Fat margins are a luxury
With more demands on their cash, consumers don’t always go for premium brands, writes Andile Makholwa
Tiger Brands has not only come under pressure from its offshore operations, its South African business has also been up against a wall in the past couple of years.
Since the days of the recession, consumer spending has yet to fully recover, which means growth in the consumer goods industry largely remains subdued. Ongoing job losses and sharp increases in administered prices such as fuel and electricity have stifled spending too.
The result has been an increase in competition between branded goods producers such as Tiger Brands and retailers’ private label offerings. In a tough economic environment, value driven consumers find private labels appealing as they help alleviate the financial pressure.
That Tiger Brands is under pressure is reflected by its share price. It’s down 30% from its all-time high in February. Analysts say this has nothing to do with the losses from Dangote Flour Mills in Nigeria as the market has already priced in this bout of negative news.
The group’s bakery and grocery divisions, the two big contributors to its income, have come under a lot of pressure lately. Management has been working hard to reclaim their number one spot, but margins remain in a tight spot.
“Times have changed. Gone are the days of Tiger Brands using the strength of some of its premium brands to enhance margins,” says Cratos Wealth analyst Ron Klipin.
Though the pressure on margins is across the board, Tiger Brands’ most comparable peers, Pioneer Foods and AVI, seem to have handled it much better.
“Tigers Brands’ competitors have outperformed it in profit growth over the past few years. Future relative performance depends on whether the same driving factors will play out,” says Victor Seanie, an analyst at Kagiso Asset Management.
The group is trying to protect margins through a delicate management of price increases, volume growth and cost-cutting exercises. It’s been able to maintain or grow market share in some categories by creating efficiencies in manufacturing, curbing waste and increasing advertising and marketing.
“In a number of our businesses we had become too premium, and in other areas, we had not taken price increases and had to manage raising prices and not losing volume,” says CEO Peter Matlare.
The group continues to leverage its brands, which include All Gold, Koo, Cross & Blackwell and Tastic.
Being the biggest division, the South African business is the life blood of Tiger Brands. It’s the reason the group continues to pay a dividend despite the tough economic environment.
The group says it continues to invest and look for opportunities to grow the business, but its efforts are being thwarted by the difficult economic conditions.
Another factor is that Tiger Brands is fairly represented in many categories such as canned food, bread, flour, rice and pasta in SA. While this does not mean it’s saturated, it implies that its scope for growth is limited. Seanie says the group still has some leeway to lift market share in categories such as cereals and maize meal.
In the six months to March, it launched Jungle Ultra, a ready-to-eat breakfast cereal aimed at the fast-growing energy segment of the breakfast market. It says it has increased investment in the grains businesses and continues to focus on operational excellence.
“One of the core drivers of the business is the ability to consistently deliver to our customers — both on the top end as well as in the independent sector — a consistent product, day in and day out,” says Matlare.
In the home and personal care business, it has seen declines over a period of time and has made a decision to invest in this business — in innovation, marketing and new management — and to continue to support strategic alliances that it has forged.
What about deals? Given its size, the group is unlikely to court any of its smaller rivals without raising the eyebrows of competition authorities. It has previously flirted with AVI but nothing came of that.
This may create a hazy picture to a novice investor, but long-term stock holders believe the group still has a lot to offer. In any case, you could hold on to it for a dividend.
The group is trying to protect margins through a delicate management of price increases, volume growth and cost-cutting