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Can costs may eat into pet food margins

Makers of canned pet foods can expect a “major” increase in the price of cans in 2009, forcing them to either eat the cost or raise prices, Menu Foods warns in its latest quarterly report.

The beleaguered Toronto pet food maker is in what it calls a “rebuilding year,” following its involvement in a major pet food recall in 2007, after it learned that ingredients supplied by a Chinese company had been spiked with melamine.

Looking ahead from the end of its third quarter Sept. 30, Menu said in a release Wednesday that it has seen some raw material costs decline from recent highs.

“However, this has not been widespread and, in general, costs remain above the levels being experienced when the latest price increase was announced,” the company said.

On top of that, the income trust said it’s been advised by its can supplier that it should expect a “major increase” in the price of steel cans in 2009.

“The fund believes that the other participants in the wet pet food industry, including the leading national brands, will experience these same cost challenges and that this will, at least, necessitate a price increase on pet food sold in steel cans,” Menu CEO Paul Henderson wrote in his message to unitholders.

On the upside, “recessionary times” usually mean a rise in demand for store-brand pet foods, as opposed to the major national brand names, the company said. Menu Foods’ main business is producing such private-label brands for retailers.

The income fund on Wednesday posted a net loss of $2.05 million on $61.63 million in sales in its third quarter ending Sept. 30, up from a net loss of $19.3 million on $78.1 million in sales in the year-earlier Q3.

Most of the costs of the 2007 recall had been expensed in the company’s 2007 Q1; Menu then saw the greatest impact from lost sales in that year’s Q2. Its 2007 Q3, by comparison, saw buyers begin to refill their product pipelines after having been without product for several months.

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