Profitability growth in the confectionery industry may slow down

The devaluation of the ruble and the rise in the price of cocoa beans on world exchanges will not allow confectionery companies operating in Russia to show profitability at the level of 2022 at the end of the year, the National Rating Agency (NRA) believes. Last year was successful for the industry: the revenue of major market players increased at a noticeable pace. But this year, it will be difficult for producers to shift the fully increasing costs onto the shoulders of consumers, since prices have already increased by 22% over the past year and a half.

At the end of 2023, the growth in profitability of large manufacturers of confectionery products will be 10-12% against 15% in 2022, according to the NRA study available to Kommersant. The total revenue of the companies included in the top 5 will increase by 10–15%, while a year earlier, a number of market players had dynamics at the level of 20%, as in the case of United Confectioners, or 38%, as in the division American Mondelez in Russia, analysts write. According to them, the reason is a significant devaluation of the ruble. Confectioners are highly dependent on imported raw materials – from 30% to 70%. So, cocoa beans are imported from Africa, and palm oil used in the manufacture of products of the lower price segment, from Asia.

The situation is exacerbated by rising world prices for cocoa beans due to drought in West Africa. So, at the end of July, cocoa beans on the stock exchange in New York cost $ 3.5 thousand per ton – this is a record since 2011. Moreover, this year there is also an increase in prices for semi-finished products, which is not standard for the market, notes Vyacheslav Lashmankin, Executive Director of the Askond Association of Confectionery Industry Enterprises. According to him, companies that have long-term contracts for the supply of raw materials will have less painful peak of price growth if the unstable situation with their prices does not last long. But a Kommersant source in the industry says that there are no prerequisites for a reduction in world prices for cocoa beans in the near future.

It will be difficult for confectioners to shift the increase in costs to the final price due to falling incomes of the population, the NRA warns. In addition, over the past year and a half, their products have risen in price by 22%.

Only in June 2023, cookies cost 30% more year-on-year (257 rubles per 1 kg), marshmallows and marshmallows – by 29% (402 rubles per 1 kg), follows from Rosstat data. Average prices for chocolate rose not so significantly – by 9.2%, to 1.02 thousand rubles. per 1 kg, which NRA analysts associate with the already high cost of these products. According to NielsenIQ, in January-June of this year, sales of confectionery products in Russia fell by 2.9% in physical terms, but increased by 9% in money terms.

Due to rising prices last year, companies in the industry managed to increase cash receipts: their total revenue reached 890 billion rubles, which is 19% more year-on-year, according to the NRA. This led to an increase in the profitability of the entire industry in 2022 by 15% (in 2021 it was 7%), and net profit – up to 11% (the previous year was 6%). At the same time, according to NRA estimates, five major players in the segment accounted for about 47% of the market turnover.

Thus, the transnational corporation Mars, which leads the top 5, saw its revenue grow by 14% in 2022, return on sales by 21% against 13% in 2021, and net profit margin by 15% against 11% a year earlier. At Mondelez – by 38%, 27% and 29%, respectively, at the Italian Ferrero, revenue grew in 2022 by only 7% year-on-year, but the return on sales – by 21%, the return on net profit – by 16%.

Western companies managed to increase sales even after they abandoned marketing activity in the Russian market after the start of the Russian-Ukrainian military conflict, analysts emphasize.

This, in their opinion, is a “paradoxical phenomenon”. So, Ferrero reduced promotion costs by 75%, to 1.2 billion rubles, Mars – by 21%, to 6.5 billion rubles, follows from the company’s statements. According to NRA estimates, the revenue of the Russian holding United Confectioners, which is also one of the top five large ones, grew by 20% in 2022, and the return on sales grew by 11% against 0.05% a year earlier. Another member of the top 5 – “KDV Group” from Tomsk – revenue for the same period increased by 7%, profitability of sales – by 4%. In all these companies, Kommersant did not provide comments.

Managing partner of Walnut Capital Artem Motorny notes that in March-April 2022, rising prices and a strong ruble allowed manufacturers to make profits 5-10% higher than the standard. But this year, according to the president of the Pobeda factory, Vitaly Muravyov, confectioners will have to put up with lower margins.

Ekaterina Rakitina, Anatoly Kostyrev, Khalil Aminov