Tiger Brands-Pioneer consumer pain spreads

Tiger CEO Peter Matlare and Pioneer CEO Andre Hanekom stress that conditions are tough. "There is aggressive discounting by competitors," says Matlare. Hanekom says the company's recent quarter [to September] was terrible. "We are also facing big input cost increases." A major concern, he adds, is the key maize price, now at a record high and unlikely to ease until well into 2012.

Also of concern is that a downtrend in the fast-moving consumer goods sector seems to be gaining pace. Data from Nielsen, supplied by Tiger, shows that volumes in this sector relating to the products Tiger handles - and by implication Pioneer also - fell by 0.4% in the 12 months to September. In value terms fast-moving consumer goods sales were up 3.2%. In the six months to September volumes fell 2.4% and sales value rose 1.9%, while in the three months to September volumes fell 4.5% and sales value rose a mere 0.3%.

Against this background Matlare has reason to put a positive spin on Tiger's results. He points to a swing from a 2% fall in HEPS in the first half of the financial year to March. "Performance by groceries and grains other than wheat [primarily rice] was solid," he says.

Specifically, operating profit from groceries was up 17% to R524m and operating profit from other grains up 16% to R364m. But showings by other SA units, including milling, baking, snacks, treats, meats and home and personal care, were weak, with their total operating profit down 4% at R2,15bn.

Saving the day were Tiger's non-SA operations. Exports lifted sales from R569m to R2,38bn and operating profit from R183m to R209bn. Key factors were a lower loss (R42m) from fruit exports and consolidation of recently acquired food exporter Davita for four months.

Little came to the aid of Pioneer, which was hit by an agreement with the competition commission to cut its gross margin on bread. This lowered its Sasko unit's operating profit by R124m to R857m. The combined operating profit of the firm's other units, Bokomo (cereals and groceries), Ceres (fruit juice) and agris (eggs, chickens and animal feeds) fell by R75m to R458m.

Though rising food inflation could be expected to provide a boost to Tiger and Pioneer in the current financial year, this appears uncertain. "We will have to look carefully at what we pass on to consumers," says Matlare, who appears to have defending the firm's market share uppermost in his mind.

Making no promises, Hanekom says: "It's hard to say if the worst is over. High maize prices mean we're in for another tough few months, and wheat product sales are falling."

Also of concern is that consumers looking for value are driving up demand for retailers' house brands at the expense of higher-priced ones. Pick n Pay's 15% rise in house brand sales in the six months to August, up from an 11% rise a year earlier, is an indication of this.

It adds up to pressure on companies such as Tiger and Pioneer to defend their premium brands. As a sign of the times, Tiger, which has resisted producing house brands, has done an about-turn. "We will evaluate house brands on a case-by-case basis," says Matlare.

In a market where cost pressure is high, volumes are falling and competition is intense, food producers' defensive status must be in question. Investors bent on food sector exposure should strongly consider going where pricing power is on more solid ground, namely the food retailers.

Source: Financial Mail