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The high price of cooking oil has taken a bite out of profits at Canada's home-grown potato chip maker, Humpty Dumpty Snack Foods Inc., but the company is confident Canadians' growing appetite for salty snacks will boost its bottom line over the next few years.

A spike in cooking oil prices, a result of storm damage to cotton and corn crops in the midwestern United States last summer, pushed losses at the Toronto Stock Exchange-listed company to $921,000 or 10 cents a share in its second quarter ended March 31, compared with a loss of $330,000 or 3 cents the year before.
The firm's stock closed at $2.99 on the TSX on Friday, compared with a 52-week high of $3.40.

Chief executive officer Gerald Schmalz said the shortage of cotton seed and corn oil has pushed up the price of all frying oils, a major component of the company's costs. Still, he says, "we should see some normalizing on prices as we get into the fall, with the new harvest."
The cost of the oil -- and the impact of a higher Canadian dollar on Humpty Dumpty's potato chip exports to the United States -- are among the volatile factors in an industry that appears to have one constant: the growing demand among the public for snack foods.
According to Statistics Canada data, Canadians devoured about $1.6-billion worth of salty snacks last year, including potato and tortilla chips, pretzels, popcorn, nuts and "extruded" snacks -- the unappetizing technical name for puffed cheese snacks. Industry players say consumption is expected to grow at about 5 per cent a year.

The business is dominated in this country by Frito-Lay Canada, an arm of giant U.S. multinational PepsiCo Inc. Frito-Lay, with six Canadian plants and 4,000 employees churning out dozens of snack food products under a variety of brand names, is unquestionably the largest chip seller across the country. But it has two Canadian rivals, split on a regional basis.
In the east -- Ontario, Quebec and Atlantic Canada -- Kitchener, Ont.-based Humpty Dumpty is firmly in second place. In the west, privately owned Old Dutch Foods Ltd. of Winnipeg is Frito-Lay's main contender. Frito-Lay claims a 60-per-cent market share of the chip market in Canada, although Mr. Schmalz challenges this figure. It reflects only numbers gathered from grocery and drugstores, he said. If gas station, convenience store and price-club store sales were added in, Humpty Dumpty would be neck and neck with Frito-Lay, he said.

Scott Kelemen, director of marketing at Old Dutch, has a similar claim for his firm in Western Canada. While Frito-Lay is dominant in the broad snack food business in the West, Old Dutch is very close to its market share in the narrower potato chip market, Mr. Kelemen said. Old Dutch benefits from the fact that Western Canadians are loyal to a local firm, he said, and from its intimate knowledge of regional tastes. Most players in the potato chip business are cautious about revealing any specific profit numbers and strategies.

The exception is Humpty Dumpty, the only publicly traded potato chip maker in Canada. Its financial reports provide a small window into the opaque world of chip makers. The company has been frank about its problems with frying oil, and the dent in its earnings from a rising Canadian dollar. The company sold $25-million worth of chips, or 14.4 per cent of its total sales, in the northeastern United States in the year ended Sept. 30, 2002.

Mr. Schmalz says Humpty Dumpty brands can compete profitably in U.S. markets so long as the Canadian dollar is below 85 cents (U.S.). The "private label" products the firm makes for U.S. clients are a different story, however. "When we cross 78 cents, we'll have to give it up," he said.
Mr. Schmalz is also forthright when it comes to problems the company experiences shipping potatoes between provinces. Trade barriers are a major difficulty, he said, such that moving potatoes from one province to another is "like trying to import from Saudi Arabia." Ontario's marketing board, he said, is by far the most unco-operative.
And while Old Dutch's Mr. Kelemen is cagey about any plans his firm might have for moving into Eastern Canada, Mr. Schmalz is clear that he'd much rather expand in the United States than in the Canadian West.
The northeastern United States is more attractive because of the large population and the proximity to Humpty Dumpty's Eastern Canadian plants, he said. And there are potential acquisition targets in the United States, while "there's nothing available in Canada that would be of interest to us."

One market segment Humpty Dumpty will be cautious about entering is low-fat snacks. While many consumers are concerned about fat levels in their diet, attempts to innovate in this area have been perilous so far. "Some of the reduced-fat products that were put into the marketplace [by other firms], quite frankly, were awful," Mr. Schmalz said. "That really tainted the consumers' perception of them."
Humpty Dumpty introduced a reduced-fat chip four years ago, he said, and while the quality was high, it didn't sell well. Frito-Lay has recently launched several new reduced-fat products -- including baked versions of its Tostitos and Doritos brands, and flavoured pretzels.
Because salty snacks are mainly an impulse purchase, and because younger customers aren't concerned about dieting, the jury is still out on the success of these products. As Monica Treidlinger, a market development officer at Agriculture and Agri-Food Canada put it: "For kids, fat is not an issue."

Illustration Copyright © 2000 Dow Jones & Company, Inc. All Rights Reserved.

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