Sasko bread. Picture: SUPPLIED
Sasko bread. Picture: SUPPLIED

SA’s largest food producers took a beating on Monday after Pioneer Foods’ half-year results showed that the industry is struggling to pass on higher costs to cash-strapped consumers.

Shares in Pioneer, which makes Sasko breads and Ceres juices, dropped as much as 15% to R70.57 — the worst level since March 2013 — after the group said earnings fell in the six months to end-March as costs rose faster than sales.

SA’s consumers have been hit hard with the country’s economy falling into recession in 2018. Unemployment is near record highs, as are fuel prices, while an increase in the VAT rate has added further pressure.

Pioneer’s woes spread to other food producers, with Tiger Brands falling as much as 4.4% to R236.94 — the worst level since late 2011. 

Investors may have decided that despite their protracted declines, both Pioneer and Tiger were still expensive considering how tough the operating environment is, said Lester Davids, a trading desk analyst at Unum Capital.

Consumers were shifting from branded products to cheaper alternatives, while economic policy uncertainty and stubbornly high unemployment “has kept a lid on household spending”, Davids said.

PODCAST: Behind the class action lawsuits against Tiger Brands

Pioneer’s adjusted headline earnings, a metric that strips out costs linked to an empowerment deal, fell 15% to R506m even as revenue rose 11.5% to R11bn. The cost of goods sold jumped 14% partly because of higher fuel costs, the company said.

While it lifted selling prices in some categories, inflation was not enough to cover increases in raw-material and operating costs.

Operating profits from the groceries business slumped 41% to R171m. That worried investors as this segment had been seen as Pioneer’s “rising star”, said independent analyst Anthony Clark.

PODCAST | Business Day Spotlight - Unpacking South Africa's decline

Subscribe: | Spotify | Apple Podcasts | Pocket Casts |

Pioneer warned that margins would remain under pressure as its ability to pass on higher input costs would be constrained by lower consumer demand and “retailer competitive intensity”.

“This proxy does not bode well for food producers,” said Cratos Capital portfolio manager Ron Klipin.

Besides weak demand, food producers “are being squeezed by   retailers looking to increase margins in a difficult market”, Klipin said. But food retailers were, in many cases, also absorbing higher costs “in a deflationary market”.

Clark said the performance of Pioneer’s groceries business did not bode well for other food-producer stocks, including AVI and Tiger Brands.

“The days of super premium margins for ‘power brands’ may be over, and lower percentage premiums to base products may become the norm,” he said.

But Clark said Pioneer could have a better second half as maize prices declined from their recent highs. “A recovery into 2020 should still be on track,” he said.

Despite reporting lower earnings, Pioneer kept its interim gross dividend unchanged at R1.05 per ordinary share.

The group said sales volumes were 2.7% higher in the six-month period, but excluding the recently acquired Wellingtons and Lizi’s businesses, revenue grew 7.9% with volumes up 1.3%.

“This represents a credible top-line performance in the significantly constrained local consumer market with consequent competitive pressures,” Pioneer said.

Pioneer Foods CEO Tertius Carstens speaks to Business Day TV about the group's interim financial results.

The increase in revenue was driven by “sound volume growth” in key product categories, including bread, wheat, rice, beverages, cereals in the UK and sausage rolls in Nigeria.

But volume declines in maize and cereals kept revenue growth in check, the company said.

Pioneer said the trading environment would remain difficult, with continued pressure on consumer demand and spending.

Cost inflation in key raw materials and other operational input costs “remain present, although it is starting to level off”.

“The group will continue efforts to optimise costs and efficiencies while ensuring its brands remain available and relevant to customers and consumers, thus strengthening the base for continued growth,” it said.

Pioneer’s shares closed 11% down at R73.90 and Tiger Brands ended 3.95% lower at R237.98.