Founder: Turnaround Talk
If one has to interrogate the shopping carts of most South Africans, a can of Koo or another product from Tiger Brands will feature prominently.
However, this has changed significantly over the past year. A volatile economic outlook coupled with rising inflation and persistent loadshedding has created a retail environment that is significantly risk-based.
Tiger Brands CEO Noel Doyle says the consumer environment is the worst he has seen in 25 years. He warns that consumers must brace themselves for continuing high food price inflation while the company is preparing for the inevitability of Stage 8 load shedding.
Food price jump
Doyle told News24 that price inflation could be “slightly over or slightly under” 10% and that this would likely remain the case for the remainder of this year and even into the first quarter of 2024.
The biggest culprit preventing any major relief filtering through to consumers was the weak rand, which at almost R20 to the dollar is pushing up the cost of imported raw materials.
CFO Deepa Sita told News24 that the effect of the weak rand was also being seen in the cost packaging.
“Even if you are dealing with local packaging suppliers, their raw materials are being imported as well.”
The News24 article adds that, as far Tiger’s projections were concerned for the next six months, even with double-digit price inflation, Doyle said he did not think “we can fully recover all of our costs”.
Of concern to Doyle was the pressure consumers were already under, saying that the market had already seen about two years of “probably average mid-teens food price inflation” when the average South African was “maybe taking home 5% or 6% more each year”.
At the same interest rates have moved from 7.75% last year this time to almost 12%.
“I think in terms of pressure on consumer spend it is a perfect storm.”
The article points out that the pressure was being felt even in higher income brackets as consumers forked out increasing sums of money for backup power to mitigate load shedding.
CEO: Tiger Brands
Load shedding concerns
The News24 article points out that Doyle said the group had developed contingency plans to deal with load shedding up to Stage 10, adding that at this level of power interruptions, it would effectively cost the group about R2.5 million a day to keep the lights on.
“If every single facility is running that day and we are on that stage for the whole day, that is what it costs,” he said.
Tiger also flagged in its results that rampant load-shedding costs had contributed to gross margins declining to 27% from 29.2% last year.
The article adds that Doyle said Stage 8 load shedding was “definitely going to happen” this year according to the guidance it had received through industry body engagements with Eskom management and government ministers.
But Doyle said based on previous experiences, Tiger believed it was wiser to prepare for an additional two stages of load shedding.
“We would be foolish not to.”
And while there was a “low probability” of a total grid collapse, Tiger also had plans to ensure that it could carry “sufficient stock to go through a (hard) startup period”.
“We obviously have plans as to how we will start up and make sure we don’t damage our equipment as part of the startup process.”
The News24 article points out that the fallout around load shedding was also affecting the availability of certain products for producers and retailers, with Doyle saying, for example, that one of its suppliers had not been able to supply Tiger with vinegar because of challenges around load shedding. The supplier had put in generating capacity that was not “functioning optimally”, which resulted in Tiger sending its engineering team to help.
Sita told News24 load shedding also affected the functioning of South African ports, which could also result in backlogs and stock shortages.
Rice issues
The News24 article points out that, as far as its results were concerned, Tiger also flagged a problem with its rice business, saying the profitability of its ‘other grains’ division had been “adversely impacted” by it.
It said that despite strong market share growth, operating income had “declined significantly due to poor price/volume management” in that division.
“This is being rectified through revised levels of promotional activity and pricing which, should result in improved profitability in the second half.”
Doyle told News24 the problem lay with the levels of discounts given to its customers being higher than we expected, adding “it is quite clear there was non-compliance with policy at a senior level within the rice category”.
Image By: Moneyweb
He said investigations into the matter were ongoing.
The News24 article adds that All Weather Capital senior equity analyst Cobus Cilliers said a few of the company’s divisions, such as rice, did “significantly worse” than previously.
At the same time, the company’s grocery business also highlighted a consumer under increasing pressure.
“The fact that you have a branded goods company that is telling you that price elasticities are going up, that people are downtrading and more value conscious, signals challenging times for Tiger Brands,” he said.
Of particular concern to Cilliers was the declining gross profit margin, as decreasing margins made efforts to improve efficiencies in order to mitigate the situation more difficult.
The retail storm has arrived
This indicates that discretionary spending will be sacristan to South Africans and that retailers must take a conservative view regarding the growth of specific brands. This news comes from Pepkor announcing a significant loss projection mainly driven by consumers pointing out that spending needs to be prioritised on essential items.
The retail storm that we predicted at the beginning of the year has well and truly arrived.
