Tiger Brands faces R500 million-plus hit to profit because of lockdown

South African packaged goods group Tiger Brands says that the nine-week high level lockdown has cost it half a billion in profits, as the group faces procurement pressure, global supply chain issues and pricing regulation.

The group has published its financial results for the six months ended March 2020, reporting a 2% rise in revenue to R15.7 billion. However, operating income was down 29% to R1.1 billion, and profits were down substantially (75%) to R359.6 million from R1.4 billion before.

Headline earnings per share from continuing operations fell to 501 cents from 773 cents in the same period last year – a drop of 35%. The group said it was deferring its dividend payout, and would reassess the situation at year-end.

Tiger Brands said its half-year performance reflects the difficult trading environment and the challenges faced by the company, particularly within grains, groceries, value added meat products (VAMP) and exports.

• The grains division was affected by volatile raw material pricing, physical supply constraints and “intense competitive activity”, particularly in the rice and pasta sector.

• The groceries division was relatively flat, with price inflation of 3% undercut by an overall volume decline of 2%. It said that the local market is highly competitive, and most shoppers are buying on promotion.

• VAMP revenue more than doubled from a year ago – however this was due to building on the segment re-entering the market (following the 2017/18 listeriosis outbreak). It did not counter the higher than expected input costs, the group said, though it managed to reduce operating losses in the segment by 14%.

• Exports were impacted by a trademark dispute with a former distributor in Nigeria, resulting in virtually no sales in Nigeria over the period. Total revenue for the businesses declined by 4% to R1.6 billion, whilst operating income fell by 64%.

Lockdown impact

Tiger Brands said that before the national lockdown came into effect at the end of March 2020, volume increases had a marginal impact on the overall performance for the period under review.

It noted that while numbers went up in certain segments, these were at the expense of other categories.

For example, sales of chocolates and other snacks that are typically higher in March were lower as shoppers turned towards starches and other staples in preparation of the lockdown.

Because the lockdown came into effect at the extreme tail-end of the reporting period, Tiger Brands said that the impact will be felt in the coming six-month period – though it is already counting hit to profitability “in excess of R500 million”.

“The pace at which we move through the various lockdown phases to fully re‑opening the economy remains uncertain, whilst the impact on consumers, unemployment and disposable incomes is likely to be dire,” it said.

“We anticipate that demand patterns will change and are preparing for significant changes in consumption and shopping behaviour as we move out of the acute phase of the National Disaster period and into, what is likely to be, a deep and prolonged recession.”

The group said that, as existing procurement positions are depleted, the second half of the year will be impacted by significant cost push due to rand weakness, global supply chain disruptions and additional costs incurred during the lockdown period.

“These costs, together with the effect of government regulations on pricing during the National Disaster period, may have an impact in excess of R500 million on profitability,” it said.

It said it will be prioritising the building of adequate stock cover to cater for the possibility of potential disruptions to the supply chain and ensure the consistent availability of products.