Consumer goods companies take strain
By Adele Shevel - Jun 18th 2017, 14:04
CONSUMER goods companies have shown greater margin compression than growth in the most recent six-month reporting period.
A survey released this week by Ernst & Young (EY) attributes this to financial pressure: a squeezed consumer, a tough economy, and unpredictability.
EY tracked 13 consumer goods, spanning diversified companies, food producers, and beverage and sugar producers with collective revenue of R180 billion. The survey includes Tiger Brands, AVI, Distell and Pioneer Foods.
It's the first time EY has done this survey, and it plans to create industry benchmarks to track trends. The companies' most recent six-month reports were used for analysis.
"If SA Inc were a company, it would probably have to issue a trading statement every week," said Derek Engelbrecht, EY's consumer products and retail sector leader.
Though margin growth was positive on average, more companies were squeezed and eight of the 13 endured contractions in their margins.
Engelbrecht said some outliers were on the upside, but "that's simply recovering from some of the effect of the drought in 2015-16. They have been able to claw back some of the sacrificed margin this time around".
Headline earnings fell sharply in the most recent six-month reporting cycle, down 14.6%. Earnings before interest, taxes, depreciation and amortisation (ebitda) dropped an average 7.1% and revenue declines were 4.6% overall.
Results have been affected by drought and higher input prices.
The drop in headline earnings for consumer product companies has mostly been driven by weak volume growth.
"The moment you hit little volume growth, economies of scale that support affordable brands are effectively trapped in the supply chain," said Engelbrecht.
"If you're an industry losing 15% on a sustained basis, you're going to see a lot of structural changes coming through," said Graham Thompson, Africa analyst at EY.
Of the biggest economies in Africa - Nigeria, South Africa and Angola - South Africa is now likely to face the least optimistic growth projections.
"You could almost argue that Nigeria and Angola are likely to see more positive growth. I don't think local growth is going to get any stronger, certainly not in the short to medium term," said Thompson
For companies looking to Africa to diversify earnings and seek growth, the existence of foreign exchange volatility and liquidity means "in some cases you simply can't get your money out", said Engelbrecht.
"Mozambique, Nigeria and Angola are currently the most affected by shortages in foreign currency."
The consumer products and retail sector in Africa received $21.5-billion in foreign direct investment, across 553 projects between 2012 and last year. South Africa is the biggest beneficiary and the second-largest investor into Africa. Food and tobacco attract most of the funds.
Agricultural companies appear to be recovering from the drought, but such companies "sit between nature, which they don't control, and the consumer, who is severely constrained", said Engelbrecht.
"Between the agri-business, consumer goods companies, and the retailers, they have to share the value."
Agri-businesses such as Astral, Quantum, RCL Foods and Clover all reported lower earnings in the most recent interim reporting period.
Among diversified companies, sugar producers Crookes Bros, and part of RCL Foods and Tongaat Hulett, reported earnings and revenue growth, partly due to a 30% increase in sugar prices.
Tiger Brands reported the lowest growth in earnings and in revenue. The best performer was Premier, followed by AVI.
Oceana was the only food company to report a decline in revenue growth but along with Pioneer, Distell and RCL, they all reported a drop in earnings.
Consumer product results are down more than the retailer results.
"The retailers grow volumes by opening more stores. The consumer product companies can't do that," said Engelbrecht.
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