Precautionary measures limit the ‘on-the-go’ appeal of snack food starting mid-March 2020
The aftermath of the Covid-19 pandemic has created an overall weaker demand environment, with the lock-down and closure of schools and universities especially crippling snack food consumption and decreasing EFID's daily sales volume by almost 30%.
However, the company's new product launches in the bakery and cake segments and accompanying strong marketing efforts slightly offset pull-down in volume. Management reported that its recently launched layered cake and savory sandwich products already contributed to c.10% of revenues in 1Q20 and were successful in the upwards migration of the company's average price point.
Plan in place to mitigate future production issues
Despite taking the necessary precautionary measures since the beginning of the outbreak, the company has had cases of coronavirus in a production facility in late April. The facility houses 10 production lines (out of a total 30 lines) and is expected to resume operations this week following the closure of the facility to implement the disinfection and sterilization protocol outlined by WHO and MOH.
Accordingly, Edita’s management created a contingency plan which entails:
- Increasing coverage for imported raw material from 45 days to 3 months and finished goods from 3 days to 6 days, to mitigate against future disruptions
- Operating 2 longer production shifts instead of the usual 3 to limit the risk of infections but reflecting in higher costs of labor and overtime
- Adjusting the distribution strategy to ensure timely restocking within limited working hours by capitalizing on the recent distribution fleet additions
- Trimming the marketing and distribution budget to counter the expected weakness in 2Q20 sales
- Cutting-back on capex spending from an initial EGP950 million (EGP650 million earmarked for Egypt and EGP300 million for Morocco) to EGP650 million by scaling Egypt's budget to EGP350 million (with EGP186 million already spent on the biscuit line and distribution additions in 1Q20)
Edita's longstanding diversified supplier base and long-term contracts should hedge against procurement issues. Management was able to take advantage of lower 2020 commodity prices by securing contracts at favorable rates, reflecting in -6% YoY decline in direct materials in 1Q20.
Edita was also able to benefit from the recent reduction in the corridor rate and room to take on more leverage by increasing its exposure to EGP debt during the quarter. The company has also applied for the low-interest rate loans provided by the government to support businesses impacted by Covid-19.
2Q20 outlook seems bleak; Morocco and Biscuit launches on schedule
· Although management expects short-term disruptions, the outlook remains stable over the long-term, with a strategy geared towards securing market leadership in their core segments through innovation and diversification into high growth segments.
· The company is expected to deliver muted volume growth during the second quarter of 2020, dragged by slower demand for snack food during the Ramadan season.
· Management has decided to push forward with the soft entry into the biscuits segment after Ramadan, as to take advantage of the expected lock-down easing measures. Likewise, construction activity in Morocco is still on track and is set to begin operations by the end of 2020.