The pressure on the South African consumer and the lingering effects of the drought are making life difficult for food producers, sparking an intense battle for market share.
Cassie Treurnicht, an analyst at Gryphon Asset Management, said all three major food producers - Tiger Brands, Rhodes Food and Pioneer Foods - were feeling the effects of consumer strain amid low economic growth.
While consumer inflation slowed to 5.1% in June from 5.4% in May, shoppers remain cash-strapped.
The problem is partly due to the fall in the maize price, which is likely to remain around current levels as South Africa expects its biggest maize crop on record following improved weather conditions. The harvest is predicted to come in at 15.97 million metric tons this season.
Fanie Brink, an independent agricultural economist, said the estimated crop had already caused the spot price of maize to plummet to R1,811 a ton for white maize from more than R5,000 a ton in early 2016.
Brink said the drop had already affected the consumer price index and he did not expect the index to slow much more in the coming months.
Treurnicht said it was very difficult for food producers to increase margins on the selling side in view of pressure from retailers to keep prices low.
He said all three companies had been affected by maize-price hedging. But investors were pricing in the environmental constraints that producers were facing and waiting for the cycle to run its course.
The share price of two of the producers has fallen since the start of the year. In the case of Tiger Brands, the share price has risen by 2%, but at Pioneer and Rhodes it has fallen by 8% and 14% respectively.
Treurnicht said conditions in the retail space would remain tough for the next six months.
A report by JP Morgan on Pioneer Foods released earlier this month identified competition issues in key markets, along with the drought and high commodity exposure, as potential risks for the group.
The report said Pioneer had lost a certain amount of pricing power in its beverage division, which includes Ceres and Liqui-Fruit juice brands. This was partly due to the reinvigoration of Tiger Brands, which makes Energade, Oros, Hall's and Rose's.
Although Tiger Brands was in a better position, the environment remained tough and the company was not immune to the pressures other food producers were experiencing, said Treurnicht.
"If the market is booming, it's very easy to rectify things, but in a situation like this it's going to be a little harder."
He said Pioneer and Rhodes had taken advantage of Tiger Brands' focus on the rest of Africa by launching new product lines in South Africa.
Pioneer has undergone considerable restructuring over the past few years in order to move the group's portfolio from mainly a commodities business to a more focused and fast-moving consumer goods company.
The group has moved out of low-margin business like Moir's biscuits and Pepsi while acquiring good enterprises such as Nigerian-bread business Food Concepts Pioneer, UK fruit-snack business Stream Foods, South African food concern Futurelife and Kenyan cereal manufacturer Weetabix East Africa.
These moves have paid off for the group, bringing considerable growth in the 2016 financial year compared with 2012. Pioneer's share price has risen 144% since the beginning of 2012.
Over the same period, Rhodes's share price has risen 91% and Tiger Brands has seen an increase of 58%.
However, the JP Morgan report said there had been a reversal of positive trends, and the financial results for the first half, to end- March, were not favourable for Pioneer. While the company's revenue was up by 2%, its adjusted operating profit declined from 12% to 7%.
When Pioneer's results were released in May, CEO Phil Roux said an unfavourable maize procurement position taken in 2016 was the main detractor in the interim results.
Roux told Business Times that Pioneer had had an "anomalous" year. It had been affected by several non-recurring problems such as the maize hedge and a crop failure in raisins, along with currency issues. However, Pioneer was expecting a much better performance in 2018.
South Africa's maize production was not the only crop that was hit during adverse weather last year.
Raisin production was also affected.
Dappie Smit, general manager of Dried Fruit Technical Services, said that because raisin grapes were grown in one area - mainly along the Orange River in the Northern Cape - they were vulnerable to weather.
Smit said that last year there had been unseasonable rain during the dry season. This had led to many growers taking their crops to wineries instead of leaving the grapes to dry. He said that if there was too much rain, there was a danger of the grapes rotting, which was why farmers sold to wineries.
He said last year's crop was 48,000 metric tons, about 12,000 tons short of the usual production.
The current year's crop was expected to be above average, at about 60,000 metric tons.
— Raisins recover after a bad spell
The drop in the maize price will be good for the group in the long run, especially if it remains low. This would lower input costs, but other issue remain.
The JP Morgan report indicated that competition in local beverages had intensified, with major export markets showing no signs of recovery.
Pioneer made a strategic decision to protect margins in the domestic beverages business in view of fruit concentrate costing more. This was at a time when Rhodes was entering the market with aggressive price points. JP Morgan's report said this had resulted in significant volume loss for Pioneer.
The report concluded that pressure from the high cost of fruit concentrate could decrease slightly owing to the rand's relative appreciation against the dollar.
Another issue is Tiger Brands' shift back to its South African operations after scaling down business in the rest of Africa following certain investments going south. This is likely to result in increased competition in categories where there is product overlap, such as in bread, maize, juice concentrates and various other grocery products.
Orin Tambo, a financial analyst at Intellidex, said Pioneer was in a better place now than six months ago.
The biggest factor likely to benefit the group was its grocery product division, which still showed good growth prospects.
Pioneer products include cereals Weet-Bix and ProNutro, and Safari dried fruits.
Tambo said the group's volumes would be flat owing to economic conditions but that margins could increase after investments in production efficiencies.
Tiger Brands has long invested in its brands, which include All Gold tomato sauce, Koo tinned foods and Black Cat peanut butter. This has given the company a competitive edge over Pioneer, which is catching up.
"Pioneer has to put money into its brands. The visibility of the product has improved compared to a few years ago," Tambo said.
Pioneer also has to deal with considerable pressure on consumers in a period of weak economic growth.
At the same time, its export business remains under pressure owing to troubled African markets such as Ghana, Mozambique and Zimbabwe, which are unlikely to improve.
Should the prospects improve for South African consumers, a decrease of competitor intensity is likely to follow.
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