In Malaysia, consumers have a wide variety of instant coffee brands to choose from, as such the competition in the domestic market is stiff for Power Root’s instant coffee brand like Alicafe.
The intense competition has disrupted its earnings growth momentum for the past few financial years.
For the first financial quarter ended June 2017, the company's net profit plunged to RM2.82 million (US$670,000), down 70% from RM9.4 million (US$2.22 million) in the previous corresponding quarter. Revenue, however, grew slightly by 4% to RM109.23 million (US$25.8 million) from a year ago.
Fierce domestic competition has driven Power Root to expand its exports in order to make up for the loss. “Domestically, it is intensely competitive whereby players are embroiled in some sort of price war. It is going through a rationalisation period, [so] we will see some players eliminated,” said Power Root Executive Director See Thuan Po.
Despite the tough operating environment at home, Power Root has seen steady growth of its exports, particularly in the Middle East and North Africa (Mena) region. “The outlook (overseas) seems brighter compared to the local scene despite economic weakness in the Mena region. The fast-moving consumer goods segment is somewhat insulated as compared to other industries in that region,” he said.
See attributed the recent drop in net profit to increase in raw material costs, higher advertising and promotional spending incurred for the promotion of Alicafe Signature French Roast in Mena, as well as a foreign exchange loss of RM3 million (US$708,000) in the financial quarter under review.
He said local sales experienced a 5% decline in the latest quarter while export sales grew 17%.
The higher advertising and promotional spending incurred on the promotion of Alicafe Signature French Roast may have weighed down its profits, but it had boosted export demand in Mena region. Exports to Mena currently contributes 79% to its total exports, with the rest coming from China and Singapore. Exports generated close to 47% of Power Root's total revenue.
Moving forward, the group foresees the possibility of exports being the larger contributor to its earnings. The group's focus now remains on Mena. As part of the group's efforts to ramp up export growth in Mena, Power Root has planned to set up a US$14 million production facility in the UAE, where Power Root ME FZCO is based. “The plant is expected to come online by the end of 2019, with an expected monthly production capacity of approximately 130,000 cartons of instant coffee powder,” added See.