Shares of Tassal Group Limited (ASX: TGR), the salmon farmer and packager, rose 10% today on news of the company's first half results, which saw profits rise 22%.
Company management has said its major strategy is to increase domestic per capita demand — and this looks to be paying off. With the strength of the Aussie dollar challenging the company's exports and international competition growing, domestic consumers picked up the slack.
Tassal expects improved earnings in the second half of the financial year as well, and plans to focus on cost efficiencies such as reducing feed prices and improving yields and fish sizes. As a source of future growth, the company also cited its new range of canned salmon to be sold in Woolworths stores.
Suppliers at risk
Of course being a supplier to Woolies or Wesfarmers' supermarket Coles (ASX: WES) isn't altogether without risk. As The Sydney Morning Herald reported today, amid the newly announced Australian Competition and Consumer Commission investigation into possible bullying practices by these giants, "about 50 suppliers to the big chains have… come forward with evidence of unconscionable behaviour, under the promise of protection of their identity."
Other grocery suppliers, from Bega Cheese Limited (ASX: BGA), which supplies all the homebrand cheese to Coles, and Warrnambool Cheese & Butter Factory (ASX: WCB), producer of Coles' Great Ocean Road cheeses, face similar pressures. In a business where net margins are thin and the two largest buyers control 70% of the market, companies are vulnerable. In recent days Goodman Fielder (ASX: GFF), supplier of $1 bread to Coles, has said it may not renew the supplying agreement, which ends June 30 this year.
"It's a significant contract that carries a lot of volume," Goodman CEO Chris Delany has said. "I would not be willing to renew that contract at today's pricing, but at some level of pricing where there's a benefit, and that's the question that we're going through."
The Foolish takeaway
While Tassal is not free from possible pricing pressure from Australia's supermarket duopoly, the company is having success convincing Australians to consume more salmon (it is, after all, delicious) yet there is still substantial room for growth.
"Our market research indicates we need to increase the frequency of purchase," Tassal CEO Mark Ryan said, commenting on the company's future plans. "Effectively, people only had two recipes for salmon. They didn't realise you could eat it for breakfast, lunch and dinner and quite possibly in between those different meals."
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The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Catherine Baab-Muguira does not own shares in any of the companies mentioned in this article.
