Clover seeks success in innovation, inflation and acquisition?

Despite challenging times for all food producers and retailers, the dairy sector is doing fairly well, and heading the sector is Clover Industries. Its momentum is being driven by a multitude of strategies.

According to Vunani Securities analyst Anthony Clark, who says the dairy sector did well compared to the underlying volume growth in a number of key food categories, Clover has been doing “okay in a tough environment,” and the company is not losing market share.

That’s confirmed by total market volume growth last year where sales of cheese and butter were particularly strong, only partially offset by declines in fruit juice and fresh milk. But the market is tough, as Clover directors warned in announcing interim results recently, for the six months ended December 31.

“SA consumers are confronted with a weak rand, high fuel prices, rising interest rates and high food inflation. This environment does not bode well for sales volumes during the remainder of the year,” said Clover CE Johann Vorster.

That might be, but Clover has a way of getting through difficult times. To maintain the good momentum within an inflationary environment Clover has further increased selling price by 8% across all products, and is also adept at earnings-enhancing joint ventures or acquisitions. It has also been expanding and upgrading its factories, to increase capacity and make production more efficient.

Clover broke ties with Famous Brands’ bulk mozzarella cheese business at the end of December 2013, reintroduced its maas sales (Amasi) and recently announced a 50/50 joint venture with Futurelife. Vorster says Futurelife’s expertise is in cereals and functional food, while Clover will run production, sales, distribution and merchandising.

Clover’s board has also approved capital spending of about R150m to start making yoghurt. The production facility should be completed by the first quarter of next year. This follows Clover ending its partnership with French food group Danone last year, through which Clover had a presence in the local yoghurt market.

However, what has got the market buzzing recently s a cautionary announcement Clover published on March 5. It was the usual “entered into negotiations” announcement but coincided with a cautionary from packaging company Bowler Metcalf. The Financial Mail speculated – and analysts agree – this could involve Clover forming a joint venture or outright acquisition of Quality Beverages, a soft-drink bottling company owned by Bowler Metcalf which makes the Jive brand of carbonated cool drinks.

Buying or forming a partnership with Jive would fit in well with Clover’s product diversification strategy. Clover’s first product, back in 1898, was butter, when a group of farmers from the then Natal Midlands met at Mooi River to establish a butter factory. Fresh milk followed, then long-life milk, cheese, flavoured milk, iced tea, mineral water and various fruit juices.

Joint ventures with Futurelife and Jive would not only increase the number of products but also expand them beyond dairy products. That’s how Clover gets through the tough times and even does well when other food groups struggle.

It also does well through investing in its factories. It has spent R171m, so far, on the Queensburgh factory near Durban. This included the construction of a new cold room and ambient warehouse, which does profitable storage and distribution work for clients such as Red Bull and Shoprite. With the expansion the Queensburgh factory is now pumping out 500 000-litres of milk, juice and Super M flavoured milk a day.

The expansions and upgrades are part of what Clover calls its Cielo Blu project. When it listed in 2010, Clover raised R500m, of which R350m was allocated to Cielo Blu. Yet CFO Jacques Botha says Clover is facing a difficult trading market. “Food prices are affecting consumer spending. Milk producers, and consumers, are under pressure.”

Source: Financial Mail, Moneyweb