Going from revolutionary to evolutionary phase
After Phil Roux became CE of Pioneer Food Group in April 2013, it took him just two years to transform it from a stodgy also-ran into a sector champion. Roux’s new challenge is to move Pioneer from what he terms the “revolutionary” phase to the “evolutionary” phase.
What was achieved in the revolutionary phase entailed a complete re-engineering of Pioneer, including a new business model.
In the two financial years to September 2015, headline EPS (HEPS) lifted almost 80% while operating profit margin has jumped from only 7.2% to 12.3%.
But from here on the going
will be tougher. Roux sums up market conditions aptly. “This is a year from hell,” he says.
The most hellish conditions not unique to Pioneer are in drought-hit essential foods categories, which in the past financial year accounted for R11.33bn (60%) of Pioneer’s total sales of R18.75bn and R1.28bn (59.5%) of operating profit of R2.15bn. Tiger Brands was not far behind, with essential foods accounting for half its operating profit over the same period.
Especially hard hit are: maize meal where, by value, Pioneer’s White Star brand has a 32.2% market share; and bread, where its Sasko brand has a 31.6% market share. Roux sees no respite any time soon.
“We have had to buy maize forward to hedge against the 1.2 Mt shortfall in domestic production,” says Roux. Price relief is expected only in the quarter to September 2017.
Wheat, a commodity in which SA has never been self-sufficient, faces pricing pressure of another kind: from government’s import duty, which it has perversely just upped by 34% to R1,224/t. “The duty now makes up 25% of the cost of milled wheat,” says Roux.
Price pressure took its toll in the six months to March, Pioneer’s overall essential foods volume falling 5% and operating profit 8% to R645m.
Saving the day for Pioneer were its groceries and international divisions. Their strong showings enabled Pioneer to turn in a total rise in revenue of 9% and a 6% rise in HEPS.
Star performer was the grocery division, where what Roux terms power brands include Weet-Bix, Bokomo, Ceres, Liqui-Fruit and Safari. Having shed three marginally profitable units, including Pepsi, the division levered a 5% rise in volume and a 6% rise in revenue to R2.5bn into a 35% rise in operating profit to R343m.
It lifted operating margin sharply from 9.6% to 13.7%, a level ahead of Tiger’s grocery division’s 9.1% margin and its beverages, snacks and treats division’s 13.5% margin.
The international division lifted revenue 20% to R1.45bn and operating profit 16% to R252m, 20.4% of the group total. In profit terms it placed Pioneer just short of Tiger’s non-SA operations which, in the six months to March, recorded a non-SA operating profit of R292m (13.9% of group total) but on far higher revenue of R2.64bn.
Roux leaves no doubt that he views internationalising Pioneer as a key longer-term growth driver: “We will push ahead in SA and then go international.”
Pioneer has established a solid foundation to do just that in Africa and the UK. In the latest six months Africa accounted for around R450m in foreign revenue — primarily from fruit juice and dried fruit exports — while the UK was the biggest contributor at about R1bn.
Pioneer’s venture in the UK is low-profile, with two Bokomo factories producing private-label wheat breakfast biscuits, muesli and granolas for grocery chains. That is about to change.
“I want to take our own branded products to 50% of revenue,” says Roux. The first step has just been taken with the £7.5m acquisition of Streamfoods, producer of Fruit Bowl, a fruit snack. “It will add sales of R250m,” says Roux. “We will be doing more deals.”
Roux is also looking to acquisitions in SA to expand its grocery division. “We have a robust acquisition pipeline and a strong balance sheet,” he says.
The balance sheet is capable of supporting an acquisition drive. As at March 31 debt stood at R470m, R3bn below the upper limit set by Pioneer.
The scene is set for an interesting tussle between Pioneer and Tiger, now led by highly experienced Lawrence MacDougall. The market is backing them equally, rating both shares on a 20 p:e.
Tipping the scale in Pioneer’s favour is Roux’s exceptional track record, something MacDougall has yet to emulate at Tiger.