Savola Group, Saudi Arabia’s largest food products company, is facing pressures from several quarters that are squeezing its revenues and profits.

The lower profit situation from 2015 continued into the first quarter with the company fighting to maintain its competitiveness amidst several negative factors, and indications are that the stringent market situation will continue for sometime.

The company is contending with falling food prices, unfavourable foreign exchange rates and retail expansion expense. Those factors led to Savola’s net profits plunging 80.3 per cent in Q1.

The company is also facing intense competition from companies within the region and outside. Savola, a sugar producer of note, has, for example, seen new sugar refineries coming up in the Middle East, while its food business continues to register a high turnover and is expected to grow both in Saudi Arabia and abroad, particularly when oil prices stabilise and consumer spending grows. In the first quarter, the edible oil segment, a key part of its food division, saw revenues fall 15 per cent year-on year to $519.4 million on account of lower volumes, but is expected to be resilient once market conditions improve even slightly.

Afia International Company, one of the main Savola Group firms, is the market leader in edible oils in the consumer goods sector of Saudi Arabia. It sells Palm Olien, Palm Stearin, Corn, Sunflower, Soya and High Oleic SF. Its customary sales are in the vicinity of 250,000 tonnes annually.

Savola is also a prominent retailer with its Panda retail stores doing particularly well in the kingdom and Q1 revenues rising slightly.

While the profit drop was mainly due to an exceptional gain made in the same period last year, the company’s shares still slumped as much as 9.2 per cent after the company said it was halving the dividend for the quarter to 0.25 riyals a share.

The exceptional gain was SR265.2 million ($70.72 million) received from the sale of its packaging unit to Takween Advanced Industries.

A prolonged drop in oil prices seems to have dampened consumer spending
 

A sugar plant of the company in Jeddah

Almarai, the Gulf’s largest dairy company and one in which Savola has a 36.5 per cent stake, warned of challenging market conditions after reporting a marginal rise in first-quarter net profit.

Savola has said changes to energy and gas feedstock prices announced by the government earlier this year will raise its costs by around SR105 million in 2016.

With oil prices keeping low, Saudi Arabia announced plans to shrink a record state budget deficit with spending cuts, reforms to energy subsidies and a drive to raise revenues from privatisation.

In the face of the prevailing difficulties, Savola finds it hard to equal or surpass its 2015 profit of SR1.79 billion, which was a decline from the SR2.07 billion of the previous year.

GROWTH INITIATIVES

One of Savola’s overseas subsidiaries, United Sugar Company of Egypt (USCE), aims to boost its competitiveness following an investment of $100 million it is receiving from European Bank for Reconstruction and Development (EBRD).

“The bank will convert an existing $50 million loan to USCE into equity and provide the company with an additional $50 million in share capital,” EBRD said.
 

A Thai Union stall at an exhibition in Paris

The investment will be used to enhance the company’s operation and competitiveness in the market as well as to assist the company in meeting international standards with regards to health and environmental practices.

By converting the EBRD’s original loan into equity, USCE will strengthen its balance sheet and reduce its exposure to foreign currency-denominated debt.  The additional $50 million the company received to finance its working capital will help boost its exports and local sales in extremely tough market conditions.

Last year, Savola Group joined hands with Thai Union Frozen Products with the aim of generating $400 million in sales in the next three to four years.

Thai Union and Savola Foods plan to invest $30 million-$50 million over the next two years into the JV, which will market a range of seafood products and the John West brand to the region.

Savola Foods is one of the largest food companies in the Middle Eastern markets and operates strong food brands such as, Afia, Alarabi, Ladan, and Yudum.

The joint venture combines the global resources of Thai Union with the regional expertise of the Savola Foods. Products sold through the JV include all seafood products ranging from ambient to frozen and chilled, as well as ready-to-eat meals. The joint venture will operate in 12 Middle East markets. 

A multi-faceted group, Savola has subsidiaries in several non-food companies as well. It has a 91 per cent stake in Panda Retail Co which operates retail stores including hypermarkets, supermarkets and convenience stores in Saudi Arabia, Dubai (UAE) and Egypt. Other Firms it has invested in include Kinan International Real Estate Development Co (29.9 per cent), Knowledge Economic City (11.5 per cent), Taamer Jordanian Co (5 per cent) and Dar Al Tamleek Co (5 per cent).

INSPIRATION FROM HISTORY

While Savola is struggling to maintain its position and profitability, it can take strength from the company’s history.

It began life in 1979 as an edible oils company with SR40 million capital and 200 employees, importing and refining raw vegetable oils under the name of Saudi Vegetable Oils & Ghee Co.  Since then Savola’s capital touched more than SR5 billion and it recorded close to 29,000 employees. 

The early days were inauspicious, faced as it was with intense competition from the strong presence of multinationals in the Saudi market. The business struggled and very nearly floundered before it revived thanks to “a long journey of efforts by great men who left no stone unturned,” as the company recalls.  Savola heaped praise on all its founders, board members, executives, managers and staff.

Now the torch has been passed on to Rayan Mohammed Fayez, who took over as chief executive earlier this year.