Strategic review

Lawrence Mac Dougall

Chief executive officer's review

The year to 30 September 2018 was an intensely challenging period for our economy, our industry and our group.

Read more about our material matters

 

Lawrence Mac Dougall, Chief executive officer

While I elaborate on the contributing factors below, some of which were identified as material matters, it is important to note that we maintained focus on executing our strategy to create value that underpins a sustainable future for our group.

A combination of external factors made calendar 2018 a very difficult trading environment. The South African economy slipped into recession during the year. While this was still a 'technical' recession at the time of writing, ie two consecutive quarters of negative GDP growth, the Bureau of Economic Research was expecting a return to growth in the third quarter. However, our industry is already reflecting the impact of recessionary conditions on retailers and consumers alike, with the JSE food companies index down 34% for 2018 to end September.

Volatility in the rand exchange rate has exacerbated the situation. While much of this volatility is due to external factors, the impact on the national economy and private sector remains severe and far-reaching.

In addition to the country's lack of meaningful economic growth, consumers are under pressure on a number of fronts: rising inflation, the first hike in value added tax since 1994, record fuel increases and rising utility costs. Combined, these have intensified pressure on consumers' disposable income and heightened social instability — from service-delivery protests to cases of arson (and subsequent looting) of stores for various reasons. Social instability has a pronounced impact on the availability of goods. In our case, on any given day, these protests and social action could make it impossible for our sales teams to service retailers because their routes are closed or inaccessible.

Consumers found some reprieve as food inflation has been well controlled, with deflation in certain categories, such as maize. However, we believe raw material prices have bottomed, which will add to mounting inflationary pressures.

Our industry therefore became even more competitive as manufacturers attempted to find the balance between maintaining volumes and limiting inflation, with a knock-on effect on margins. To bolster profitability and capture market share, retailers capitalised on rand strength to import growing volumes of private label products. We are mitigating this risk through our strategic drive to build on already-strong relationships with our key customers and have disproportionately spent on master and standalone brands to drive brand equity. In addition, we have innovated wisely to meet consumer needs for value, on-the-go lifestyle as well as health and wellness, while our strong pipeline of innovation includes new pack sizes to address affordability. Throughout the review period, we have focused on consistent, clear positioning through advertising, supported by product enhancements that will keep our brands contemporary while adhering to their core promise.

The final external factor was the protracted drought in the Western Cape, which has had a significant impact on the quality and availability of key raw materials such as wheat and fruit. Our facilities coordinated in mitigating the water shortage, working closely with authorities on water allocation, permits for boreholes and ensuring that communities around our facilities were not affected by our water use. Similarly, we worked with industries around us to optimise water efficiency, learning from each other. All the facilities had plans in place for day zero (the forecast day when the Western Cape would have run out of water) to ensure minimal disruption of production.

        Addressing key consumer trends to health, wellness and on-the-go
Health and wellness   Health and wellness   Jungle logo   Jungle logo   Ace logo Albany logo
        Crunchalots   Muesli flavours   Quick cook samp   Bread-A-Betix
On-the-go   On-the-go   Golden cloud logo   Fattis and Monies logo   Fattis and Monies logo   Morvite logo
        Cake-In-A-Mug   Fasta Pasta   Instant Noodles   50g strip pack
Value   Value
(price)
  Benny logo   Albany logo   Tastic logo    
        Benny Chicken   Thick Slice   Soft and absorbing long grain whiter rice/wholegrain long grain brown rice    
Value   Value
(bulk & multi-pack)
  Black Cat logo   All Gold logo   Morvite logo    
        Black Cat – 1kg Tub   All Gold Jam – 1,2kg Tub   Morvite – 500g    

A contributing factor that began as external but rapidly became internal for Tiger Brands in 2018 was the national listeriosis outbreak and resulting health crisis. Listeria monocytogenes is a ubiquitous bacteria worldwide: while commonly associated with food preparation, it also caused several deaths in Australia this year after people ate contaminated melons. The specific ST6 strain, which was not previously included in testing requirements in South Africa, is particularly aggressive, especially for people whose immune systems are compromised by disease or malnutrition. After exhaustive investigation, it became apparent that industry standards needed to be reviewed to be more appropriate for the level of immune deficiency among the majority of the South African population.

This was a significant event in our history, one that affected each of our capitals in different ways and to different extents. Arguably the most important was the social, reputational and financial impact caused by a relatively small component (7% of revenue) of our portfolio. Financially, it had a material impact on our results, disclosed in the detailed financial statements. The social loss of these lives to their families can simply not be quantified.

We have consulted with local and global food-health experts and regulatory authorities in developing controls and standards that will set new industry benchmarks. The collaboration between Tiger Brands and various stakeholders during this outbreak is proof of how important the United Nations Sustainable Development Goals (SDGs) are for us, in this case SDG 17. We will report in more detail on SDGs in future.

The more aggressive standards now in place at our Vamp facilities can be confidently rated as world-class, and are being rolled out across our group. For consumers, our commitment to quality is evident in the 7-step quality check process on every label (www.enterprisefoods.co.za).

By November, the Germiston manufacturing facility and associated supplier had reopened after extensive deep-cleaning, rehabilitation and staff training. Our Polokwane facility will resume production towards the end of 2018, once we have received full regulatory approval. The high standard of food-safety procedures in place before the outbreak is evident in the relatively low capital expenditure required (R68 million) to entrench world-class standards.

Importantly, learnings from the work of internal and external experts have been distributed across the group and shared with relevant stakeholders. In line with our commitment to enhance standards in the industry we have advanced discussions with key stakeholders, including industry bodies and academia, for improved food safety assurance in South Africa. To bolster these efforts, Tiger Brands has partnered with the Stellenbosch University and is the founding member of the Centre for Food Safety. The Centre is a one-of-a-kind applied food science research consortium comprising Stellenbosch University and the food industry. The Centre will provide stakeholders with the opportunity to develop and exchange knowledge, experience, and expertise in food safety, food defence and food processing. Specifically, the Centre for Food Safety aims to provide expert opinion and academic support to the industry, contribute to the knowledge of research in food safety, and participate effectively with Government to ensure that food safety regulations are based on sound scientific evidence. Additionally, the Centre will provide industry research and will educate consumers.

At the time of writing this report, the now-combined class action lawsuit was still awaiting agreement between the parties on the wording of the proposed certification order. Only once this order is granted will the class action commence, beginning with determining the company's liability, and, if liable, establishing the extent of damages due to claimants.

We again express our deep regret for the loss of life and offer our heartfelt condolences to all who have lost a loved one. Tiger Brands has a long heritage in South Africa. The key task ahead is to rebuild trust with every stakeholder through our actions and to manage every facet of this crisis openly and with absolute integrity.

Key strategic objectives

met icon Met partially met icon Partially met not met icon Not met
    Progress
Grow the core and expand into adjacent categories and geographies, while delivering top-tier financial results   not met icon
Deploy an operating model that provides the capabilities needed to deliver on our growth objectives   partially met icon
Build distinctive capabilities required to win with consumers, customers and business partners   partially met icon
Build a world-class integrated supply chain to leverage scale and create fuel for growth   met icon
Invest in our communities and sustainable supply.   met icon

Progress against strategic objectives

Against this background, Tiger Brands produced disappointing results for the period. Despite the challenges, however, we continued to execute our strategy to position our business for the future. We are confident that our strategy remains compelling but, mindful of the current operating environment, we regularly review every strategic element and refine where necessary. Some adjustments were implemented in the review period. In September 2018, the board approved the Africa growth strategy.

This builds on our core competencies and existing markets and is supported by detailed and clear milestones.

Embedding the new operating model has taken longer than anticipated, partly because implementation had only been under way for 10 weeks when news of the Listeria crisis broke. However, capabilities have been enhanced in key disciplines through executive appointments for human resources, growth, strategy, Africa and marketing. Supported by strong teams, the new leadership is settling well and focused on strategic issues to achieve our true potential.

Tiger Brands is a large, established group – while there are inherent strengths to this status, we also understand we need to be more flexible and agile in today's market. Our new structure and the cultural transformation under way will support this flexibility, along with a certain level of independence, within a framework for success. Throughout this process, we are mindful that change needs to be carefully managed. For example, we are introducing new, simpler processes, with the first wave implemented in shared services and human resources during the year. This includes a R82 million investment in our IT systems to improve communication and information flow, as well as more robust cyber security.

In tandem with our new operating model, capital expenditure of R2 billion has been approved to enhance our manufacturing facilities in FY19. Projects totalling R720 million were executed across the portfolio in FY18. In tandem, we have created a separate function for quality control in the group. This builds on similar functions in each business unit, adding a layer of central monitoring and control for additional assurance.

Our investment in key brands paid off with another sterling performance in the Sunday Times Top Brands survey. KOO was again ranked top brand overall, against global competitors, and Tastic as number 1 essential food for the second consecutive year. Please see summarised results on Turning outputs into competitive advantage.

In the current environment, managing the trade-off between volumes and protecting our margins has proved challenging. As such, we are encouraged by the brand equity improvement in most of our key brands (Tastic, Fatti's & Moni's, Mrs Balls, Oros, Maynards, Beacon, Energade and Crosse & Blackwell). Measured by brand equity, our key brands continue to lead by a significant margin, with KOO, Albany and All Gold well ahead of their closest competitors in these fiercely traded sectors.

Tiger Brands holds one of the top three positions in 80% of the categories in which it competes, as illustrated below.

Our fully integrated supply chain has been established, and delivered significant value in this period. At present, around 70% of the group's procurement is flowing through a centralised hub, with important opportunities for smaller suppliers. We have also made progress in how we engage with our customers in terms of our contact centre and consolidating our distribution network. The anticipated benefits of an integrated supply chain include unlocking cash through improved efficiencies and significant cost savings.

The company's investment in associates was reviewed during the period. To this end, the Tiger Brands board has decided, subject to the necessary regulatory approvals, to pursue an unbundling of its shareholding in Oceana, with an approximate implementation date of April 2019. The decision was taken following a review Oceanas' fit with the group's core business undertaking, as well as after taking into account the challenges associated with acquiring a controlling stake in Oceana, given the regulatory environment in which it operates.

                 
  Gap between Tiger Brands equity share vs closest competitor    

KOO, a favourite South African brand, has an equity leadership of

73,2%
points

      Tiger Brands are on the podium in 80% categories we compete in
  Gap between Tiger Brands equity share vs closest competitor       Brand positions
              1 Nielsen

 

Outlook

South Africa faces another challenging year, exacerbated by the political hyperbole and uncertainty ahead of national elections early in 2019. Throughout this run-up, consumers will remain under intense pressure in an economy marked by low growth and rising inflation.

Government faces an immense task to restore our economy to the levels that support investment and job creation. The private sector can contribute by ensuring its businesses are run efficiently and ethically to create value for all stakeholders.

For Tiger Brands, this means an unrelenting focus on executing our strategy. We believe we are structuring our business to profitably improve revenue and market share while our Africa strategy will build on what we have in South Africa. The elements of our strategy combine to support growth in earnings for our shareholders and make Tiger Brands a great place to work for our people, whose skills are our lifeblood.

Appreciation

In an intensely difficult year, our people have proved their resilience and their determination. Many employees took time to personally engage with me and offer their support. This has meant so much to me and showcased our people's can-do spirit. I thank every one of you for your commitment to achieving our purpose. Equally, the energy and support of the leadership team has been invaluable and is deeply appreciated.

Our board has been an extraordinary source of counsel, insight and support for which we are most grateful. In particular, we thank our chairman, Dr Khotso Mokhele, for his active and expert contributions.

The contributions of our strategic partners and ongoing support from our service providers, suppliers and customers is equally valued. We will continue to listen to you, and work towards common goals.

Lawrence Mac Dougall
Chief executive officer

21 November 2018