Tiger Brands, more than almost any other JSE organisation, with the arguable exception of Pioneer Foods and the now-defunct construction firms, is highly sensitive to suggestions that it may have benefited from increased prices during the Covid-19 crisis.
As unpalatable as it may be, there is evidence to suggest that food prices have increased over the last two months.
A basket of 38 basic food items has increased by 78% or R249 in two months, says Mervyn Abrahams of the Pietermaritzburg Economic Justice & Dignity Group in KwaZulu-Natal. The group monitors food baskets and food prices in supermarkets and among informal traders.
In a discussion on South Africa’s food system in and beyond the crisis, and hosted by the Institute for Poverty, Land and Agrarian Studies, Abrahams noted that rice had increased by 26%, sugar beans by 18%, brown bread by 14%, oil by 11% and fresh produce by a “massive amount” under lockdown.
This is despite the fact that the Department of Trade and Industry put in place regulations ahead of the hard lockdown to prevent price gouging by food manufacturers and retailers.
“These were proactive and sensible,” says Noel Doyle, Tiger Brands CEO, “and reinforced issues around excessive pricing.”
The DTI, he said, made it clear that price increases could only be justified in the face of massive cost pressures, and only if they did not benefit gross and operating margins.
“We have had slight increases in our price of wheat and rice products since the lock-down began, but we alerted the Competition authorities that this was due to the weaker rand and rise in underlying commodity prices.
“If there are food price increases they are not coming from the big food manufacturers,” he says.
“You understand our history. It is important for us that we are beyond reproach when it comes to price increases.”
Presenting the group’s interim results to 30 March, Doyle warned that the impact of the pandemic would only be felt in the second half of the group’s financial year, and would be ‘dire’.
That said, revenue for the six months to March (before lockdown), hardly shot the lights out, increasing by 2% to R15.7-billion. Group operating income dropped by 29% to R1.1-billion, with operating profit margins declining to 7.0%, impacted by lower volumes, raw material and conversion costs rising ahead of inflation and increased marketing investment.
Headline earnings per share from continuing operations dropped 35% to 501 cents.
Operating conditions are only getting tougher. The company warned that the full-year (to September) could see profits fall by R500-million, impacted by significant cost-push due to rand weakness, global supply chain disruptions and additional costs incurred during the lockdown period.
Unfortunately for consumers, the real impact of legitimate food inflation is still coming and will be felt in the first quarter of the next financial year (Sept-Dec 2020).
“The consumer is not yet fully feeling the impact of commodity increases,” says Doyle. “My next shipload of rice will be 40% more expensive.”
Covid-19 was the last thing that Tiger Brands needed. Having lurched from one crisis to crisis over the past 13 years, the company is a much-diminished version of its former self, with a reputation in tatters and its share price, at R168.55, lower than it was ten years ago.
In addition, several years of disappointing results have resulted in investors losing confidence in management’s ability to execute.
These are things that its CEO, who is virtually a Tiger Brands lifer, and who stepped into the CEO’s shoes from the CFO’s shoes in February when Lawrence MacDougall retired, is determined to change.
“The bread pricing fixing saw us tighten up on governance and the Nigerian investment resulted in better board oversight, but the most traumatic event was Enterprise. That brought an acute awareness of, and sensitivity towards the safety of our people, both staff and consumers,” Doyle told Business Maverick.
Tiger Brands runs through his veins. As an essential supplier, Tiger’s factories have kept on churning out Jungle Oats, Albany bread, Golden Cloud flour, Mrs Balls and All Gold tomato sauce, among others. On more than one occasion the CEO could be found at one or other Gauteng site at 5 am, monitoring the shift change, checking on staff and ensuring safety procedures were being followed.
“My focus is to ensure the ongoing safety of our employees.”
But he will need to do more than that. Disappointing performances were experienced in almost all divisions, from Grains, Groceries and Exports to Value Added Meat Products. Even the normally solid Beverages and Home, Personal Care and Baby disappointed.
“In the short term, we must ensure the availability of our products while building stock levels in the event of potential disruptions to the supply chain while keeping our employees safe.”
Part of this involves supporting small scale wheat and tomato farmers that supply the firm. “We understand their cash flow challenges and will help to preserve these businesses. There are people in our organisation who have wrapped their arms around these enterprises…”
But the bigger picture requires that Tiger becomes “more nimble and entrepreneurial” within its categories. “We have proven good at diagnosis but poor at execution – we must remedy our weak innovation in the way we go to market,” he says.
Cutting costs is also essential, and job losses are a possibility, but only after other avenues have been explored. “I’m lighting a fire. We need to change the ‘it’s other people’s money mindset.”
The company is in the process of implementing a reengineered organisational structure to grow in its categories and has plans to optimise costs.
In addition, the Group’s business portfolio has been assessed and Tiger has exited businesses and categories that do not align with its growth aspirations. This included the closure of Deli Foods – a biscuit factory based in Nigeria, the intention to sell its Value-Added Meat Products business and exploring options for its Deciduous Fruit business which produces canned fruit and fruit purees largely for export markets.
Tiger Brands is blessed in one respect – it has a strong balance sheet, with no debt.
“This may provide us with opportunities. We won’t be buying a $150-million business in Nigeria, but we could buy into product adjacencies that complement our core brands,” he says.
But the board – older, wiser and infinitely more cautious – has elected not to declare an interim dividend as it prioritises cash preservation given the Covid-19 uncertainty. BM