On Friday, fund manager Holberg hosted Orkla’s chief financial officer Harald Ullevoldsæter as a guest at a webinar to talk about pricing and cost increases, among other things.
Cost increases were significant for a number of commodities after the invasion of Ukraine, with significant shortages of partially important raw materials. These ups and downs should eventually affect Norwegian consumers when it comes to groceries.
These price increases that hit us are very large. We have no special options other than that we have to pay a lot of these prices for our customers. Of course, we are constantly working to reduce costs.
– But we have to significantly increase prices towards our customers. We’ve done this so far this year, and unfortunately will continue to do so throughout the year,” Ullevoldsæter said in a webinar. Orkla’s customers are grocery chains, but they will likely have to pay their price increases to consumers.
to the fullest
Orkla’s chief financial officer said he’s followed Orkla for at least 35 years.
In that period, we have not seen such sharp and rapid increases in costs. We’ve reached some of these levels before. But the dynamics here are very intense in terms of how quickly prices will rise. I don’t think we’ve tried that before.
Orkla and its suppliers essentially adjust prices twice a year, on February 1 and July 1. There is also a minimum notice period of two months prior to these dates. For items sold at corporate clients, it’s easier with constant price adjustments.
Ullevoldsæter was particularly challenged on a shopping cart with popular Orkla brands, such as OMO washing powder. Potato sticks from Kim’s, Zalo, JIF, Grandiosa, Laban seigmenn and Stabburets mackerel in tomato
– This basket currently costs 263 crowns, so what does it cost in half a year? asked.
– I have received similar questions many times and cannot answer them for reasons of competition law. But I can say that it is higher than it is today.
Free from sunflower oil
Orkla Foods, which sells food, has five main buying categories. There are vegetable oils, dairy products, grain products, additives and packaging materials.
Holberg wanted to know if the situation was so dire that Orkla had to cut back on production of certain products.
So far, we’ve basically been able to produce what we’re going to do. Our biggest challenge is vegetable oils, and perhaps sunflower oils in particular. Sunflower oils are important as inputs in snack food production and biscuit production
– We spent time switching from palm oil to sunflower oil, but now we have a situation where about 80 percent of sunflower seeds are produced in Russia and Ukraine. The chief financial officer said that the supply of sunflower oil is almost completely exhausted, and this is the biggest challenge.
So Orkla must return for a while to certified palm oil, at least until it again receives new shipments of sunflower oil. Uncertainty surrounding raw materials and sharp price increases have affected early deliveries.
– Before the sharp price increases occurred, we usually had six to twelve month contracts for most areas. But in the past six months, contract terms have gotten shorter and shorter.
– Long contracts today are not very common, and not everyone can fulfill their obligations. So, there is a huge task now being done on the buy side of Orkla, said Ullevoldsæter.
There has been a significant slowdown in resource purchases, he said. They work around the clock to secure us in competition and secure Orkla products, but not everyone is able to deliver on contract.
Summer is saved
Ullevoldsæter said they also face challenges with the individual ingredients that make up a small but important part of the recipe. However, summer seems to have been saved.
– As the picture looks today, no products are completely gone this summer. But what happens in the long run is very difficult to assess.
The CFO was also asked if a price increase could lead to lower sales.
Yes, with the price increases we have, it would be strange if nothing negative happened on the volume side. But grocers have different price sensitivities. Perhaps the most vulnerable markets are those with the lowest purchasing power, such as the Baltic states and Central Europe, the chief financial officer said.
Orkla rates their prices against chains individually in various categories. The main factors are geography and intensity of market competition. In general, price sensitivity is low among customers: they are willing to buy products even if prices go up.
ready to pay
We start with what we are willing to pay and the product opportunity we have. We want to create brands that have a clear association with taste in consumers’ minds. We’re working on this constantly, Ullevoldsæter said.
In other words, Orkla wants to build strong, popular brands so that consumers are not allergic to price hikes. Then it pays to be by far the biggest.
Orkla has some very dominant market positions in Norway, Nordic and Baltic countries. on. 80 percent of revenue comes from where they are the market leader or number two. Market shares vary from 30 to 80 percent.
Among the five business districts in Orkla, Orkla Foods is the largest. 80 percent of Orkla Foods sales are grocery. Well-known brands include Stabburet, Toro, Stabbur mackerel, Nora, Vossafår, Denja, Stabburet Leverpostei, Pizza Grandiosa, Fun Light, Vestlandslefsa, Gøy and Idun.
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