KUALA LUMPUR (Dec 12): Surging coffee bean prices arising from a global shortage is impacting companies across the industry, including Power Root Bhd (KL:PWROOT), which has been diversifying its supplier base and raw materials, and is now looking at planting some of the coffee beans it needs to mitigate the price pressures.
Arabica coffee futures have hit record highs, driven by supply shortage and adverse weather conditions in key coffee-producing regions like Brazil and Vietnam. On Tuesday, Arabica futures were up 4% at US$3.434 (RM15.19) a pound in New York, Bloomberg reported. Prices had surpassed the previous all-time high set in 1977, when the market was rattled by Brazil’s devastating frost of 1975 that impacted future crops.
Spot prices of the raw material Power Root uses for its coffees have been increasing weekly since last month, said the group's chief executive officer Wong Tak Keong.
Power Root, which is known for its range of premixed coffee beverages including Alicafé, Per'l Café and Ah Huat White Coffee, primarily uses spray-dried coffee powder, which accounts for 95% of its coffee supply.
“Spray-dried coffee powder is derived from coffee beans and is also affected by increases in coffee bean prices,” Wong told The Edge. The group imports about 80 tonnes of spray-dried coffee powder every month, which makes up around 38% of its annual raw material costs.
To mitigate the surging prices, Power Root has explored various strategies, including locking in the prices for most of its spray-dried coffee for the next 15 months. It has also sourced for more suppliers and diversified the types of spray-dried coffee powder it uses to ensure a steady supply of raw materials.
The company is now planning to cultivate on its own some of the coffee beans it uses. "For very rare coffee beans that we use or plan to use [in our products], we plan to grow them in our plantation," said Wong.
For that, the group is acquiring a plot of land in Johor measuring 3.48 million sq ft for RM19.99 million. Wong expects the group's plantation to be able to produce coffee beans from as early as 2028.
Prices will continue to rise
Wong expects coffee bean prices to continue rising due to a global shortage of agricultural land, adverse weather due to global warming, and the increasing costs of planting, including labour costs.
But this situation will be mitigated by farmers turning to coffee over other crops, he said. This shift should help stabilise prices over time, although at a higher equilibrium compared to previous levels.
So far, Power Root has been able to pass on the price increases to the consumers, like other players in the market.
The significant price increases in the market has definitely had some dampening effect on consumer sentiment and demand, Wong said, though he noted Power Root has managed to navigate this challenge by adjusting its prices at smaller increments compared to others.
As a result, the company has been able to maintain its competitive edge, and in some sub-segments, even gained market share despite the broader market competition, he said. “Our price increases are trailing behind [market peers] but it is already sufficient for us to recoup the increase in costs,” Wong said.
Power Root reported a net profit of RM8.48 million for its second quarter ended Sept 30, 2024 (2QFY2025), down 18% from RM10.35 million a year ago, despite revenue rising 3.05% to RM102.74 million from RM99.7 million. It had blamed the lower 2QFY2025 earnings on higher staff costs and loss on foreign exchange.
For the six months ended Sept 30 (6MFY2025), the group made a net profit of RM15.77 million, down more than one-third from RM25.63 million in 6MFY2024, while revenue slipped 1.5% year-on-year to RM208.94 million from RM212.11 million.
Power Root's shares closed seven sen or 4.67% higher at RM1.57 on Wednesday, giving the group a market capitalisation of RM725.62 million. The stock is down 20 sen or 11.3% since the start of the year.