Can deliver, needs variety

Clover’s prospects are both organic and acquisitive, writes Andile Makholwa

Having laid a solid foundation, dairy producer Clover Industries now wants to scale up and improve earnings through the development of new products, acquisitions and expansion into the rest of Africa.

The group is exploring entry into the baby food market. Soft drinks is another sector it’s researching. Elsewhere on the continent, it’s planning to get into Angola and grow its small operation in Nigeria. However, SA remains its focus — the fragmentation of the local market means opportunities for sizeable tie-ups could be pursued.

The group has undergone significant transformation in recent years. Founded as Natal Creamery Ltd in 1898, Clover traded as a co-operative for 104 years. Its transformation into a public company in 2003 and then a listed entity in 2010 has been a remarkable success story of entrepreneurship and visionary leadership under CEO Johann Vorster.

Because co-operatives are generally asset-rich but profit-poor, the temptation in recent years has been to strip off these assets and create a different entity. Vorster is proud that in Clover’s case, milk producers and the descendants of the farmers who started the business were first in line when R1,3bn was unlocked for shareholders when the company listed.

The group had to undergo a major transformation to unlock value. In the late 1990s, says Vorster, co-ops were not the flavour of the day when it came to lending as they were considered an archaic form of business ownership, where voting power was not linked to the number of shares one had. To grow, Clover needed to change its business model.

The group was also saddled with a staggering R1,3bn in debt.

“As a co-op, we were supply-driven. The farmers supplied us the milk and we had to get rid of it, sometimes at a loss,” says Vorster. “When you’re demand-driven, you buy only the milk you need.”

Vorster, who joined Clover as finance director in 2000, began changing the group’s business model in 2006 and expanding its product range. It went into fresh juice and other value-added products such sliced cheese. In recent years, it’s added water, iced tea, yogurt and custard. More than 20% of the group’s product portfolio is nonmilk. Vorster says these products generally have a higher margin than milk and are easy to put into the truck delivering milk to a supermarket. However, milk still contributes more than 50% to the group’s turnover.

Funds raised from the listing helped the group pay off its debt and address supply inefficiencies through a project called Cielo Blu, which included the relocation of factories. Cielo Blu was completed at the end of last year at a cost of R340m. The group’s factories and distribution networks are now state of the art.

During the transformation phase, Clover wasn’t looking for acquisitions, though it made few, but focused on optimising its operations.

Dirk van Vlaanderen, investment analyst at Kagiso Asset Management, says despite the distraction of re-engineering the business, the company has made a few sizeable bolt-on deals in recent years, including the Quali juice brand (acquired from AVI in 2012), Nestlé Pure Life (bottled water) and Nestea (iced tea) brands from Nestlé and more recently the acquisition of Dairybelle’s Fruits of the Forest yoghurt brand. He says the group’s management is not shy of big deals but has “shown a disciplined approach to deal making, resulting in value creation for shareholders”.

Vorster says now is the time to consider opportunities. “We want to diversify further but remain a food company close to the core or yoke of our business, which is chilled fresh products,” he says. “We’ve got a number of products in the pipeline and interesting acquisition opportunities, which could benefit us.”

Without providing details, Vorster says there are several extensions to products such a Tropica, water and milk. He says since Clover is already producing an infant formula ingredient (milk), it makes logical sense to get into the baby food market. On soft drinks, he says the group wants to introduce something that is unique because it will not be able to take on the likes of Coca-Cola and Pepsico.

“Our Africa strategy is low risk,” says Vorster. “It’s not a big-bang strategy. It’s more like a calculated move.” He says Clover is looking for local partners to which it could add value by “bringing our IT systems, processes, merchandising, training materials, brand experiences and procurement consolidation”.

The group recently entered