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Signs of recovery for Aviko but trouble ahead for potato processors?
Floris van der Pijl published on June 28, 2022
A-INSIGHTS is specialized in analyzing company figures, which captures detailed information on the activities of companies and explains the drivers behind their performance. This blog contains a combination of financials and news sources.
- Net sales development (2021): above average
- Operational profit (2021): below average
French fries are one of the most profitable menu items for restaurants. It costs processors on average €0.75 to produce one kg of French fries, wholesalers sell French fries to restaurants for €1.50-2.00 per kg and restaurants sell them to consumers for €3-4 euro per portion (of 200 grams) which translates to €15-20 per kg. Most French fries (>80% worldwide) are consumed out of home, so it should not be a surprise that French fry producers were troubled by COVID-19. Aviko, the fourth largest potato processor in the world, is one of them
Figure 1: Aviko net sales development and %EBIT vs. the industry average*
Sales of Aviko vs. the industry
While the Dutch consumer knows Aviko as a retail brand the company has an out-of-home focus internationally (>70% of total sales is realized in the out-of-home segment), the company was strongly hurt by COVID-19 in 2020 but also in 2021. In 2020 sales fell strongly and Aviko barely managed to realize operational profitability.
In 2021 some recovery is visible, but in the first half of the year, Aviko was severely hit by lockdown policies in its main market Europe. In the second half of the year most markets opened up, but supply chain issues caused 1. Cost inflation in production inputs (potatoes, labor, packaging, oils, and other materials) and transportation costs 2. The inability to source these two, limiting the ability to even supply French fries at all.
Below average profitability levels due to inflation
In terms of profitability, Aviko was on-par with the industry average in 2017-2018, realizing a significant outperformance in 2019 (profiting from high sales prices against relatively stable purchasing costs) and slipped to below average in 2020 and 2021. The main reason is off course its aforementioned reliance on the out-of-home segment. But the company is also strongly hurt by cost inflation in H2 of 2021 as with a higher turnover than in 2018 and 2017; the company is not able to come close to these profitability levels.
Will french fries remain profitable?
And at the beginning of 2022, the cost inflation did not suddenly disappear. Actually; most supplier contracts have to be renewed somewhere down the line. To give an example: (direct) energy costs make up roughly €0.05 per kg: 8% of the total production costs of French fries, but at current levels, energy costs would make up an estimated €0.21 per kg. This would then make up 24% with all other costs assumed to be stable.
Unfortunately that is not the case: sunflower oil supply is limited because of the war in Ukraine, forcing Aviko back to sustainable palm oil for which prices increased drastically upon the sunflower shortage. Other critical inputs like labor, transportation, and potatoes are also up in price if even available at all. This raises the question: will French fries remain one of the most profitable menu items for restaurants? And how will potato processors get them on your plate in the end?
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*Data for 2021 is an indication as only 40% of companies have filed their annual statement currently