Clover battles rising costs in ‘new reality’
It’s a roller-coaster out there. Ask any company. But SA is its own worst enemy regarding creating a nonconducive business environment, as reflected in the recent World Bank poverty data. Whether it is a mean, median or mode, the statistics don’t bode well.
Among emerging-market peers including Brics members Brazil and Russia, the beloved country is right down there with Namibia concerning percapita calculations for poverty, unemployment and inequality.
Ironically, this is one reason why Clover’s value-added long-life milk and juice products, and those dairy and fruit juice blends in between — for example, Tropika and Danao — are critical to SA’s wellbeing. These are a source of proteins, vitamins and minerals that can be stored without refrigeration for long periods. They cover low-margin milk products and value-added ranges, such as custards and yoghurts in no-fat, low-fat and full-fat varieties.
The complexities of foods and beverages run deep and are subject to many internal and external factors. In the year to June, Clover said it “faced an exceptionally challenging year” along with other South African food producers and retailers.
Prolonged drought and a subsequent wetter and cooler summer and rand volatility resulted in above-inflation input costs and subdued volume growth amid poor consumer spending. Clover CEO Johann Vorster mentions aggressive competitor pricing and market positioning in the fight to optimally sustain business in a constrained “new reality”. Food producers now cannot just pass costs on to consumers.
“All brand businesses understand that the good old days of [passing] costs on to consumers is not sustainable,” he says. “So, you have to find ways of counteracting inflation in your business.”
Vorster says volume growth is the best way to “absorb” inflation and grow the economy. This means growing distribution in areas that are far away from big retail stores and where consumers are mostly much poorer than elsewhere.
With strong rural and urban distribution networks, Clover’s brands are greatly enhanced by its school-feeding initiatives.
This underpins two strategies: to grow volumes of low-margin milk products, while greatly expanding the value-added products range. Therefore, Clover has bought the Dairybelle yoghurt and ultrahigh-temperature processing businesses and the Nestlé water operations.
Compared with other big South African food and beverage producers, such as AVI, Clover does not have the pricing power, strong brands with large market shares or a highly diversified food basket, says Cratos Capital portfolio manager Ron Klipin.
“AVI has been a consistent performer throughout economic cycles, delivering predicable and quality growth,” Klipin says. Diversification of AVI’s food basket, its strong brands and significant market share in “most of its offerings” are the reasons for an “outstanding track record”.
This has enabled the group to increase prices, even though costs were not fully recovered.
Despite a resultant loss in volumes, the higher prices offset this, with gross profit margins remaining stable.
Klipin says that AVI’s offerings of tea and coffee encompass lower- and higherend consumers. It has strong growth in operating profit and its Bakers brand biscuits have kept market share despite falling consumer spend.
Selective hedging also enables AVI to smooth pricing of its products in ways that are harder for Clover.
Dirk van Vlaanderen, associate portfolio manager at Kagiso Asset Management, says category exposure often differs significantly across South African food manufacturers.
“This brings with it quite different competitive and pricing dynamics as well as input cost exposures. In general, a stronger rand is good for manufacturers, as common inputs such as packaging are usually linked to US dollar prices,” he says.
Some manufacturers, such as AVI, rely more on dollarlinked soft commodities such as coffee, tea and palm oil, and will hedge these inputs as required.
“A producer such as Clover relies more on locally priced inputs such as milk, which is independent of global prices,” Van Vlaanderen says.
DESPITE A … LOSS IN VOLUMES, HIGHER PRICES OFFSET THIS, WITH GROSS PROFIT MARGINS REMAINING STABLE