17 Sep 2014 Muted economy sours Clover’s earnings
Dairy products group Clover, which is trading under a cautionary announcement (possible buyout of Quality Beverages), sees opportunities for consolidation in the sector as SA’s weak consumer environment offers limited growth opportunities.
“I think this market is ripe now for consolidation,” CEO Johann Vorster said yesterday, adding that Clover was assessing opportunities in SA and other regional countries such as Angola and Mozambique.
Clover Industries said that the 21% fall in its profit to R189m for the year ended June reflected a “constrained operating environment in which the full recovery of higher input costs could not immediately be passed on to consumers”.
The company’s share price closed 5.07% lower at R17.80 on Tuesday.
Among the drivers of input costs was a roughly R50m increase in the costs of raw milk as shortages fuelled competition for it. Clover had to “defend our position” and retain suppliers.
Farm gate milk prices were up 15 percent year on year in March 2013 and again in February, March and April this year.
Packing costs were up by R139.2 million, while milk collection costs increased by R38.4m due to fuel cost increases and manufacturing costs grew by 10 percent.
Higher selling prices coupled with rising inflation eroded market share in a number of categories, with overall sales volumes dipping 0.8 percent.
In response to consumers’ cut back on spending, Clover plans to introduce new reduced packet sizes, as well as new products.
Daniel Isaacs, an analyst at 36One Asset Management, said all food producers faced similar cost pressure dynamics in the form of raw materials, labour and packaging.
“In general, these companies do not have much control over their raw material costs,” he said.
Isaacs believed that food companies could recover some of the cost by increasing prices. However, “the amount of pricing they can push to cover their cost depends on how commoditised their product is and how much brand equity they have”, he said.
Isaacs said food producers who could push their prices more without losing volume were going to be able to hold on to their margins. But he said certain elements of Clover’s portfolio, like their long-life milk, was more of a commoditised product and might not have the brand equity required to offset costs with necessary price increases.
“Times are tough and consumers are under a lot of strain. For commoditised products with low brand equity, consumers will change brands quickly for cheaper alternatives. Companies dealing with this dynamic and increased costs are finding themselves in a tough space, as their price increases cannot offset costs and result in lower volumes, affecting the overall margins of the business,” he said.
Added Vorster: “I’m confident though that the recent downward pressure on international oil and grain prices as well as the stabilising of raw milk supply will enable us to claw back some of these costs while growing market share and sales volumes.”
Vorster said he was “satisfied” with Clover’s recent achievements, including the conclusion of capital investment project Cielo Blu, raising prices paid to farmers to ensure sustainability of supply, and increasing its own product prices at the end of the financial year.
It had also bought DairyBelle’s yoghurt and ultra-high-temperature milk businesses, giving it access to these higher-margin products from January next year.
Vorster said Clover could bolster any part of its supply chain in the industry’s consolidation, including milk production, procurement and merchandising for third parties, and acquiring new products.
The company was looking domestically, and in Mozambique, Angola and Kenya despite competition and challenges with procurement in the country. In Nigeria, where Clover sells only its Tropika beverage brand, the next step would be for the company to manufacture its own product in-country.
Vunani Securities analyst Anthony Clark speculated recently that Clover’s latest cautionary could relate to a possible buyout of Quality Beverages. Quality Beverages is owned by Bowler Metcalf, which is also trading under a cautionary.
Sources: BDLive; IOL.co.za
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