a strong message at the end of February. A few days after the conflict between Russia and Ukraine broke out, the Mexican businessman announced in a conference with analysts that the increases in the prices of his products could continue this year, given the increase in the costs of raw materials and hand work, as well as the impacts on the supply chain.

His message was a reflection of the nervousness that the deployment of Russian troops in Ukraine generated in the commodity market, which flared up in the first quarter of 2022 after the conflict between Russia and Ukraine broke out. Wheat and corn reached highs not seen for 13 years in world markets, due to the harsh sanctions imposed on Russia, one of the main producers of wheat and corn.

Grupo Bimbo closed 2021 with record levels of sales, volume and profit. The bakery registered an increase of 5.4% in its income, up to 348,887 million pesos. Its net profit was 15,916 million pesos, 74.7% more than the result of 2020 and the operating flow was 49,178 million pesos, an increase of 8.8%. However, the cost of sales was 163,575 million pesos, an increase of 7.2% compared to the previous year and 18.4% compared to 2019.

Volatility in raw materials has become one of the factors exerting pressure for food and beverage companies listed on the Mexican Stock Exchange, such as Bimbo, Gruma, Bachoco, Arca Continental and Coca-Cola Femsa, which are trying to contain the prices of their products, while moving their chips to avoid the rise in their main inputs.

Bendreff Desilus, a specialist at the Business School of La Salle University, comments that the vision of the companies is now in the long term, since it will be difficult for prices to return to the levels prior to the ceilings they have touched in recent months. “Companies already know their business cycle and their value chain; they know where they can cut costs. Here, technology plays an important role, but it also depends on the ability of administrations to decide which processes can be simplified to reduce costs and have a cushion that prevents price increases”, explains the academic.

Gruma made an adjustment to its prices in 2021, which gave a boost to its net sales in 2021. In the last quarter of last year – the latest data available at press time – it achieved sales growth of 17%. compared to the same period in 2020, which was a record quarter for the company. “Price increases for our products in all regions are enough to cover cost pressures,” Rogelio Sánchez Martínez, Gruma’s vice president of finance, said during the February 2022 investor call. The company will remain “cautious.” before new price increases.

Coverage and operating efficiencies

The price escalation that was experienced during 2020 and 2021 prompted companies to maintain the strategy of buying raw materials in advance. Grupo Bimbo, for example, has hedges equivalent to 70% of the raw materials it uses per year, although inflationary pressure could be reflected in future purchase contracts. Arca Continental also has coverage for the rise in aluminum and sugar.

But analysts agree that these hedges are only part of a comprehensive strategy focused on maintaining the profitability of companies, without raising prices indiscriminately. Julián Fernández, head of analysis at Bursamérica, comments that putting innovations on the market is one of the most effective strategies, since a new product can come out with a high price without there being a reference price, as is the case with products that are already They are on the different sales floors.

“Companies are going to have to find another way to generate the same volume of sales and, obviously, the same margins. Possibly with offers, which usually give added value to attract customers who do not usually consume their product, in addition to considering the launch of new products,” says Fernández. “Surely we are going to see adjustments again in presentations with less product content but a similar price, which is something common in these episodes,” adds Carlos Hermosillo, an independent stock market analyst.

Companies in the industry are also looking for efficiencies in their operations, in order to make savings that allow them to offset high costs. However, there are analysts who predict that inflation in some of the supplies will last throughout the year, and may even last until 2023, so raising prices is one of the alternatives that companies will have kept in the drawer to throughout this year. “This is an issue widely known by the public, so the resistance to accept the transfer of costs to the sale price will be relatively minor, which will not be easy,” says Hermosillo.

Rise in prices

Arturo Gutiérrez Hernández, general director of Arca Continental, announced during the call with analysts that the company is analyzing a price increase for its products, such as Ciel water and Bokados snacks, to respond to inflation. “We expect volatility related to material cost inflation and supply chain challenges, and while there is still uncertainty under the current business climate, we feel more confident about our estimates,” he says. “In our perspective, by 2022 we will continue to adjust prices to compensate for the rate of inflation in each of our operations, always ensuring that our products remain affordable,” he adds.

Gruma also does not rule out new hikes in the medium term. “We are projecting profitability with price increases…” Rogelio Sánchez Martínez, Gruma’s vice president of finance, said in another call.

The Mexican Bachoco and closed the period with net sales of 24,367 million pesos, an increase of 25.9% compared to the same period last year, according to the report published this morning in the Mexican Stock Exchange (BMV).

“(The growth in sales) was the result of better prices in the United States and in our main lines of business in Mexico, as well as a higher volume sold in the others segment due to the integration of RYC,” the company explained.

The poultry company’s sales volume grew by a lesser proportion, by 6.9%, during the quarter, in line with the 27.1% increase in its costs. Bachoco has explained that this is due to the high prices of grains and soybean paste . “We continue to see historically high prices,” the company says in its report. quarter.

Shares of companies in the consumer sector have a Neutral recommendation. “We expect a moderate impact due to a better performance in volumes due to the return to normality and due to the strategies that companies have been carrying out so that the consumer does not see their spending so affected, so that even if they are finding higher prices, they keep buying. of the products”, says Marisol Huerta, stock market analyst at Grupo Financiero Ve por Más.

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