Consumers are shunning premium food brands in favour of house brands and cheaper alternatives, as unemployment and below-inflation salary increases continue to bite.
Tiger Brands [JSE:TBS], one of the country’s largest packaged food producers, told investors during a conference call on Wednesday that it had lost market share to house brands and "second tier" competitors in the six months ending in March 2020.
The company, which published a trading statement ahead of the investors’ call, warned that its headline earnings per share were expected to be between 30% and 37% lower in the first half of its 2020 financial year compared to the same period in 2019.
The culprits were declining sales volumes of pasta, rice, baked goods and groceries, as well as a legal dispute with a former distributor in Nigeria, which resulted in virtually no sales in that country during the six months to March 2020.
The decline in sales volumes in the local market, as well as price pressures and rising costs of raw materials Tiger Brands uses to produce some of its food items, shone a spotlight on how difficult it has become to raise profits, not just for retailers, but for the entire value chain - including farmers and food producers.
New Tiger Brands CEO, Noel Doyle, said food prices would have to rise modestly to improve the company’s performance, but that didn’t seem possible for most food items at this stage.
"We did make an attempt to move prices upward in this quarter and it was an attempt that failed pretty dismally," said Doyle in relation to pasta prices.
Given consumers’ heightened price sensitivity, he said he expects only a rise in bread prices, as there haven’t been any increases in the past two years. For other staples like rice and pasta, it would be challenging to raise prices without causing further declines in sales volumes. Tiger Brands also experienced challenges in selling non-essentials, like mayonnaise and canned veggies.
Even in bread sales, Tiger Brands - which produces Albany Bread - has seen volumes drop, particularly in the informal sector in Gauteng. Doyle said players who have emerged as winners are those who aggressively pushed volumes to make up for low prices.
"For bread, we haven’t seen any indication of price increases in probably the last two years. There are some indications that the price is starting to move. [But] across the various other categories, we are not banking on year-on-year movement in inflation," said Doyle.