Tiger, Tiger, not burning bright

For a company that aspires to being "the world's most admired branded consumer packaged goods and health-care company in emerging markets", the damage to Tiger Brands' reputation caused by the bread price scandal is acute - and the situation is worsening.

The company admitted last week that an anonymous letter, sent to Tiger chairman Lex van Vught, claims that CEO Nick Dennis, financial director Noel Doyle and executive Haydn Franklin (who retired earlier this year) may have known about the price-fixing - despite their protestations of ignorance.

Van Vught told the FM it was "unfortunate" that the letter was anonymous because this made it "very difficult to follow up unsubstantiated allegations".

He has passed the letter to law firm Edward Nathan Sonnenberg, which conducted Tiger Brands' initial investigation into price-fixing in February, to probe the allegations.

Meanwhile, embattled Tiger Brands executives are trying to get on with running the business.

Fine hits numbers

The company's annual results, reported last week, showed turnover of R16bn, up 28% from R12,6bn in 2006 - but profits were R2,2bn, down from R2,3bn in 2006. The R98m fine levied by the competition commission, as well as the one-off cost of unbundling Adcock Ingram, affected the numbers.

Tiger's operations are divided into foods, consumer health care, pharmaceuticals, hospital products, fishing, and exports and international. The contribution to operating profits by these divisions in 2006 was 47% from foods, 10% from consumer health care, 39% from pharmaceuticals and hospital products, 4% from fishing and very little from the rest, according to the annual report.

Therefore, it is not hard to see why the unbundling of Adcock Ingram is significant. The immediate impact has been on the internal targets the company sets for itself. The targets developed to take the company "to 2010 and beyond" have been quietly revised. Out has gone the ambitious earnings-before-interest-and-tax margin of 20%. This has been revised to a "stretch target" of 15%, says Doyle. Margins were 13,9% this year and 12,4% in 2006.

The turnover target of R30bn has also been revised, but Doyle is not yet saying in which direction. Moreover, the target date is no longer 2010 but 2012. "That margin [of 20%] would be influenced by the higher margins in the pharmaceutical business. Our margin expectations have come down in the growth plan to 2012."

Tough times ahead

The company's executives are saying that tough times lie ahead. Relentless input cost pressures - felt by brands such as Koo, All Gold, Albany bread and Golden Cloud flour in the domestic foods business and sorghum in the beverages business - have eaten into margins and will continue to do so in other areas of the business.

The limited scope to pass these costs on to consumers means Tiger needs to raise its volumes, while maintaining internal efficiencies. The problem is that in some areas of the business, such as in parts of the snacks & treats division, capacity constraints are being felt.

Dennis (60), a man who drives himself and the company hard, has restructured internally and pruned the company aggressively over the past decade. Questions are arising over whether he has cut too much.

No, says Doyle. Supporting the strategy that sees Tiger growing through organic and acquisitive growth, the company's capital expenditure is also growth-orientated, he says.

Not under-funded

In the past financial year the company spent R303m (2006: R264m) replacing older equipment and facilities, and R295m (2006: R223) investing in new capacity. For instance, the company has upgraded its manufacturing plants for oats, commissioned a new pasta plant (for the new financial year) and installed additional cereals capacity to support growth in the baby-care division. This expenditure, says an analyst, has been consistent over the past five years and does not appear to be under-funded.

Investments have also been made in the Out of Home division, a business unit that has yet to come of age. It was established four years ago and reflects the company's early identification of the consumer move towards convenience foods.

A new pre-prepared meal facility was built in Johannesburg, while another was upgraded in Cape Town. As a result operating income declined by 20% while turnover increased by 5%. This investment in better facilities, with better standards for food safety and preparation, will pay off, says Out of Home MD Roger Falck. Out of Home is now preparing about 120 of the 300 or so line items that Pick ' n Pay unveiled recently as part of its new convenience offering.

Changing demographics appear to support strategy

However, faster growth will be in the snacks & treats, beverages and consumer health-care divisions, says Doyle. Snacks & treats grew operating income 54% off a 25% increase in turnover, though this was boosted by last year's acquisition of Nestlé Southern Africa's portfolio of sweets, including Jelly Tots and Wilson's.

The beverage business has also enjoyed market share gains and double-digit volume growth. Consumer health care also grew profits by 47% (or 21% excluding the acquisition of Designer Group).

"The changing demographics in SA would appear to support Tiger's strategy," writes A J Cilliers, senior lecturer in the department of accounting at the University of Cape Town, on investment website Marketviews. "Population growth and illegal immigration means more mouths to feed, while a growing black middle class should deliver more buyers of up-market branded products. It should also be remembered that Tiger has a number of leading brands aimed at the bottom end of the market, such as Ace Maize Meal and Lucky Star pilchards."

Another building block for growth lies in the company's stated aim to invest in other areas of Africa, particularly in the higher-margin businesses: consumer health care, snacks & treats and beverages. The difficulty, says Doyle, is to find the right businesses at the right scale and price. And the right partner, too, he says. "It is proving challenging, we have done a lot of work in the past year, particularly in East Africa."

However, first the company will have to rebuild morale and put the competition commission issue to bed. Van Vught is supportive of his MD.

"It's arguable [that Dennis should or could have known of the anti competitive behaviour]. It is a huge organisation and these discussions took place quite a few layers below management. So it's not necessarily true that he would have known," he says.

Source: Financial Mail

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