Food group warns over commodities

SILVER Spoon sugar-to-Twinings tea company Associated British Foods yesterday posted a 26% jump in annual profits – with an “outstanding” performance by its Primark discount clothing chain leading the way.

ABF reported an adjusted pre-tax profit of �825million for the year to September 18, on sales up 10% at �10.2billion.

Primark contributed a 35% increase in operating profits, although ABF warned that the retailer’s future margins would be squeezed by the soaring costs of cotton and transport.

Sales at Primark grew 18% during the year to �2.7billion while operating profits hit �341m, helped by the opening of 13 new stores, including its first in Belgium.

Primark will continue to open new stores, particularly in Spain where growth has been strong.

Among ABF’s food businesses, which include the British Sugar beet processing company which has a major factory in Bury St Edmunds, the outstanding performer was Kingsmill bread, which grew its market share following the launch a year ago of the Little Big Loaf. However, ABF warned that its margins would also come under pressure due to rising wheat costs.

Chief executive George Weston said the soaring cost of commodities, including sugar, cotton and wheat, was a mixed blessing for ABF.

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A near doubling in the cost of cotton would reduce net margins at Primark from the 12.5% they reached this year, although they were not expected to fall back to the 10.9% level seen a year ago. Primark would remain the cheapest on the high street “no matter what it takes”, he said.

The rising cost of wheat, which has increased by about 50% in recent months, would erode margins at Kingsmill although the group was in negotiations with supermarkets to pass on the price increases. “In the UK we are negotiating higher prices now although we have been paying higher wheat costs for a couple of months already,” said Mr Weston.

However, the company’s grain wholesale and animal feed business should benefit from the increase in price, he said.

And the rising cost of sugar, which is approaching a 30-year high on the back of strong demand from China, was also benefiting ABF because it was passing on the price increases to consumers in China, he added.