Demand for banana has been relatively stable and seems to have been decreasing with a gradual increase in selling price of banana. Supply cycle working with elasticity of price caused fluctuations in selling price and sales volume. Recently increasing distribution costs dragged down companies’ profitability.

Sector’s current, trend, causes behind trend, and future

Current and Trend

• While organic demand for banana has been stable but presented a downward trend in the past several years indicated by decrease in worldwide sales volume of banana.
• Supply cycle working with elasticity of price caused fluctuations in price and sales volume constantly. However, economy elasticity of price in current price level is not determining factor in this sector.
• A general decrease in industry supply in the past several years seems to have been driving price of banana to go up but increasing costs in distribution dragged down the profitability of banana wholesalers.

 

Causes behind the trend

• In long run, the growth in demand for banana should be determined by growth in population.
• However, in short term, industry supply and price cycle directly impact the price and sale volume of banana. For example, a decrease in supply will cause an upward drive on price, which may be a negative factor for sale volume and create a less flexibility for banana distributors to manage their costs but also improve growers’ profitability.

Industry Future

• If there are no fundamental changes in preference of consumers to banana, we will still be able to see, in relatively longer term, the continuing cycle of increasing industry supply and declining price followed by cutting of supply and going up of price.

General Financial Performance of Companies In the Sector

It seems that the demand for banana has been stable and presented apparent economy elasticity related to changes in price, which seems to be determined by industry supply. Increased supply and reduced supply of banana seem to follow by each other and form a cycle with increased industry supply- decreased price and increased sales volume or decreased supply – raised price and decreased volumes. Due to an upward trend in price probably resulted from increasingly tight industry supple, the sales volume of banana seem to have been decreasing generally since 2015.

Because the company in this sector usually grows a significant portion of its major distributed products by itself, it presents more characteristics as a fruit farm than a distributor in terms of its financial performance, which are that its margin often went down when there were increased supply and fallen price and went up when supply decreased and price rise. Therefore, we see companies’ margins decreased when banana’s selling price decreased in 2015 and 2017 but increase when banana’s selling price increased in 2016. Unexpected increase in distribution costs significantly hurt companies’ profitability in 2018 while rising selling price of banana. Changes in companies’ operating income follow the same pattern as margins’ probably because the economy elasticity of banana is currently at a level where the decrease in profits resulted from decreased volume due to increased price has not yet been offset the increase in profits resulted from the higher margin due to higher price.

 A typical gross margin is 7% and a typical operating margin is 2.5% in 2018 but fluctuating in the cycle of supply and price.

According our analysis, companies’ enterprise price/adjusted EBI is around 32 with interest/EBITDA ratio of 10%. 

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