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Philippine consumer companies hit by rising inflation and weak peso

Wage and interest rate hikes expected to still pressure companies in the second half

Higher prices are hitting consumer in the Philippines.    © Reuters

MANILA -- Stubbornly high inflation and a weak local currency dealt a blow to Philippine consumer companies' margins in the first half, forcing some to cut costs and raise prices to protect earnings, with little reprieve expected in the near term.

Jollibee Foods, the nation's largest and most popular fast-food group, reported a 16.1% increase in net income to 4.05 billion pesos ($75.6 million), partly helped by tax relief. But it had to raise prices at its restaurant chains, including at its flagship Jollibee, Greenwich Pizza, and its Burger King franchise, to offset inflationary pressure.

"The impact of the rising inflation rate and cost increases brought by the peso depreciation also negatively affected Jollibee's gross profit margins for the second quarter and the first six months of 2018," the company said. Jollibee's gross profit margin fell to 17.9% in the first half from 18.5% a year ago.

Group sales still increased 23.2% to 99.9 billion pesos, although growth in the Philippines was slower than in foreign markets like China and  the U.S. where it also operates restaurants.

Inflation reached 5.7% in July, a fresh five-year peak, due to higher global fuel prices and the impact of the government's tax reform program, which increased workers' take-home pay and levies on fuel and some beverages. The Philippine peso, however, has fallen to a 12-year low. Those twin factors have driven input and logistics costs, especially for consumer-focused companies that import raw materials.

Another restaurant group, Shakey's Pizza Asia Ventures, saw its profit growth for the January to June period slow to 7% from 10% a year ago amid rising costs. The company booked a net income of 396 million pesos, up from 371 million pesos last year.

Shakey's CEO Vicente Gregorio said the company will "maximize scale, increase efficiencies, and manage overheads to cushion cost pressures and meet our double-digit earnings growth target for the year."

He added that "higher input costs, a depreciating peso, and continuously rising inflation" were challenges in the short to medium term.

The bigger companies also felt the pressure. SM Investments, the country's biggest conglomerate by market capitalization, finished the first half with a net income of 18.1 billion pesos, up by 9% from a year ago, although its retail empire felt the pinch of rising costs.

"SM Retail saw some pressure on the cost side as net income margin in the second quarter and first half dipped," brokerage COL Financial said, attributing the fall in part to higher logistics costs. COL said that SM Retail's net income margin for the first half dipped to 3.9% versus 4.0% a year ago. SM Retail did not provide those figures in its earnings report.

Apart from having nation's biggest retail network, SM also owns the nation's largest lender BDO Unibank, and SM Prime Holdings, the most valuable real estate company. SM President Frederic DyBuncio said: "We remain vigilant about inflationary pressures."

JG Summit Holdings, another conglomerate which owns an airline and has businesses in food, petrochemicals and real estate, was also hit hard, with net income falling 32.8% to 9.8 billion pesos in the first half.

Net profit at its food and beverage unit Universal Robina slid 23.1% to 4.8 billion pesos due to rising inflation, weak peso and growing competition in coffee segment. Meanwhile, low-cost carrier Cebu Air's net profit plunged 23.6% to 3.3 billion pesos due increased fuel costs.

Luis Limlingan, an analyst at the Regina Capital Development, said inflation will likely remain high in the second half, and rising labor costs will keep the companies under pressure. The government last month approved wage hikes in nine out of 16 regions outside the capital, which will hit companies' bottom lines. "Sales will rise but margins will be affected," Limlingan said.

The Philippine central bank last week hiked benchmark interest rates by 50 basis points, the largest increase in a decade, to 4% to tame inflation. Limlingan said the increasing cost of borrowing could hurt other companies such as property developers and banks.

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