Soaring costs could take sparkle off strong Irn-Bru sales

Irn-Bru maker AG Barr will this week reveal sales have bounced back to above pandemic levels, but the focus will be on the impact that soaring costs are currently having on the business.

The rising cost of raw materials and energy, together with wage inflation, is putting pressure on manufacturers like Irn-Bru maker AG Barr.
The rising cost of raw materials and energy, together with wage inflation, is putting pressure on manufacturers like Irn-Bru maker AG Barr.

The Cumbernauld-headquartered company has already flagged that it is seeing inflationary pressures, particularly across packaging and energy.

But since its last update, the invasion of Ukraine has fuelled further cost rises for industry.

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Sophie Lund-Yates, equity analyst at Hargreaves Lansdown, said the spotlight will be on what that means for the outlook for operating margins.

“Efforts to offset inflation could present in a number of different ways, including further price increases. Well-known brands give AG Barr the firepower to do this to some extent, but its products don’t exactly fall into “premium” territory, so pricing power may be limited,” she said.

“That puts the onus on volumes, as well as further cost cuts. The latter could be a cause for concern if it comes at the expense of marketing budgets.”

In its February pre-close update, AG Barr – which is also behind brands including Rubicon and Funkin – said it had initiated several measures to reduce the impact of rising costs and had adjusted its pricing “where appropriate”.

“We will continue to seek opportunities across the coming year to offset the impact on our business,” it added.

The group is expected to report revenue of around £267 million for the year to 30 January, a 17.5 per cent increase on the previous year and also ahead of its pre-pandemic performance.

Although restrictions had impacted consumer behaviour across the year, it said both its Barr Soft Drinks and Funkin business units had traded well, particularly during the periods when restrictions were eased.

Operating margin before exceptional items for the financial year is expected to be around 15.6 per cent, up from 14.8 per cent the previous year, and underlying profit before tax and is expected to be marginally ahead of guidance given in November.

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House broker Shore said the update had highlighted the strength of the group’s brands.

“We reiterate our view that AG Barr is a very high-quality business with an excellent management team and a well-invested manufacturing infrastructure,” it said.

Although Shore praised the way the company had handled cost pressures to date, it said “potential headwinds remain”.

It highlighted carbon dioxide, fruit and recycled plastics as areas for management to keep an eye on, alongside wage inflation.

In December, AG Barr announced it had acquired an initial 60 per cent equity stake in porridge brand Moma Foods. It has also agreed a path to full ownership over the next three years.

Moma was founded by Tom Mercer in 2006 as a challenger brand in the porridge market, using quality British jumbo oats. Most recently, the brand has diversified into the high growth plant-based milk sector, and is now the UK’s third largest oat milk brand.

London-based Moma also produces a range of low sugar granola and bircher muesli branded products. Financial teams surrounding the deal were not disclosed.

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