As companies grapple with a surge in commodities, energy, transport and labour costs, the CEO of SA’s largest food producer, Tiger Brands, has warned consumers to brace for double-digit inflation.
“We are going to face a very serious challenge over the next six months ... products like oats flour, maize bread, we [are] probably going to be looking at price increases of between 15% to 20%,” Noel Doyle told Business Day.
“We’ve run out of that cheap wheat that we had bought and we are now replacing it with costs that are 45%-50% more.”
Doyle’s comments came as the centenarian group’s first-half earnings report underscored a deft balancing act facing consumer-facing companies as they seek to protect profit margins without losing customers to competitors.
Doyle said that due to the deployed forward buying strategy by Tiger Brands — whose results showed shrinking margins and volumes — consumers were in the period shielded to a degree from the cost push that ensued immediately after the Russia-Ukraine war started.
But as stock runs out, there will be a dramatic change between first half and second half inflation.
“There is a big challenge that lies ahead for the country as a whole,” he said, adding that consumers are already beginning to feel the pinch and are opting for competitively priced offerings.
The rising costs of living could become a political headache for President Cyril Ramaphosa, whose government knocked R1.50 off a litre of petrol in March to ease pressure on consumers hit by spiralling energy prices in the wake of Russia’s invasion of Ukraine.
Dividend steady
They also threaten to erode the buying power of the R350 social relief of distress grant, which is costing the state R44bn a year, and the extension of which has polarised economists and policymakers.
Tiger Brand’s share price rose 5.29% to R148.15 on Wednesday after the owner of Oros, Koo and All Gold held its dividend steady at R3.20 for its half-year to end-March, despite volume drops. This represents a R594m payout to shareholders.
Tiger ended the period in a net cash position of R318m, from R1.2bn previously, and during the period also spent R676m buying back about 2% of its shares.
Supply chain disruptions and a strike weighed on the group in the first half of its 2022 year, with revenue up 2% to R16.8bn, driven by selling price inflation, while volumes fell 1% and operating margin (the percentage of profit left after expenses have been subtracted) shrunk to 8.9% from 9.6%.
Group operating income was down 5% to R1.49bn. The group’s snacks and treats division was affected by supply challenges due to an eight-week labour disruption in November and December.
Operating income, a measure of operating profit, fell 59% to R55.6m in this division, which includes Jelly Tots and liquorice Allsorts.
Product innovations
The group’s bakeries division, which produces Albany Bread and Tinkies, was also hit by illegal work stoppages in October and November as well as higher fuel costs. Operating income in the group’s milling and baking division fell 42.9% to R272.2m.
Groceries fared better, with operating income up 31% to R290.8m amid solid growth in mayonnaise, tomato sauce and chutney, with Tiger Brands also saying it had benefited from product innovations.
Tiger Brands warned the full effect of the pressure on global supply chains and inflation is being “felt acutely”, further warning that “procurement positions are being exhausted”, referring to the expiration of current agreements on terms of supply.
The company said it will intensify its efforts to reduce costs and minimise selling price increases through its various cost reduction and efficiency initiatives.
Describing the moment as a turning point for the country, the CEO bemoaned that he had never in his 20 years at Tiger witnessed this breadth of inflation and “at the same time had to struggle to get ahold of products”.
“We are in a perfect storm, but we are going to have to ride it out together,” said Doyle.
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