Tiger Brands facing a food producer’s worst nightmare
Class actions, damage to reputation and closure of factories for extended periods are among the enormous challenges
Another day, another scandal. Tiger Brands put the Dangote Flour Mills disaster behind it just over two years ago but now the company is being plunged into another crisis and this could cost it well over R1bn.
Facing a food producer’s worst nightmare, Tiger has conceded that processed meat products produced by its Enterprise Foods division have been the source of the deadly ST6 strain of the listeria monocytogenes pathogen.
The American Society for Microbiology describes listeriosis as a "rare but severe disease". Close to 1,000 hapless SA consumers have found this out the hard way.
The official listeriosis death toll stands at 183 while, according to the website Listeria Class Action, there have been 978 cases recorded since January 2017. This makes it the worst outbreak of listeriosis in world history.
It is not the first time Tiger has been forced to recall a product. In October 2014 it recalled 17,000 items in its Tastic instant rice range following the discovery of potentially carcinogenic colourants in some items. But that was a minor incident compared with the listeriosis crisis, which is already costing Tiger big money.
Since the news broke on March 8, operations at Enterprise’s Polokwane, Germiston, Pretoria and Clayville processing facilities have been suspended and all Enterprise products recalled for destruction.
Tiger estimates the cost of destruction of products and raw materials at R337m-R377m, while the closure of the factories will result in a monthly loss of R50m at the earnings before interest and tax level.
Tiger will be submitting an insurance claim that will cover up to R94m of these costs. If the factories remain closed for three months, Tiger will be left with a bill of up to R433m.
But the big unknown is the amount Tiger will have to cough up to compensate listeriosis victims who win class actions against it.
The first class action was brought against Tiger by Richard Spoor Attorneys, in conjunction with US foodborne illness litigation firm Marler Clark. Tiger estimates that this class action will set it back R425m.
No estimate has so far been given by Tiger for the potential cost of a second class action, being brought against it by LHL Attorneys. Throwing more light on the issue is Zain Lundell, a senior partner at the law firm and the driver of the class action. "In our application to proceed with the class action a figure of about R425m was mentioned," says Lundell. "It is also possible that the number of people lodging claims against Tiger could increase a lot."
However, to have two class actions proceeding simultaneously is unlikely, says Lundell, who thinks the ideal would be for the three law firms involved to join forces.
The other alternative would be for one law firm to proceed with a class action and another to handle claimants individually.
Either way Tiger appears to be in for a legal bill that could top R850m.
If the costs of product recall and destruction and an assumed closure of plants for three months are added, the total comes to around R1.4bn. This amount is equal to a third of Tiger’s pretax profit in its past year to September.
The group is putting on a brave front.
"We will leave no stone unturned to get to the bottom of this to ensure it does not happen again," says Lawrence MacDougall, Tiger CEO since March 2016.
That would appear to suggest that Enterprise’s factories will reopen.
But with the brand having sustained crippling reputational damage there is no certainty.
"Tiger may try to revive the Enterprise brand but that would be hugely costly and even if it could, it is unlikely to ever get back to previous numbers," says Nadim Mohamed of First Avenue Investment Management.
36One Asset Management’s Daniel Isaacs puts it bluntly: "Enterprise is finished as a brand."
Tiger may consider alternatives such as a costly establishment of a new brand or turning Enterprise’s factories over to producing only house brands for retailers, speculates Isaacs.
Mohammed believes the listeriosis news is already discounted in Tiger’s share price.
In similar vein, Isaacs says investors will "strip out" the listeriosis costs when assessing Tiger’s results.
However, Tiger’s share price started coming under pressure well ahead of the listeriosis news. Its price peaked in mid-January. Since then it has gone on to fall 21%, with only a third of that coming after the listeriosis news broke.
The market, it appears, is also concerned by Tiger’s trading update for the four months to January in which it reported a 4% volume decline. For now, Tiger should be treated with caution.