Tiger Brands that has been around for more than a century. The past few have been punctuated by scandal, product recalls and the deadly listeriosis outbreak. That the iconic brand has been able to absorb those negatives and still come out looking reasonably good is a mark of its resilience.
Being a food producer in SA, where demand is predominantly for commodity-type, low-margin food isn’t not easy, yet Tiger has managed to harness efficiency and innovation in sustaining its profit margins. Costs have soared — notably diesel used in generators when load-shedding affects the group’s manufacturing facilities.
The year to September 2022 was characterised by a noticeable recovery in the second half. Group revenue rose by 10% to R34bn, operating income by 53% to R3.4bn and headline earnings per share (HEPS) rose by 51% 1,702c. A total dividend of 973c a share was declared.
For many years, Tiger Brands has deliberately avoided getting involved in distributor own brands (DOBs), often referred to as private label or house brands. The reason was simple: house brands tend to be cheaper than branded products and if they become popular enough, they can cannibalise branded product sales. However, DOBs are undoubtedly the future of retailing, especially in countries such as SA where the incidence of DOBs is relatively low. In a typical SA supermarket they account for 15%-20% of dry groceries on the shelves. This compares with 30%-50% penetration in countries such as the UK and US.
About two years ago, Tiger abandoned its rigid, doctrinaire approach and decided to enter the DOB market in a highly specific fashion and only where excess capacity existed. Tiger is now looking at a softly, softly approach to DOB manufacture, characterised by a category-by-category degree of pragmatism and flexibility.
Recent examples include a relationship with Shoprite whereby Tiger manufactures a 600g loaf of bread at a certain price point. The conditions for such a partnership with Shoprite were ideal: Tiger facility is the number three player, and had significant excess capacity. There are DOBs for some of Tiger’s flour capacity in the Eastern Cape and in some of the consumer space, for example in snacks & treats.
Scaling up
CEO Noel Doyle said that besides internal resistance to DOBs previous conversations with retailers had often seen them question Tiger’s intent. Still, Doyle reckons there has been a major thaw in that respect.
When making big investment decisions being able to make an informed choice whether to gear up to volume in the early years in a facility is critical, and can often the deciding factor. Tiger is looking at a major investment in the pasta space and a factor that would swing it or at least make it a lot more feasible is if Tiger can secure at least a medium-term DOB commitment with a major retailer.
Venturing into DOBs isn’t necessarily going to make a huge difference to a branded products company such as Tiger at first, but if it mops up excess capacity, especially in a moribund economy, it certainly has a place.
These were excellent results from Tiger and more of the same is required if it wants to return to blue-chip status. The share price is more than 50% below its all-time high of R427 reached in early 2018 and its PE ratio, at 11.5x, seems reasonable.
• Gilmour is an investment analyst.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.