AVI and City Lodge — The power of coffee (and good management)

What do AVI and City Lodge have in common? These days, more than you might think.

AVI is primarily a consumer brands business, although it plays further up the value chain. Its primary focus is on food and beverage brands. Things are not easy for the company, as the South African consumer environment is a tough place. It also has some legacy businesses that aren’t a good fit with the group, so some cleaning up is needed there.

Over at City Lodge, management has been actively executing a food and beverage strategy designed to improve margins and asset utilisation at the hotels. Aside from attracting people to stay at the hotels, this strategy also encourages people to meet there for meetings or social occasions. Pursuing a higher “occupancy rate” on the ground floor at those restaurant tables is a winning strategy, as the actual occupancy rate from the second floor up can be much harder to get right.

Overall, I think that both management teams have done a solid job with the cards they’ve been dealt. The share price over the past year tells a different story, with AVI down 6% and City Lodge down 13% as the shine came off the GNU-inspired SA Inc rally.

Do they deserve better? Perhaps.

City Lodge — Signs of (very) green shoots

City Lodge just released its earnings for the year ended June 2025. It was a tough time for the business, with the occupancy rate dropping by 200 basis points to 56%. It managed to get revenue growth into the green at least, up 3% due to pricing increases. Expenses increased by 4% and headline earnings per share (Heps) dipped just 0.3% in the end. The dividend was flat for the year.

If “treading water” were a set of accounts, this is what it would look like. But there are two particularly important underlying stories that the market arguably isn’t giving enough credit to.

The first is the momentum during that period. Occupancy in the first half was down 400 basis points, so a recovery to a drop of 200 basis points for the year tells you that the second half was a lot better than the first half. This momentum has been carried forward beautifully into the new financial year, with occupancy up 400 basis points year-on-year in July and August 2025. Interesting.

The second is the continued progress in the food and beverage business, a segment that grew revenue by 8% for the year and which now accounts for 20% of group revenue (up from 19% in the prior year). Again, the momentum into the new financial year is exciting, with mid-teen growth in each of July and August 2025.

It feels as though the business is making real progress now, yet the share price has hardly responded. Market apathy when faced with clearly stronger numbers is an indication that investors should keep a close eye on this one for signs of an upward move.

AVI — Put the kettle on

AVI also released results for the year ended June and they tell a story of a difficult consumer environment, with revenue up just 1% for the year. Based on the mix effect of the various segments and management’s overall ability to keep things chugging along in a tepid environment, gross profit margin expanded by 240 basis points. If you combine this with excellent operating cost discipline, you get operating profit growth of 7.8% and Heps growth of 6.1%. The dividend also increased by 6.1%. Achieving real growth in earnings (i.e. greater than inflation) off such little revenue growth is a proper achievement.

If you dig into the numbers, it’s the Entyce Beverages business that really pulled the company into the green in the past year. It includes a number of key tea and coffee brands, with products you’ll find in both retail and hospitality settings. From Frisco to Freshpak, there’s something for everyone.

AVI revenue growth across divisions

Snackworks (Bakers biscuits, among other brands) and I&J (seafood) also contributed positively to growth, particularly in the second half of the year. This is important, as Entyce Beverages cooled off in the second half in terms of growth, so it helped for other divisions to accelerate. Such is the benefit of diversification.

Diversification for the sake of diversification isn’t great though. The personal care segment as well as footwear and apparel at AVI are hurting the business, with both areas suffering a year-on-year decline in operating profit in both the first and second half of the year. There were some good reasons for this (like supply chain disruptions), but it does seem like an odd fit for AVI to own discretionary consumer businesses with little in the way of a moat in the same group as great consumer brands in the food and beverages aisles.

The market tends to get frustrated by groups that have either odd exposures or have parts of the group that are ugly ducklings compared to the rest. It’s true that these things ebb and flow, but sometimes a business just clearly owns something that it shouldn’t. It feels like AVI is one of those situations, although the coming year with interest rate cuts (hopefully) and the end of the supply chain issues is their opportunity to shine. If the business has another disappointing year in those segments, then it’s time to take action. DM