Breakfast Cereal Company—which makes Weetabix — is facing a profit slowdown as it finds it difficult to raise prices following additional production costs arising from expensive wheat as a result of stiff competition from South African and European low cost importers.
International wheat prices have increased by 30 per cent in the last month to stand at $360 (Sh28, 944) a tonne or Sh2, 620 per bag (excluding duty), piling pressure on pastries makers to increase prices to protect profit margins.
Wheat was retailing at between Sh1, 800 and Sh2,000 per bag in the first half of 2010.
But Breakfast Cereal Company reckons that it is absorbing a significant portion of the additional wheat costs, citing the risk of losing market share to low cost importers should it pass through the entire 30 per cent, arguing that stiff competition from imports is making it difficult for it to pass the cost to consumers.
“We will absorb most of our product cost that has gone up by 30 per cent in the last one month and this will eat into our profits,” said Mr Ahsan Manji, the managing director of Breakfast Cereal Company (K) Limited.
“The other option is to pass the increment in raw material cost to consumers and face the risk of losing out to low cost importers, some of who get their products from manufacturers who run their own wheat farms to feed their factories,” added Mr Manji.
Wheat takes 95 per cent of Weetabix’s production cost.
The firm is facing stiff competition from imported cereals that include the Kelloggs from Britain and Bokomo from South Africa, which rely heavily on their own wheat farms to feed factories.
Still, the imported brands have economies of scale and other lower production costs such as power, giving them headroom to offer competitive prices.
Weetabix remains one of the oldest and most popular brands according to Consumer Insight, but the Sh1.5 billion breakfast cereals market is now experiencing a proliferation of local brands like Proctor & Allan cornflakes and imported foreign ones.
So far, the growing demand for breakfast cereals from Kenya’s emerging middle class has created a market large enough to accommodate the rivals without hurting their markets shares, according to Francis Maswili, the general manager at Naivas Supermarket.
Last week, international wheat prices rose to a 22-month high because of drought in Russia and Ukraine, and the ban on exports by Moscow—the world largest producer of wheat has further complicated the situation.
Other manufacturers of wheat products have already started increasing their prices with bread— the main breakfast meal for a majority of Kenyans— shooting up by at least three shillings for a 400 grams loaf to Sh36 in the last four days.
The International Food Research Policy Institute (IFPRI), last week, raised the red flag that the rise in wheat prices could have a spiral effect on the production of the cereal globally, affirming that the prices of wheat based products will go up.
The company is betting on reduction of duty on imported wheat from 35 per cent to 10 per cent in this year’s budget to cushion it from impeding losses.
But KRA is still charging the 35 per cent duty on imported wheat a move that has seen wheat farmers cry foul, arguing that it would discourage production and make them unable to sell their harvest.
But the latest developments is sweet music to the ears of local farmers who are also said to be hoarding their produce hoping for higher prices, causing artificial shortage that is adding pressure on retail prices.
Millers have on their part asked the government to implement the minister’s decision arguing that despite years of protection, wheat farmers have neither become efficient nor increased acreage.
Kenya produces an estimated 300,000 tonnes of wheat annually or one third of the 900,000 tonnes consumed every year.
Official figures indicate that Kenya had the second highest wheat import bill at 813,000 tonnes last year after Tanzania, in the East African region.
The company has put a spirited marketing campaign to reinforce the breakfast cereal brand as an “all family cereal” versus the previous “only for children” perception.
Some consumers also believe that breakfast cereals are too expensive compared to other products—that offer the biggest competition—like bread, mandazi, chapati, sweet potatoes, eggs and other foods commonly eaten at breakfast, a situation that is likely to further hurt the cereal business.
The latest research by Consumer Insight, a marketing research firm shows that only 30 per cent of Kenyans eat breakfast cereals.
Consumers in the middle to upper social class (AB) have accepted breakfast cereals with half of consumers in this segment eating them but in the lower social class C1 to D even fewer than 30 per cent eat them.
Consumers are also becoming more health conscious, which is influencing the products they buy.