Un­der a mi­cro­scope

Scru­ti­n­is­ing Tiger Brands’ re­sponse to the lis­te­rio­sis cri­sis

Financial Mail - Investors Monthly - - Front Page -

The way a com­pany re­sponds to bad news can be de­ci­sive for in­vest­ment in it. Yet — de­spite lis­te­rio­sis al­legedly linked to Tiger Brands’ prod­ucts was as­so­ci­ated with the deaths of 193 peo­ple and the ill­ness of count­less oth­ers — the com­pany seems to be rid­ing through rel­a­tively un­scathed, as the share price con­tin­ues to pick up af­ter an ini­tial col­lapse.

This might sound strange, con­sid­er­ing that Tiger Brands is likely to come out of this with its rep­u­ta­tion ham­mered and its bal­ance sheet un­der pres­sure. By the com­pany’s own cal­cu­la­tion, the cri­sis will cost it at least R380m and up to about R800m.

Ac­cord­ing to an­a­lysts’ cal­cu­la­tions, it could even run to bil­lions, de­pend­ing on the out­come of class ac­tion claims.

Whether a di­rect link be­tween its prod­ucts and lis­te­rio­sis deaths can be legally es­tab­lished or not, the truth is that peo­ple have died. And some ob­servers be­lieve the com­pany re­sponded with off­ish, legally fu­elled com­ments and not enough em­pa­thy.

The cri­sis also ex­posed the fact that it was caught sleep­ing when the Na­tional Con­sumer Com­mis­sion and the de­part­ment of health in­formed it of the pres­ence of listeria mono­cy­to­genes ST6 type bac­te­ria at its En­ter­prise meat di­vi­sion — some­thing it should have been aware of it­self and then have acted upon.

None of this can be good news for the share, which has lost ground — from 425c prior to the March 5 rev­e­la­tion of the con­tam­i­na­tion to 395c at present — though the price has been in­creas­ing since midMarch.

In the year to date, it has lost only 1.5%, and the con­sen­sus is a buy.

This does not look too bad, although the com­pany’s re­sponse has to be com­pared un­favourably with com­peti­tor RCL, which im­me­di­ately acted, pulled prod­ucts and pro­vided as much in­for­ma­tion as it could to its cus­tomers. Its share price has risen from 17c be­fore March 5 to 19c, with a year-to- date in­crease of 35%.

Tiger Brands’ share price may be hold­ing up, but the com­pany could face head­winds for a long time to come, de­pend­ing on how much this cri­sis costs.

So what will the ex­pense be? As much as R10bn, by some peo­ple’s reck­on­ing, de­pend­ing on the re­sult of class ac­tion suits and the amount of dam­age to its brand.

Tiger Brands has re­called prod­ucts and sus­pended op­er­a­tions at four meat pro­cess­ing fa­cil­i­ties at an es­ti­mated pre­tax cost of R337m-R377m be­fore ac­count­ing for in­sur­ance re­cov­er­ies, which could be up to R94m, the group says. Its value-added meat prod­ucts busi­ness will show a loss be­fore in­ter­est and tax of R28m-R33m in March. Ceas­ing pro­duc­tion will cost R50m monthly be­fore tax.

Class ac­tion claims have been launched on be­half of

“En­ter­prise could still sur­vive if the brand were repo­si­tioned, but there will have to be sig­nif­i­cant mar­ket­ing costs and price cuts to per­suade cus­tomers

peo­ple who fell ill and de­pen­dants of peo­ple who died, with the group es­ti­mat­ing the amount to be claimed at R425m.

Asked about other costs, in­clud­ing mar­ket­ing to re­pair the com­pany’s rep­u­ta­tion or the em­ploy­ment of ad­vis­ers, cor­po­rate com­mu­ni­ca­tions di­rec­tor Nevash­nee Naicker gives no fur­ther de­tails, re­fer­ring IM to the group’s pub­lished cost es­ti­mates.

Gryphon As­set Man­age­ment re­search an­a­lyst and port­fo­lio man­ager Cas­parus Treur­nicht es­ti­mates a worst-case sce­nario of R10bn for class ac­tions. “Look­ing at a mar­ket cap of R75bn, that is a lot of cash.”

Treur­nicht says that in the first half of 2018, the group’s cash and cash equiv­a­lents stood at R1.2bn, with bor­row­ings of about R800m. “The prob­lem this poses for Tiger Brands, [in the case of a] R10bn worst-case sce­nario, is that it is go­ing to have to raise bor­row­ings, which will be ex­pen­sive and put a lot of stress on the bal­ance sheet.”

“The com­pany should start de-gear­ing the bal­ance sheet and build­ing up a cash sur­plus in an­tic­i­pa­tion of the worst. This will cause de­r­at­ing of the share price — and we can even see it at 270c,” he says.

Vu­nani Se­cu­ri­ties eq­uity an­a­lyst An­thony Clark says: “Tiger Brands [will be] sim­mer­ing un­der a cloud of doubt, cer­tainly un­til the claims are set­tled. It has put aside R425m for le­gal claims, and it will rally or tank de­pend­ing on whether th­ese come in higher or lower.

“It is in a hold­ing pat­tern now, be­cause the mar­ket doesn’t know the ul­ti­mate quan­tum, and un­til it does, the group will have to act as a re­spon­si­ble, good cor­po­rate cit­i­zen. It will have to make sure noth­ing else hap­pens if it wants to keep its po­si­tion in the mar­ket place.”

Even given the worst-case sce­nario, Treur­nicht ex­pects Tiger Brands to see the cri­sis through. He says it could even lead the group to re­fo­cus, some­thing it has been do­ing to a de­gree since its costly mis­takes in Nige­ria, which it left at the end of 2015.

Treur­nicht has ex­pressed some doubt about the ten­ure of CEO Lawrence MacDougall, how­ever, say­ing his po­si­tion is vul­ner­a­ble.

Clark says the En­ter­prise meat di­vi­sion makes up about 8% of the group’s profit, and it has in­di­cated it has 15% of the polony mar­ket and just un­der 20% of the vi­enna mar­ket in SA. “Quite a key di­vi­sion is in a sub­op­ti­mal po­si­tion and needs to re­build its brand image. This will have an im­pact for the next two to three years.”

En­ter­prise could still sur­vive if the brand were repo­si­tioned, says Clark, but there will have to be sig­nif­i­cant mar­ket­ing costs and price cuts to per­suade cus­tomers.

En­ter­prise’s loss is the Eskort co-op­er­a­tive and RCL Foods’ gain, and they will be fight­ing to main­tain mar­ket shares gained at En­ter­prise’s ex­pense. RCL, which owns Rain­bow chicken, im­me­di­ately re­called prod­ucts when the pres­ence of listeria was sus­pected, and tem­po­rar­ily closed its Wol­we­hoek polony plant. It says the costs to date are R75m for the re­call and sus­pen­sion of pro­duc­tion and R20m/month for the lost con­tri­bu­tion of polony prod­ucts as well as the knock-on ef­fect on the rest of its pro­cessed meats and other chicken prod­ucts.

Treur­nicht says he will award RCL “five out of five” for the way it han­dled the cri­sis.

“It shut down im­me­di­ately and has worked hard in try­ing to cre­ate aware­ness and to do the right thing — an at­ti­tude Tiger Brands should have shown,” he says.

Tiger Brands may ex­pe­ri­ence fur­ther dam­age to its rep­u­ta­tion if con­sumer dis­trust spills over onto its other prod­ucts, which are ex­ten­sive and in­clude ev­ery­day house­hold prod­ucts such as Al­bany, Koo, Ace and Pu­rity.

“The ques­tion is whether other prod­ucts will be af­fected, so it has a tough and lengthy [ad­just­ment] pe­riod ahead — I

don’t ex­pect this to dis­ap­pear in the next few years. Five years from now [the group] may be back on its feet,” Treur­nicht says.

Tiger Brands will sur­vive the de­ba­cle, but its han­dling of the sit­u­a­tion and loss of good rep­u­ta­tion will prey on it for years to come.

Those with long mem­o­ries might re­call how for­mer Pick n Pay CEO Sean Summers took de­ci­sive con­trol in 2003 to han­dle an ex­tor­tion plot and pos­si­ble poi­son­ing of food items. It was de­scribed at the time as a text­book case of how to man­age a cri­sis.

Tiger Brands man­age­ment should have read such a text­book. It cer­tainly should have read about US med­i­cal brand Tylenol’s han­dling of a cyanide poi­son­ing cri­sis and its US$100m (in 1982 prices) global re­call, about which there are many case stud­ies.

Tiger Brands should also have learnt lessons from its own un­suc­cess­ful foray into Nige­ria, a mi­nor event rel­a­tive to the lis­te­rio­sis cri­sis, but nev­er­the­less an im­por­tant learn­ing op­por­tu­nity about how to deal with bad news.

Asked if the cri­sis was han­dled cor­rectly and what the ex­tent of the rep­u­ta­tional dam­age was, Naicker says the pri­or­ity “has been to en­sure the safety and health of con­sumers, and we worked con­sis­tently to en­sure that the re­call was man­aged thor­oughly and at pace”. The com­pany is “leav­ing no stone un­turned”, lead­ing to it “vir­tu­ally de­con­struct­ing [its] fac­to­ries and equip­ment”.

Naicker gives a very care­fully worded re­sponse to a ques­tion about the hu­man cost of the out­break. “We ac­knowl­edge that any loss of life is tragic. We are deeply sorry and of­fer our sin­cere con­do­lences to those peo­ple who have been af­fected by the lis­te­rio­sis out­break in SA. We com­mit to man­age any valid claims brought against us with hon­esty and in­tegrity, and in a struc­tured way.”

How­ever, Naicker be­lieves the com­pany “com­mu­ni­cated openly, frankly and with ur­gency with all [its] stake­hold­ers from the out­set, in ad­di­tion to furnishing Sens an­nounce­ments to the mar­ket”. She says the group’s board “is con­sid­er­ing a num­ber of ini­tia­tives aimed at re­build­ing trust”.

Re­build­ing cus­tomers’ trust will prob­a­bly de­pend on the ex­tent to which they know of its many other prod­ucts and whether they will choose to stay away from th­ese.

The items’ ubiq­uity on SA’s shelves is likely to shield the com­pany in part, as many peo­ple would strug­gle to iden­tify which prod­ucts come from the group.

But Tiger Brands should not un­der­es­ti­mate the ef­fect of bad news on in­vestors, who are in­creas­ingly ex­pect­ing only best prac­tice.

The Stein­hoff de­ba­cle sounded a strong warn­ing to in­vestors that com­pa­nies need to be held to the high­est stan­dards or the re­sults can be crip­pling for their in­vest­ments. Sim­i­lar lessons have been learnt this year from Face­book.

Since the hous­ing bub­ble and global sell­off, in­vestors are in­creas­ingly seek­ing in­vest­ments in com­pa­nies that are prin­ci­pled and trans­par­ent, and have their eyes on the ball.

This is not to say Tiger Brands isn’t. That it did not pick up listeria may not mean it isn’t an oth­er­wise well-run and prin­ci­pled busi­ness.

But that doesn’t change the fact that miss­ing the con­tam­i­na­tion was just un­ac­cept­able and the re­sults dev­as­tat­ing.

Time will tell if it will learn from its mis­takes.

Stein­hoff does not pro­vide a good ex­am­ple. Its di­rec­tors have been eva­sive, they have dragged out in­ves­ti­ga­tions and the re­fil­ing of fi­nan­cial in­for­ma­tion, and seem to feel they are en­ti­tled to big bonuses de­spite their fail­ures of man­age­ment and over­sight.

Pic­ture: 123RF — MON­TI­CELLO

RCL, which owns Rain­bow chicken, im­me­di­ately re­called prod­ucts when the pres­ence of listeria was sus­pected, and tem­po­rar­ily closed its Wol­we­hoek polony plant.


Cus­tomers queue to re­turn meat from the En­ter­prise Fac­tory store in Ger­mis­ton, east of Jo­han­nes­burg, af­ter it was found that the re­cent out­break of lis­te­rio­sis was traced to a En­ter­prise Foods fa­cil­ity in Polok­wane.

Yum Yum peanut but­ter is one of RCL’s food brands.

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