Packaging companies under Covid pressure
Nampak sees worse ahead as consumers tighten their belts
● JSE-listed Nampak is bracing for an exceptionally difficult economic environment in the next few months.
The diversified packaging group says that, even with the move to level 3 restrictions, South African consumers are going to be holding back —and this will affect even essential goods.
In an interview with Business Times following the release of Nampak’s results for the six months ended March, CEO Erik Smuts said on Friday that the current economic conditions are the worst he has ever experienced.
The Covid-19 pandemic will “from an economic point of view be probably the biggest disruption our generation will ever go through”.
The packaging industry is regarded as a bellwether for the economy, with demand for packaging a reliable indicator of consumer demand. Nampak supplies packaging to the food manufacturing and dairy industry, and makes cans for the alcohol and cooldrink sectors.
During levels 4 and 5 of the lockdown, Nampak saw a more than 50% drop in the group’s trading levels compared with the same period last year.
“Even [for] products we are allowed to sell — on the nonalcoholic side — consumer demand is down. In some products, such as food cans, there has been an increase in demand, but the bulk of our products, even essential goods, were down more than 50% and some products even more than 90%,” he said.
“Because consumers are not out there in the shops and the streets, consumption has gone down. Retailers are sitting with high stock levels and until they reduce those stock levels, they are not going to place new orders, and that will have a severe knock-on consequence throughout the supply chain.”
Smuts said the group’s trading results show that even before Covid19 the South African economy and others Nampak operates in were already weak.
The group is worried about an increased level of unemployment and its effects on spending.
“Even under level 3, once we get out of hard lockdown, even alcohol products are not just going to jump back.”
The consumption of alcohol is associated with social gatherings and as these are still not allowed, demand is expected to be down, said Smuts.
“Second, people’s disposable income is going to be severely constrained. A lot of people had no income during the last two months.”
For those who are still earning, “most companies implemented salary cuts, and a lot of industries will just never open up again and there will be a lot of job losses”, Smuts said. “The overall demand is going to be slow to recover and a lot of this will be due to consumer confidence. A lot of people are very worried about the future and will hold onto their cash as much as possible.”
The weak economy before the lockdown and the impact of the lockdown are also reflected in Nampak’s market capitalisation on the JSE, which, at just under a R1bn, is a fraction of the more than R5bn it was six months ago.
The group’s interim results show that revenue from continuing operations is down 17% to R6.5bn, and trading profit has dropped 39% to R633m.
Another JSE-listed packaging group, Transpaco, which supplies the pharmaceutical and food sectors, among others, says the lockdown restrictions under level 5 affected it too.
“All of our businesses were able to continue operating — albeit at much reduced levels because the apparel industry was not open, the transport, building and wine industries were not open,” said CEO Phil Abelheim.
Abelheim said during the hard lockdown, only half of any given factory was allowed to be open, to provide carrier bags for grocery retailers. The other half, which would have served clothing retailers, was closed.
“We didn’t reach our budgets.”
However, “we still managed to do a sizeable amount of turnover during the lockdown because we’re very involved in the pharmaceutical and food industry supply chains,” said Abelheim.
About 55% to 60% of the group’s operations were running in April.
The move to level 3 from tomorrow should open up most of the group’s operations, with its May sales already close to 75% of what is ordinarily expected.
“We are very happy with the way May is tracking at the moment,” said Abelheim.
“With more of the economy opening up in June, hopefully we will be close to our expectations.”
As for the months ahead, “we have such a variety of businesses. In our printed pharmaceutical box business we’ve just installed additional equipment and our order book is pretty full.
“In our general packaging distribution businesses, however, we deliver as we get orders — it’s difficult to say what kind of lead time we have because of all the different businesses we are servicing,” said Abelheim.
“Transpaco has a wide spread of activities so we can hedge one against the other. I think Transpaco will be back to normal in two to four months.”