Thinking small on price rises lifts Yurun Food profit

PUBLISHED : Monday, 21 April, 2008, 12:00am
UPDATED : Monday, 21 April, 2008, 12:00am

Raising product prices without driving away customers is something of an art, especially for food companies, which are battling to stem sliding margins caused by surging raw materials prices and the government's guarded policies to control prices.

China Yurun Food Group, one of the country's biggest pork-product makers, is a master of such an art.

The Hong Kong-listed, Nanjing-based company, whose business is split among chilled, frozen pork and other processed meat products, this month reported net profit growth of 78.6 per cent for the year ended December, despite a 63.5 per cent jump in the price of pig meat - its key raw material - during the same period.

The surge in pig meat prices last year was driven by a supply shortage after an outbreak of blue ear disease, and farmers' reluctance to rear pigs in previous years as they could not make much money when the price of feed was high, and many were lured to work in cities.

Yurun's gross profit margin fell to 14.1 per cent from 15.4 per cent a year earlier, but the company was less affected by rising materials costs and a tighter supply of pigs than its peers.

Chairman Zhu Yicai said Yurun raised its selling prices almost daily following the change of pig meat prices, and as the percentage of this price rise was less than 1 per cent each time, 'the impact on customers was minimal'.

And the practice also helped the meat-processor to minimise any possible price increase caps from the government, Mr Zhu said.

In January, the National Development and Reform Commission stipulated that distributors of food commodities or food items needed to seek approval before revising selling prices.

But Mr Zhu explained that their price rises had not violated regulations since the NDRC rule requested food and beverage companies seek approval for price rises which exceed 4 per cent the first time, 6 per cent in 10 days and 10 per cent in a month.

With this practice, the accumulated selling price increments for the company's chilled pork were 81.1 per cent and frozen pork 67.7 per cent over the past year.

Tiffany Feng, an analyst with Guotai Junan Securities (Hong Kong), said the fragmented meat industry was also less vulnerable to government price caps than the dairy, edible oil and instant noodle sectors, which were dominated by a few leaders.

The top three players -Yurun, Shenzhen-listed Henan Shuanghui Industry Group and Shandong-based People's Food - only represent an aggregate 5 per cent of the total pork processing industry. Small and medium-sized companies account for around 90 per cent of the total 448,000 industry players scattered around the nation.

By comparison, the mainland's diary industry is dominated by China Mengniu Dairy, Inner Mongolia Yili Industrial Group and Bright Dairy and Food, which account for more than 60 per cent of the liquid milk market.

Despite the tight supply of pigs, the volume of pigs Yurun slaughtered for chilled and frozen meat grew by 12 per cent last year. Meanwhile, its rival Shuanghui saw a 27.61 per cent slump in volume because of the shortage.

'The difference [in volume of pigs slaughtered], especially in this unfavorable business environment, has shown that Yurun has better management skills than Shuanghui,' said Ms Feng.