Fat mar­gins are a lux­ury

With more de­mands on their cash, con­sumers don’t al­ways go for pre­mium brands, writes Andile Makholwa

Financial Mail - Investors Monthly - - Cover Story -

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

Pic­ture: THINKSTOCK

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