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Tiger Brands review FM

Tiger Brands sharpening its claws

When Lawrence MacDougall picked up the apparently poisoned chalice of Tiger Brands CEO from Peter Matlare in May, he explicitly took on the challenge of putting SA’s largest food manufacturer back on a growth path.

It’s a herculean task, considering that both his predecessors left under something of a cloud.

Matlare, who quit last November, had botched up Tiger Brands’ African foray so badly it had to write off R2.8bn in Nigeria within three years; Nick Dennis quit in 2008 with the company under an immense cloud for ripping off the poor by fixing bread prices for years in its Albany subsidiary.

It’s a series of ignominious faux pas for a company whose products are stocked in most SA grocery cupboards: if you don’t have their iconic Tiger Oats, you’ll probably have All Gold Tomato Sauce, Purity baby food, Albany bread, Tastic rice, Ace maize meal, Mrs HS Ball’s chutney or Black Cat peanut butter.

“Tiger is not a broken company,” says Ricco Friedrich, an analyst with Denker Capital. “MacDougall has been handed a wonderful business.”

But what is evident is that the recent travails, particularly its ham-fisted African strategy, have severely tarnished a company which was founded in 1921 by Jacob Frankel in Newtown, Johannesburg, listed on the JSE in 1925, and which rose to become a corporate powerhouse in the 1970s under the name Tiger Oats.

Lawrence MacDougallInvestors are putting big faith in the Johannesburg-born MacDougall (left) — who beat 35 rivals to the post, both local and foreign — to instil new vigour into the company.

Since he was announced as the new CEO four months ago, Tiger Brands’ share price has climbed 20.4% to around R368. (Matlare might have been in charge during Tiger’s ill-fated African venture, but during his eight years in charge, since 2008, Tiger’s stock climbed 173%)

As it stands, five of the nine analysts who cover it rate it a “buy”, two a “hold”. The most optimistic, SBG Securities, this month reckoned the stock could hit R410 within a year, while Renaissance put it at R400.

Analysts expect MacDougall to leverage his 39 years’ experience in the fast-moving consumer goods (FMCG) market to restore Tiger Brands to its former glory.

So does that mean that after the mauling Tiger Brands was handed out in Nigeria, and to a lesser extent in Kenya (where it turned out managers were ferreting away goods in warehouses to meet their sales targets), MacDougall plans to scrap Tiger’s African expansion plans entirely?

In an interview with the Financial Mail, MacDougall says that won’t be happening. “I am a very optimistic African leader,” he says, brimming with enthusiasm.

“We have a great team, phenomenal brands and a fantastic manufacturing footprint. Eight of our brands are achieving annual sales of over R1bn and rank number one or two in their categories.”

Tiger may not be broken but it has been shaken to its core by costly management blunders which came fast and furious during Matlare’s seven-year tenure, which ended abruptly last December.

They were blunders that have left Tiger’s growth record in tatters: in its four years to September 2015, headline earnings crept up by a mere 5.2%.

You could argue that in a tough environment, this wasn’t too bad. But compare Tiger to its rivals, and you’ll see how this is sub-par. Over the same period, AVI (which owns brands like Five Roses, Bakers Biscuits and Provita) grew headline earnings by 66%. Pioneer Foods’ earnings grew by an even more emphatic 92%.

Even at the half-year to March, Tiger’s headline earnings per share were flat (for its continuing operations), even if its overall revenue was up 9% to R15.8bn, after shutting the Nigerian operations.

It’s a welcome sign of green shoots after a growth record that will surely have sapped the enthusiasm of even the most die-hard employees.

“One of the key things MacDougall will have been brought in to do is to instil a high-performance culture,” says Jiten Bechoo, an analyst at Avior Capital Markets.

MacDougall believes he is already getting the support he needs. “There is a lot of enthusiasm among the team,” he says. “The energy is palpable.”

Whether that energy translates into bottom line profit remains to be seen.

But what MacDougall doesn’t lack are the right credentials. Before joining Tiger, he was the executive vice-president for Eastern Europe, the Middle East and Africa for Mondelez International — the US confectionery giant which owns such top-notch brands as Cadbury, Stimorol and Toblerone, and clocks up US$33bn/year in revenue.

His invaluable background is something that his predecessor Matlare conspicuously lacked. Matlare, who was appointed the deputy CEO to Maria Ramos at Barclays Africa last week, arrived at Tiger Brands in April 2008 from cellular giant Vodacom where he was the chief strategy and business development officer. And before that Matlare was CEO of the SA Broadcasting Corp (SABC), which has lurched from crisis to disaster since Matlare left in 2006.

What Matlare didn’t lack, however, was an abundance of self confidence, plunging Tiger into an aggressive and ultimately ill-fated acquisition drive into Africa.

He wasn’t the first to get led up the garden path by the hype of the African consumer market, typified by McKinsey’s breathless report, “Lions on the Move”.

Tiger’s rivals AVI and Pioneer Foods did not fall for the hype. “I don’t believe that with the vagaries you have to contend with in Africa you can be too brazen in your approach,” Pioneer CE Phil Roux told the Financial Mail.

But Tiger’s approach to Africa was brazen. “It went for the big-bang approach and ignored the inherent high risks in Africa,” says Daniel Isaacs, an analyst at 36One Asset Management……

Africa is indeed no place for sissies. Some companies have succeeded, not least SABMiller, Shoprite and Mondelez. But Africa has for them been a long-term project stretching over decades, not one approached like a bull in a china shop.

It is not an approach that can be expected from MacDougall. He has what Matlare lacked: an in-depth understanding of the FMCG scene in Africa gained since he joined confectionery group Cadbury in 1982.

Cadbury was acquired by US group Kraft in 2010 for $14bn. Kraft went on to spin off its domestic grocery operation in 2012 with the remaining global snacks and confectionery business becoming Mondelez International.

In particular, MacDougall has gained vast experience in the complex Nigerian market where Mondelez has a 79% stake in the listed Cadbury Nigeria. “I was chairman of Cadbury Nigeria for seven years,” says MacDougall. “It is a huge business.”

Enthusiastically, MacDougall says: “The opportunities for Tiger in Nigeria and East Africa are fantastic.” He has also served as Kraft’s East Africa president.

Tiger is also likely to extend its geographical footprint beyond Sub-Saharan Africa. “North Africa will also be a focus for us,” says MacDougall, who comes with experience gained in the region in his former position with Mondelez. Among likely targets are Egypt and Algeria. “They are big markets and have a very sophisticated approach to branded products.”

But it appears unlikely MacDougall will swing his attention to further African expansion just yet. “We must first address the Nigerian distraction and get our SA portfolio up to the optimum level,” he says. “My job is to align the team behind the right priorities.”

There is considerable room for improvement in Tiger’s operations in its home market, where things were allowed to slip under Matlare’s watch.

“While Tiger was busying itself with African expansion, SA operations were neglected,” says Isaacs. “They thought that the strength of their brands would carry them through.”

Tiger’s brands are indeed formidable. Also among its 41-brand line-up are All Gold, Koo, Cross & Blackwell, Halls, Fatti’s & Moni’s and Oros.

But even the best brands will suffer damage if neglected. It proved to be a bad judgment error by Tiger, which allowed its marketing spend as a percentage of sales to fall to the lowest in the industry.

Tiger left the door open for rivals such as Pioneer, AVI, Rhodes Food Group and Premier Milling to grab market share in many segments.

“There has been a huge increase in competition in recent years,” says Isaacs.

In particular Pioneer, led since May 2013 by Roux, has emerged as arguably Tiger’s most serious competitor. “Roux has transformed Pioneer,” says Isaacs.

Until becoming Pioneer CE, Roux had been Tiger’s consumer brands business executive. He knew Tiger’s weaknesses and has exploited them to the full. The two heavyweights are clashing head-on in many key sectors, including groceries, bread, pasta, rice, cereals and beverages. Leading Pioneer’s charge are brands such as Sasko, Weet-Bix, Bovril, Marmite, Ceres, LiquiFruit, Spekko, Safari, Bokomo and Pasta Grande.

“I believe 70% of MacDougall’s effort will be put into ensuring that Tiger’s products remain attractive and hold their market share,” says Bechoo. “Tiger must innovate.”

Hlelo Giyose, First Avenue Investment Management CIO, applauds MacDougall’s appointment: “He comes from a highly innovative group. Tiger has lacked innovation and has had one of the lowest ratios of research and development spend to sales ratios of any major food manufacturer.”

Cost control had also been left to slip badly during much of Matlare’s tenure. It was a far cry from the regime under his predecessor Nick Dennis.

“I rated Dennis highly,” says Friedrich. “He was ruthless on cutting costs.” So ruthless that Dennis was dubbed “Nick the Knife”. During his 14-year tenure as CE, Tiger’s operating margin more than doubled from 6.2% to 13.4%.

If belatedly, efforts are under way to remedy past slack cost control with a R500m annual saving target. Tiger has also upped its marketing spend markedly. In the year to September, marketing spend lifted 12% to R845m and in the six months to March by an even more hefty 23% to R502m.

There is still a long way to go on cost cutting and marketing spend, Thompson believes. “Streamlining the supply chain through enhanced procurement in areas such as raw materials and packaging will be a big focus, I feel.”….

Financial Mail: Read the full article here

Related reading:

Tiger Brands’ new CEO on the way forward

Lawrence MacDougall has seen it all before – Financial Mail 

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