Within an hour of financial markets opening on Wednesday morning half a billion had been wiped off the value of Glanbia. It came on the back of a profit warning issued by the company which outlined a weak set of first half performance figures and a reduced outlook for its full year profits. Shareholders may ask what is wrong at Glanbia and is the company running out of muscle?

The share price has been under pressure since March, which was boosted by a solid set of full year numbers for last year. However, the group’s first-quarter results announcement in April disappointed shareholders where it reported a double-digit decline in sales volumes in its performance nutrition business.

The company blames a strong dollar and geopolitical issues in key growth markets such as Brazil, Mexico, the Middle East and India for the weaker-than-expected performance

This trend has continued into the second quarter where volumes in the performance nutrition business fell 8.7% for the half year. Prices have also been coming under pressure and for the first half of the year are down 2.7%. Margins have fallen from 12.2% last year to 7.6% in the first six months of 2019.

The company blames a strong dollar and geopolitical issues in key growth markets such as Brazil, Mexico, the Middle East and India for the weaker-than-expected performance. It also called out challenges in the EU market driven by the move to online channels by consumers and first- quarter seasonality in the US market. The reason for the drop in prices according to the company is due to increased price promotions to drive volume.

Jewel in crown

Up to now performance nutrition was seen as the jewel in the crown of Glanbia and has driven much of the growth. Over the last decade the company has spent more than €1.2bn acquiring businesses in this category and has become a global market leader in the space.

However, Glanbia looks like it is facing a number of challenges as it pivots its business away from a pure dairy and ingredients company to become a lifestyle consumer food brand. Last year the group spent €303m in its largest acquisition ever in a deal to buy the Slimfast brand.

Today, it sells performance products from whey protein powders to energy drinks and protein bars across 23 countries

Glanbia transformed itself by turning whey, a by-product of cheese that was seen as a waste and fed to pigs into a value-added product to become the world’s largest holder of global performance nutrition brands.

Today, it sells performance products from whey protein powders to energy drinks and protein bars across 23 countries. Its consumers span body builders, performance athletes to on-the-go lifestyle consumers.

When Glanbia first moved into this area it started selling its products through speciality stores such as GNC and Holland and Barrett which were the main sales channels at the time. However, in more recent times, there has been a significant shift in the sales channel for performance nutrition products with consumers increasingly buying these products online.

This saw Glanbia buying the online retailer, Body and Fit. One of the standout figures from the half-year results is that Glanbia spent €37m on capital investment in the first half of the year with €30m of this going towards installation of a new website for direct to consumer online sales. This puts it in competition with new competitors.

The big question for shareholders is if the growth in this segment is over or is the weaker first-half performance just a blip?

This move into online retailing further distances Glanbia from its core expertise – manufacturing high-quality dairy protein ingredients and the risk of failure rises as the subtleties of the business becomes more abstract.

The big question for shareholders is if the growth in this segment is over or is the weaker first-half performance just a blip? The company is saying the overall market is still growing and it is confident that its long-term prospects remain on target and strong. No doubt competition has increased in the category driven by the attractive margins in the sector. However, it is worrying to see margins dropping off so quickly to single-digit levels for a product that was seen an added-value branded play.

No doubt countries like Brazil and Mexico are at the early stages of entry into the category and will be more price sensitive when economic conditions weaken

The other concern centres on its key markets of the US and the EU. The US alone accounts for 67% of the performance nutrition business. While the announcement on Wednesday detailed challenges in international markets such as India, the Middle East and Latin America, very little detail is given on the performance of its core markets. No doubt countries like Brazil and Mexico are at the early stages of entry into the category and will be more price sensitive when economic conditions weaken. The strong dollar has been a headwind to growth in these markets but this is not a challenge that has come overnight.

It is reassuring that the company says the investment in the Slimfast brand appears to be performing where the company noted margins in that business in the range of 10-11%. The real challenge will be for Glanbia to drive on prices in the near term to deliver improved margins without it impacting on volumes.