‘Everyone is holding their breath’: ABFI is preparing for the energy crisis to get worse after a ‘record’ 2022
Associated British Food, whose business spans agri-commodities to fast fashion retailing, saw a jump in sales and adjusted operating profit in 2022 – up 22% and 42% respectively. Growth was in part driven by the rebound at ABF’s Primark retail business, which ‘broadly’ returned to pre-COVID levels in the UK. Nevertheless, the food businesses also put in a strong showing, with sales up 10% and higher operating profit across ingredient, sugar and agriculture businesses helping to offset margin pressure at its grocery brands.
Indeed, ABF Ingredients CEO Saadane-Oaks reflected, her division put in a ‘record year’ in fiscal 2022. “If anybody had asked me how we’d perform I would have been more cautious because of the challenges we faced,” she said, speaking at trade show Fi Europe in Paris last week. “The main challenges last year were linked to supply chain disruption, limited availability of inputs, and inflation.”
Navigating these required an agile and forward-looking sourcing strategy. ABFI took the decision to source raw materials early and increased safety stocks, a move that paid off even if it initially came at the expense of lower cash-on-hand. “It was about sourcing properly,” Saadane-Oaks customs FoodNavigator. “Our business is about customer-centricity. We ensured we’d be able to supply our customers no matter what. We were ready to take action to increase our safety stocks and inventory even if it meant it hurt cash initially.”
All the while, ABFI continued to do ‘all the things you should’ around innovation, NPD, and margin improvement. “We maintained our margin, which increased in absolute value terms due to volume growth. We had some price increases to our customers. We had to and the industry was ready for that. We also worked on continuous cost improvements through yield increase and reformulation.
“We were able to quickly adjust our processing model because we had invested in our pilot plant capabilities,” the ingredient executive revealed pointing to upgrades to pilot facilities in Finland (enzymes) and Germany (yeast extracts). This allowed the company to innovate its processes to increase efficiency and pivot where necessary. For example, in enzymes, ABFI was able to test and trial alternative formulations for bio-nutrients. “We were able to identify a formulation that reduced the cost base while also increasing yield.”
These investments (€100m to be spent on Hamburg facility over two years and enzymes ‘not far behind’) show ‘our confidence in the business’.
But ‘the real reason we did so well is we were there to support and supply our customers’ at a time of unprecedented disruption. This helped to drive ‘significant’ volume growth.“Some of that will stay [in 2023] but we have to be humble. Nothing is won forever,” Saadane-Oaks predicted.
Mounting headwinds in 2023: ‘We have a crisis plan’
“What we experienced over the past two years is unheard of in the food ingredient sector,” Saadane-Oaks said reflecting on COVID, inflation and supply chain disruption. The CEO thinks that trading conditions in 2023 are likely to remain challenging, as concerns over a potential recession dampening industry optimism. “The demand is there. There is caution at our customers… A recession is a question mark. We aren’t seeing major signs yet, but our customers are watching the consumer closely,” we were told.
The geopolitical situation is also expected to have an ongoing influence in the year ahead, with Russia’s invasion of Ukraine contributing to higher input costs for raw materials like grain and canola oil, as well as the mounting energy crisis in Europe. “We are still in uncertain times. The supply chain issues have evened out, but we now face challenges linked to the energy crisis in Europe… The big piece of price inflation is the energy crisis, which is only just beginning in Europe. Eastern Europe is gearing up for a bigger crisis. Everyone is holding their breath.”
As a business, ABFI is bracing itself. “We’ve tried to anticipate what might happen and prepare,” Saadane-Oaks explained. The company is increasing ‘flexibility’ around energy inputs, for example in Hamburg ABFI has developed the capacity to switch from gas to oil. The supplier is also driving energy savings towards a target of -10% usage. And it is contingency planning.“We have a crisis plan for if we have to close our factories because of government requirements [to shut down energy use]. We can switch back on as quickly as possible and, where we can, we plan to switch from European to US production. We are also working to increase inventories to make sure we maintain continuity of supply for our customers.”
Such crisis planning makes for some pretty grim reading. So, what are Saadane-Oaks’ hopes for 2023? “What everyone should be hoping for,” she responded.“The end of war; stabilisation of energy markets; visibility on the supply of energy to Europe; for global financial organisations to be able to prevent recession.”
Innovation bright spots for 2023
These concerns have meant that, while food brands are still innovating, their R&D pipelines might be looking a little thinner than pre-crisis. “We are seeing that the food industry continues to invest and innovate. But manufacturers are more cautious than they used to be. There is not as much of an innovation pipeline… I wouldn’t describe it so much as a slowdown as increased selectivity. I see more prioritisation – or the de-prioritisation of higher risk, longer term investments,” we were told.
This means that areas where ‘the science is not yet established’, meaning it will take longer to bring new products to the market and generate returns, have been ‘put on the back burner’. Nevertheless, Saadane-Oaks still sees R&D bright spots.
Plant-based is ‘going full speed’. Products that deliver health benefits are showing strong interest – a trend ABFI intends to capitalise on through investments like its recent Fytexia acquisition, allowing the company to offer polyphenols for benefits weight management, joint health or immunity. Sustainability also remains an important trend. “You could say sustainability is a longer-term investment but it is now definitely mainstream,” the food industry expert stressed, noting ABFI has seen rising demand for ‘more sustainable solutions’, such as enzymes that can decrease energy use and food waste. “These are active discussions that are accelerating.”
While Saadane-Oaks is aware of the challenges ahead – and planning for some turbulent operating conditions in 2023 – she insists she remains broadly upbeat.“In the food business I’m seeing a positive trajectory. There is a lot of activity in new products and formulations, so I expect volume growth. On margin, we are actively working on costs, but we are facing an inflationary environment… Overall, I’d like to convey a sense of growth. It is a journey.”