— Jamaican manufacturers faced rising costs at the height of the COVID-19 pandemic.

— Some say they were unable to pass on the rising costs and suffered reduced margins as a result.

— However, of six companies analysed by the Jamaica Observer, two showed better margins while two fared worse and two showed no change before and after the pandemic.

JAMAICAN manufacturers complained at the height of the COVID-19 pandemic that rising costs, first associated with difficulties in sourcing raw materials because of lockdowns, soaring shipping costs, and then the war in Europe, squeezed the margins they make on the products they sell because, faced with the economic situation at the time, they could not pass on price increases to consumers who had little or no disposable income. And, even when price increases were implemented, they came with the disclaimer that it was not enough to cover the rising costs businesses were facing as they grappled with economic shifts and unprecedented uncertainties. But, what is the reality? The Jamaica Observer’s Business Desk randomly selected six manufacturing entities on the Jamaica Stock Exchange (JSE) and analysed their gross profit margins, revenues and profits — both before the COVID-19 pandemic and since the full re-opening of the economy in 2022 — to ascertain how they have performed in both periods.

The entities selected were Wisynco Group, Lasco Manufacturing, Caribbean Cement, Caribbean Flavours and Fragrances, Honey Bun and Salada.

First, the big picture is a mixed bag of results which showed their gross profit margins underwent a metamorphosis as the shadows of the pandemic receded. Our analysis, based on a sample, highlights that while two manufacturers witnessed higher profit margins in 2022 compared to 2019, two faced a decline, and two had profit markets which were not changed significantly.

Why gross profit margin?

In their quest to grow, it is not unusual for companies to become fixated on revenues and cashflow as measures of progress. However, success measured on these milestones alone is likely to be short-lived. In the long run these milestones don’t matter if the business will not be profitable and the growth itself doesn’t contribute appropriately to profitability. To understand the overall health of the business and whether its growth will be sustainable, one needs to grasp its margin story.

Gross profit margin indicates a company’s sales performance based on the efficiency of its production process or service delivery. We choose to analyse gross profit margin because it is one of the most crucial measures of a company’s financial health and competitiveness within its industry — specifically, it helps managers to evaluate how efficient their companies’ production is, compared to their competitors, by showing the money the company makes after paying the direct costs of running the business (ie the costs of goods sold).

Typically, gross profit marging is shown as a percentage of net sales. It’s calculated by subtracting direct costs from revenue, dividing that figure by revenue, and then multiplying by 100.

At the very least, a company’s gross profit margin should reach the point where revenues cover production costs. But this is only the minimum threshold business owners should target. If your gross profit margin fails to achieve this baseline, drastic changes need to be made — and soon.

It’s also important to remember that gross profit margin conveys how much revenue your products or services generate per dollar after subtracting your cost of goods sold, so it only factors in the direct cost of sales. Other operating expenses — such as rent, payroll, marketing and taxes — are not included, therefore its primary use is to assess the performance of individual goods and services.

The gross profit margin equation is relatively simple. If you want to improve your gross profit margin, you typically have one of two paths — incresing prices and or reducing the cost of goods sold. Depending on your business, either one of these measures — or even both — could dramatically improve your gross profit margin. But with either course you must weigh your options carefully before taking decisive action.

Raising prices typically involves passing on the costs to the consumer. If you do that, it must be incremental or in line with competitors’ strategies. Even then, such an action could upset loyal customers and turn off prospective ones. In most cases, reducing your cost of goods sold is the superior, albeit more difficult, option and can be achieved in a number of ways, many which are unique to each company’s reality.

Having established that, we now look at the performance of each company.

WISYNCO GROUP

Wisynco Group is one of the biggest producers in the country, with a huge portion of its portfolio dedicated to the beverages sector. With brands such as Boom, its energy drink; Wata, its purified water brand; CranWata, which is its flavoured water product; and Bigga, its soft drink brand, the company dominates that sector — with its closest competitor being Pepsi Jamaica which produces its flagship Pepsi products and the line of D&G soft drinks that it acquired from Red Stripe a few years ago.

Our analysis of Wisynco Group Limited showed an increase in gross profit from approximately $10 billion in 2019 to $13 billion in 2022, which was the company’s best financial performance since going public at the end of 2017.

However, during the same period, Wisynco’s gross profit margin decreased from 37 per cent to 34 per cent, showing the company earned less from sales in 2022. The company said it was due to the higher cost to generate these sales, including increased spending on raw materials which doubled from 2018 to 2022. Despite this substantial increase in those costs, Wisynco’s gross profits did not grow enough to match the rate of increased raw material costs. Instead, the gross profit only grew by 26 per cent. Consequently, this disparity between the rising raw material expenses and the growth in gross profit explains the decrease in gross profit margins during this period.

Wisynco has improved gross profits since 2019 but its gross profit margins have suffered. It is crucial to keep in mind that variations in the price of raw materials can have a direct impact on a company’s profit margins. A sizable increase in raw material costs outpaced an increase in Wisynco’s gross earnings, which led to a decline in gross profit margins. As a juice manufacturer, higher costs for key ingredients such as sugar impacted Wisynco negatively. To reduce the negative effects of increased input costs on overall profitability, good cost management and strategic decision-making are necessary. Wisynco stocked up on additional inventory to move ahead of supply chain disruptions and substantial price increases, improved the production capacity at its facilities, and sought other ways to optimise on fuel costs to run its operations.

It is also important to highlight that regardless of increased raw material costs, the company did improve its gross profits. In 2022 Wisynco had a specific focus on the export of its products and increasing exposure in international markets, particularly to the United Kingdom, North America, and the Caribbean. In 2022 Wisynco’s exports witnessed a surge, recording a substantial 71 per cent increase compared to the previous fiscal year. This notable statistic serves as a clear indicator of the company’s plans to improve the sale volumes of its products, which can assist in improving gross margins.

LASCO MANUFACTURING

While many other Jamaican companies struggled to recover from the pandemic’s impact, Lasco Manufacturing has not only rebounded but surpassed its pre-COVID financial performance.

In 2019 Lasco Manufacturing reported a gross profit margin of 36.43 per cent on $7.57 billion in revenue, compared to an almost unchanged gross profit margin on 36.35 per cent on $11.24 billion in revenue in 2022. This means the gross profit moved from $2.8 billion in 2019 to an impressive $4.1 billion in 2022. However, it is crucial to dive deeper into the factors that underpin this success and consider the role of gross margins in assessing overall performance.

COVID-19 was a stressful period for businesses. The combination of supply shortages, low demand, and increased raw materials costs was tumultuous for businesses to manoeuvre. Lasco Manufacturing faced a $1-billion increase in its cost of sales as well as a $200-million increase in general expenses. In order to improve or maintain gross profit margins a business has to sell more volume or raise prices on the products it sells.

To counteract this, Lasco had to cut costs efficiently. One example of Lasco’s commitment to cost-cutting has been using efficiencies — from improving its facility to contain costs and using a diverse supply chain — which allowed the company to stock up on additional inventory as inflation began to increase. Lasco Manufacturing has demonstrated a keen focus on customer acquisition costs, and this signifies a shift towards more efficient, targeted, and cost-effective marketing strategies, enabling the company to maximise its resources and improve gross margins. This highlights the company’s commitment to optimising production, sourcing, and manufacturing processes, ensuring efficiency and a competitive cost structure.

While many Jamaican companies faced challenges during the COVID-19 pandemic, Lasco Manufacturing Limited successfully rebounded, surpassing pre-COVID gross profits and gross margins. As the company continues to thrive, it stands as an example of corporate resilience in the face of adversity, resilience, and adaptability.

CARIBBEAN CEMENT

Caribbean Cement Company Limited, a prominent player in the Jamaican cement industry, has experienced steady growth over the years. Analysing the financial statements of the company, specifically the gross profit margins, provides valuable insights into its performance, comparing the out-turn for the years, 2019 and 2022.

During the 2019 fiscal year Carib Cement reported an impressive revenue of $17.76 billion accompanied by a gross profit of $7.1 billion, and a commendable gross profit margin of 40.35 per cent. Using 2019 as a foundation Carib Cement witnessed a substantial profit increase of 63 per cent in 2022, resulting in a gross profit of $11.4 billion for the year. This positive trend continued as Carib Cement reported an impressive 68 per cent surge in revenue, amounting to $25.8 billion in the 2022 fiscal year, coupled with an impressive gross profit margin of 43.97 per cent — an improvement on the margin earned prior to the pandemic.

Like most other Jamaican businesses, Carib Cement faced a significant increase in raw material costs, an over-$2-billion increase in electricity and fuel costs, and an over-$500-million increase in both repairs and maintenance and equipment hires during the pandemic. However, the company was able to offset these costs with the increased demand during Jamaica’s building boom. To outpace the rising costs of raw materials, fuel, and electricity — allowing it to maintain and protect its profit margins — Carib Cement used its domination of the cement market to increase prices. By effectively balancing pricing dynamics and cost management, Carib Cement demonstrated its ability to adapt swiftly and efficiently to market conditions.

Carib Cement’s ability to increase both profit and profit margin during a time of great uncertainty is a testament to the company’s resilience and strategic decision-making. By proactively monitoring market dynamics and anticipating the impact of rising raw material costs, Carib Cement was able to adjust its pricing strategy accordingly. This approach ensured that the company not only maintained its profitability but also capitalised on market demand, leading to gross profit and gross margin growth.

CARIBBEAN FLAVOURS AND FRAGRANCES

Caribbean Flavours and Fragrances Ltd., a company in the Jamaican beverage, baking, and confectionary industry, had an increase in gross profits but saw a slight decline in its gross profit margin between the years 2019 and 2022. This downturn in gross profit margins is a result of increased costs of sales across the board.

Comparing the two years in detail, the revenue for the reporting period ending December 31, 2019 amounted to $462.462 million, with a gross profit margin of 30.1 per cent, while the 2022 reporting year recorded $674.298 million with a 29.7 per cent gross profit margin for the period. We can attribute the increased revenue and the decrease in the gross profit margin to the increased costs.

With the impact of the novel coronavirus, Caribbean Flavours and Fragrances faced a large increase in its costs of sales. This increase was a result of raw material costs, logistical challenges, increased staff costs, and new COVID-19 sanitation protocols, according to Ian Kelly, group chief financial officer. Due to the pandemic, in 2021, the price of commodities skyrocketed, including sugar which is one of the most important raw materials to Caribbean Flavours and Fragrances.

Kelly highlighted the significant spike in logistics costs, telling the Business Observer that before COVID-19 the cost of shipping a container would range from from US$2,000 to US$4,000. However, shipping a container at the height of the shipping challenges cost between US$20,000 and US$25,000. Another increased cost was staff expenses. Due to COVID-19, many workers were unable to work in the factory but still had to be paid because they were forced by the new COVID-19 protocols to stay at home. As a result, with fewer workers the people who Caribbean Flavours and Fragrances employed had to work overtime to compensate. To stabilise gross margins, many of these increased costs were transferred to the consumer. This resulted in a profit margin decrease of only 0.4 percentage point. Considering the challenges, such as the rising costs of raw materials, having approximately maintained the profit margin is an accomplishment.

Caribbean Flavours and Fragrances was able to increase gross profit and maintain its gross profit margin from its pre-COVID-19 levels. Though it faced rising costs, many of which were passed to the consumer, it is still impressive that the company was able to perform so well during these challenging times.

HONEY BUN

Honey Bun is a company that specialises in pastries and bakery products. Honey Bun has seen continuous gross profit growth through COVID-19 and has gone from nearly $750 million in 2019 to nearly $1.2 billion in 2022. However, this does not indicate complete success throughout the pandemic. Another significant measurement of a company’s success is its gross margins. Honey Bun’s gross profit margins have shrunk more than eight points, going from 48.2 per cent in 2019 to 39.8 per cent in 2022. What caused such a decline in profit margins?

Across the board, Honey Bun’s cost of sales increased, however, the cost of the largest, single expense for the company, its raw materials, has more than doubled since 2019. In 2019 Honey Bun’s cost of raw materials and consumables combined was $582 million. In 2022 this cost shot up to $1.38 billion. Such a spike in the cost of raw materials cannot be matched with a more than twofold increase in gross profits. Other costs also increased since 2019, including a $100-million increase in staff costs, a more than $50-million increase in utility costs, and a more than $11-million increase in other costs of operating revenue. Increased costs that were not passed directly to the consumer resulted in a significant decrease in gross margins.

One very important detail in the raw material cost increase that Honey Bun faced was that this increase was not continuous over the three years that the pandemic tormented the economy. In 2021 Honey Bun’s raw material cost was $871 million, still about a $200-million increase since 2019, however between 2021 and 2022 Honey Bun faced a roughly $500-million increase in the cost of raw materials. Such an increase could be attributed to the increase in the price of wheat the world faced in early 2022. In 2021 the gross margin of Honey Bun was still over 47 per cent, which also shows that the root cause of this decline can be found in 2022.

Honey Bun has worked deliberately to keep costs down and maintain its gross profit margins, but due to factors outside of its control it has been unable to do so. Honey Bun’s gross profits of 2022 have increased since 2019 — but not without a decrease in its gross profit margin.

SALADA FOODS

Salada Foods is one of Jamaica’s leading brands in both the instant coffee and tea markets. Between the financial years ending in 2019 and 2022, Salada both increased gross profits and gross margins. It is an impressive achievement for a company — having gone through the COVID-19 pandemic when most businesses faced increased raw material costs — that it was able to increase both of these financial metrics.

In the financial year ending in 2019 Salada had gross profits of $257 million, while in the year ending in 2022 Salada had gross profits of $412 million. Over the same period gross margins increased about five percentage points, shifting from 25.9 per cent to 30.8 per cent. This increase in both gross profit and gross margins throughout the pandemic is almost unheard of and an impressive accomplishment for Salada.

Raw material costs are typically the largest costs in a company’s cost of sales. For many Jamaican companies, due to supply chain issues the cost of their raw materials significantly increased. However, raw materials cost Salada $489 million in 2019 and $613 million in 2022. Though this jump was over $150 million, such an increase can easily be understood. In addition, this increase in costs was met with an increase in gross profits, meaning that the quantity demanded may have driven the recorded cost of raw materials.

For many Jamaican companies, costs increased across the board. However, Salada was very deliberate about cutting costs, and when comparing their 2022 financials to their 2019 financials the company decreased costs in security, gas, fuel, depreciation, and other areas. This is in part the reason for the improved gross margins.