SOFTENING demand in the United States, rising product costs, and a hike in interest payments on debt combined to sap earnings at Derrimon Trading during the second quarter of the year.
The company released financials showing its profit for the April to June period of this year sank 9.68 per cent to $113 million dollars.
The lower profit was realised despite the group, which includes Spicy Hill Farm, Arosa Limited, Woodcats Limited and Caribbean Flavours and Fragrances, posting $4.6 billion in revenue — up 14 per cent during the quarter compared to a year ago.
"It's all due to increasing expenses," Derrick Cotterell, chairman and CEO of Derrimon Trading, told the Jamaica Observer regarding the lower profits for the second quarter of the year. "Everything gone up, and we can't pass on the price increases to the consumers as demand lags off because we sell basic foods," Cotterell continued.
He added that supply chain issues have forced the company to carry larger amounts of inventory than normal. Despite rising costs for products, Derrimon improved its gross margin from 19.4 per cent last year to 23.6 per cent in the April to June quarter of this year.
In the notes accompanying the release of the company's financials, Cotterell pointed out that recession fears in the United States — after that country recorded a second-consecutive quarter of gross domestic product (GDP) decline, compounded by the current increased prices for energy and other basic goods associated with daily living — are having effects on his business as consumer demand shifts towards essential goods.
Expanding on that note, Cotterell told the Business Observer, "the New York market has been very soft. America is seeing a reduction in demand as spending power goes down. That is fuelling more competition and depression in the margins, and also costs have gone up".
Derrimon currently operates two stores in New York, a cash and carry location and a supermarket. Locally, it operates seven Sampar's retail outlets and one Select Grocers outlet. A second Select retail store is currently being built in the Millennium Mall, Clarendon. It's opening, which was originally set for July, has been delayed. Cotterell said it could now open in the first month of the last quarter, a timeline which would take it to October.
"That has burnt through some of our cash; that development's cost has gone up more than we expected," Cotterell said of the store being built in Clarendon.
The company's financials also show its cash has declined 25 per cent to $369 million at the end of June. At the same time, the company has had to deal with higher financing costs as the Bank of Jamaica increases interest rates to cauterise rising inflation that has remained stubbornly above its projected range of 4 per cent to 6 per cent since August last year. Up to June, the point-to-point inflation in Jamaica was 10.9 per cent. It fell slightly in July to 10.2 per cent but remained at levels not seen in the past decade. Already, to tamp down the inflation the central bank has increased its policy rate to 5.5 per cent. A new announcement on rates will be made tomorrow by the Bank of Jamaica but already, companies are feeling the pinch from higher rates.
"Finance costs have gone up significantly. We borrowed money at 6 per cent and 7 per cent and it is gone up to double digits now," Cotterell lamented as he said his company is now paying 10 per cent and 11 per cent interest rates on its loans.
The result is finance costs for the second quarter which reached over $90 million compared to $23 million in the same period a year ago. The company has already signalled that it expects those costs to continue to increase in the current environment.
"With the movement in market interest rate we expect to see the repricing of new debt taking on these new interest rates, which will negatively impact our business. We remain confident that, based on the strong working relationships that exist with our bankers and alternative investment partners, that we will ensure that capital is available to the group's various companies as the needs arise."
Operational costs have also gone up as the company implemented wage increases to counter some of the effects of rising prices on its employees.
On the matter of the overall rising costs the business is facing, Cotterell highlighted: "We continue to look at a number of strategies to mitigate these issues. We are looking at cutting costs in other areas such as energy; we have a project that we are working on to get more alternate energy — that's more mid-term. Some of the short term things we are doing is looking through the company to cut out waste, increasing efficiencies in all areas of the business, and trying to find alternate suppliers to get prices down.
"The good thing is that, looking forward, we will be opening May Pen [Select Grocers store] certainly by the beginning of the last quarter and so that investment will start to show some returns; and we are settling and consolidating Arosa so the income from Arosa will increase also and Spicy Hill — so a lot of new stuff will kick in towards the end of the third quarter into the first part of the last quarter."
Spicy Hill Farm was bought earlier this year and its factory has been relocated from Trelawny to the Derrimon Trading headquarters at Marcus Garvey Drive in St Andrew.