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Goodman Fielder faces higher costs and increased competition

Retail food producer Goodman Fielder (ASX: GFF) told shareholders at its AGM that after returning to profit in 2013 with a $102.5 million net profit after tax, that going forward in 2014, the retail environment is still difficult due to remaining pricing and competitive pressures.

In New Zealand, where it generates about 84% of total revenue, higher farmgate prices for dairy products are expected to impact dairy related earnings before interest and tax by around $8-10 million in the first half of 2014, and it is likely it won’t be recovered in the second half, according to the company.

Increased investment in marketing and brand promotion will pay later dividends in the year, so in conjunction with the higher farmgate costs in this first half, it expects that total 2014 earnings will be weighted more towards the second half.

In 2013, the company did sell of two businesses, Integro and New Zealand Milling, as part of its focus on core business restructuring, which aided the year’s net profit. Net debt was down 40%, and operating cash flow was up 39%. With those improvements in capital structure and cash flow, a final dividend of 3 cents per share unfranked was reintroduced, the first since its final dividend in 2011.

It welcomed the voluntary code of conduct agreed to by Woolworths (ASX: WOW) and Wesfarmers (ASX: WES), the owner of Coles, for the protection of suppliers’ intellectual property in the development of private label brand goods and the move to stop retroactive changes of contract terms.

For other retail food product companies, investors can follow Bega Cheese (ASX: BGA) and Warrnambool Cheese (ASX: WCB), which are involved in a three-way takeover bid for Warrnambool Cheese from Bega, dairy producer Murray-Goulburn and Canada’s Saputo.

It is difficult to say which takeover offer may be the ultimate winner, but Warrnambool Cheese’s share price has risen from about $4.50 when the first takeover bid was made in September to about $9.05 currently.

Foolish takeaway

The retail food environment is still tough as the economy begins to improve. Price pressures by major retailers are pushing down supplier’s profits so that the supermarkets can still offer low prices to consumers.

That is why investors have to study and analyse companies to see which are the lowest cost producers or suppliers that can best weather this business trend, and still have a decent profit.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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