Food manufacturers going hungry
Tough times see consumers becoming picky shoppers with an eye on ‘specials’
● Food manufacturers are feeling the impact of shrinking basket sizes as consumers shop around for pocket-friendly deals.
This week, Tiger Brands, Pioneer Foods and Rhodes Food Group results showed just how tough it is out there for companies that are facing not only rising input costs, such as fuel prices and electricity, but also consumers who are not easy to win over.
“Generally, shoppers are shopping at least five times a month, so the days of the big once-a-month shop are a very distant memory. They are also buying less and they are spending less than they were over a similar period in the previous year,” said Lawrence MacDougall, Tiger Brands CEO, on Wednesday at the group’s interim results presentation for the year ended March.
MacDougall said 65% of shoppers who had abandoned the big shop compared prices across brands, 25% were stocking up on premium brands on promotion and 70% were shopping for promotional packs with more value.
For the promotions, 40% of shoppers have turned to newspapers where retailers advertise when and where the best deals are.
“So they [customers] are not only doing one shop, they are shopping between retailers to make sure that the overall basket that they get is at the best possible price. So 80% of the goods sold are on promotion and that’s where you are getting the dilution in margin, not only from manufacturers but from retailers as well,” he said.
This comes as the unemployment rate has risen and fuel prices remain stubbornly high, leaving consumers with no option but to curb spending.
This presents a tricky balancing act for SA’s biggest food manufacturer, said MacDougall, because off-promotion sales and spending during the month were how retailers could sell key value items at the normal price and at lower margins on promotion at the end of the month.
He cited research by market research company Nielsen on shopper behaviour that showed consumers were spending more on essentials like bread, toilet paper, soya-based products, canned pilchards and soap.
For Tiger Brands, shoppers spent the most on personal care products such as bread, body-care brands Ingrams, Status and No Hair, as well as Purity baby products, cereals such as Morvite and Jungle Oats, Golden Cloud flour and seasoning brand Benny.
The company’s profit remained almost flat, increasing by just 1% to more than R1.4bn, while its share price has declined 29% in the past year.
Cheap pasta imports hurt both Tiger Brands and competitor Pioneer Foods.
Pioneer Foods CEO Tertius Carstens said the company was hit hard by pasta imports.
“Pasta is brought in from the EU on a duty-free basis whereas local producers are exposed to a wheat import duty [increasing the cost of wheat flour, which is the raw material for pasta].
“Local pasta producers effectively pay more for wheat flour than the EU competitors given this regulatory disadvantage. Per capita consumption in SA is still relatively low and the expectation is for the category to continue to grow incrementally,” he said.
Pioneer Foods customers also stuck to essentials, with the bread and rice segments performing well.
Carstens said the performance of these segments reflected availability and improved consumer choice.
But overall, the company performed poorly, with a 17.7% decline in profit.
On Monday, Pioneer Foods’ share price crashed 15% following the release of the results and has declined by more than 30% in the past year.
The far smaller Rhodes Food Group, which produces fresh and frozen food and long-life meals, also posted weak results, with profit almost flat at R80.2m from R80.9m for the six months to March.
Rhodes Food’s share price has fallen almost 6% in the past year.
But SA’s biggest producer of canned pineapple grew market share in that category and also with its tinned meat brand Bull Brand.
Bull Brand’s market share rose to 80% from 76%.
Ian Cruickshanks, chief economist at the South African Institute of Race Relations, said food companies were trading in a difficult environment, with shrinking consumer spending.
“The food sector used to be looked on as a safe sector to be [invested] in; not now,” he said.
Stats SA delivered bittersweet news about easing consumer prices this week. It is good to know that steak is nearly 5% cheaper than a year ago and that inflation on stewing beef — a staple for hearty stews in winter — has slowed to 5.4% since April last year.
But how much comfort is that for consumers who have, for some time, been juggling financial priorities to keep their heads above water?
The latest consumer price index, published on Wednesday, notes sizeable increases only on bacon, biltong and sausages.
Overall annual food inflation continued to moderate to 2.3% in April, though the prices of vegetables, fruit, bread and cereals, fish, sweets and fuel continued to accelerate.
The unabated disinflation — a decline in the rate of inflation — coupled with weak demand has anchored inflation within the Reserve Bank’s target range of 3%-6% over the past two years. As a result, economists continue to call on the Bank’s monetary policy committee (MPC) to consider cutting interest rates. This would give consumers much-needed breathing room and hopefully stimulate spending, which consumer-facing companies are desperate for.
The central bank may itself get some breathing space if the US cuts interest rates later this year if inflation in that country continues to languish. The US Federal Reserve targets 2% inflation over the long term. A president of one of the 12 reserve banks that constitute the US central bank
this week suggested that US interest rates may be cut later this year. That country’s benchmark inflation rate rose to 2% in April from 1.9% the month before.
Lesetja Kganyago, SA’ s Reserve Bank governor, and his emerging-market peers may view such a development with relief as it reduces the pressure to take action in their jurisdictions as the risk of liquidity gravitating away from emerging markets towards safe havens, in particular the dollar, wanes.
But they may also take a sceptical view of forecasts of lower US interest rates amid the brewing trade war between the US and China, which has made markets jittery and created a volatile environment for currencies.
The US Federal open market committee, the equivalent of our MPC, meets next month, and then the trajectory of US interest rates will be clearer. With regard to SA, however, economists remain divided over the direction of interest rates.
A UK research firm, Capital Economics, has a contrarian view and is forecasting a cut spurred by downward inflation well into 2019 and weak economic growth.
The Reserve Bank expects inflation, which slowed to 4.4% in April, to average 4.5% this year and rise next year.
This would be partly due to high administered prices, specifically electricity. So it is pointless to cut rates only to raise them again soon.
Kganyago has always maintained that he is not an inflation nutter, but circumstances outside his control highlight how powerless even he is to sweeten this sour economy.
Economists, however, remain divided over the direction of interest rates in SA