SA food price crunch

SA food manufacturers: Taking cost strain

South Africa’s food manufacturers are walking a fine line. Facing soaring costs of raw materials, they must still maintain volumes and profit margins.

The industry’s woes, brought on by a devastating drought and the rand’s slump, show no sign of abating. “Cost pressures are increasing,” says AVI CE Simon Crutchley.

Not even the rain that has finally come to SA’s farming heartland will help.

“The rain came too late and is of very little benefit,” says Grain SA chairman Louw Steytler. “We are going to lose a lot of commercial farmers.”

Just as grim is a trading update for the four months to January from Pioneer Foods, which markets under brands such as Sasko, Spekko, White Star, Weet-Bix, Ceres and Safari.

Maize input costs jumped 74% in the period and had a “significant impact” on volumes, notes the food group.

Adding further cost pressure, the wheat price, driven by a weak rand and a R755/t increase in the tariff on imported wheat, rose 30% year on year over the four-month period.

Producers of what Pioneer terms essential foods, such as bread, maize meal products, flour, pasta and rice, are in an invidious position.

They will find it impossible to pass on all the cost increases being experienced without risking devastated sales volumes.

This was signalled in a trading update for the four months to January by Tiger Brands, whose brands include Albany, Koo, All Gold, Tastic, Ace and King Corn.

The food group states: “With consumers under considerable financial pressure, the impact of the depreciating rand and rising soft commodity prices was only partially offset by price increases.”

In their four-month trading updates, Pioneer reported an 8% increase in sales and Tiger a 6% rise. Consumer food price inflation was running at 7.1% year on year in January.

Pioneer finds itself the most exposed to essential foods, which in its year to September 2015 made up R11.33bn (60%) of total sales of R18.75bn and R1.28bn (59.5%) of operating profit of R2.15bn.

It suggests that Pioneer’s exceptional performance in which headline EPS (HEPS) rose 103% in the three years to September 2015 is at an end, at least for now.

The market has punished Pioneer’s share price accordingly, hammering it a third lower from its highest point, reached in August.

Tiger’s exposure to essential foods is not far behind Pioneer’s. Grains, milling and baking made up R11.37bn (40%) of sales of R28.6bn in its year to September 2015. (The figures are adjusted for an estimated R3bn sales from its loss-making 65.7%-owned Nigerian investment, Dangote Flour Mills (DFM).)

At the adjusted operating profit level, essential foods made up an even more weighty 50% of the total.

Tiger’s share price has been spared the extreme hammering handed out to Pioneer.

The reason seems to be the sale of DFM for a token US$1 to Dangote Industries, from which it bought DFM for R1.5bn in 2012. By the end of its year to September, DFM had cost Tiger R1.7bn to fully impair its investment and R928m in accumulated losses.

Tiger has also resolved leadership uncertainty that followed the departure of former CE Peter Matlare in December and the appointment of COO Noel Doyle as a temporary replacement.

Stepping into the position of CE at the end of March is Lawrence MacDougall, who will bring with him 25 years of international experience in the beverages, snacks, groceries, confectionery and biscuit categories.

A South African, MacDougall is currently executive vice-president and regional president for Eastern Europe, Middle East and Africa at US group Mondelez International (formerly Kraft Foods).

Hlelo Giyose, First Avenue Investment Management CIO, applauds MacDougall’s appointment. “He comes from a highly innovative group,” says Giyose. “Tiger has lacked innovation since the late 1990s and has had one of the lowest ratios of R&D to sales of any major food manufacturer.”

However, MacDougall will not transform Tiger overnight. Giyose believes that it may require radical action, including disposal of its extensive bread operations.

“There is no pricing power with bread,” says Giyose. “It is a commoditised product.” The same applies to maize meal products, rice and pasta.

Pricing power can only come with strong, unique brands, stresses Giyose. He points to AVI as a company with a focus on building strong brands, which include Five Roses, I&J, Bakers, Yardley and Frisco…..

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