Oceana’s Lucky Star ascendant
With local pilchards in short supply, Oceana has had to look elsewhere for sources — with great success
A new "import-driven" production model, used by fishing group Oceana to overcome a shortage of local pilchards, is paying off. The plan, initially aimed at stopping a serious profit dent at its best-selling Lucky Star canned fish brand, is proving to be a winner in its own right.
With the local total allowable catch for pilchards well below what is needed for commercial production for canned fish, Oceana has increasingly taken to securing supply from outside SA waters.
At an investment presentation last week Oceana CEO Imraan Soomra said 96% of Lucky Star’s pilchards now come from elsewhere in the world, with key sources being Mauritania and Morocco.
Naturally, this has raised concerns around additional production costs — especially if the rand weakens. Oceana’s working capital cycle is now also skewed to the first half of the year when the group procures the bulk of its pilchard stock.
To make matters worse, Lucky Star scraps for market share in the highly competitive "affordable protein" segment that cannot, given the state of the economy, accommodate chunky price increases.
We believe that if we need to increase supply out of regions like Morocco and Mauritania, we can do so very quicklyImraan Soomra
Lucky Star, though, has proved resilient over the long term, continuing to outperform the average food basket in SA by a fair margin. So in the six months to March, Lucky Star’s volume growth was a sprightly 12%, compared with the 0.6% decline in the overall food market.
The brand’s market penetration is also compelling, claiming a presence in four out of five SA households.
There is an intriguing argument from Oceana that household consumption is still "exceptionally low", considering Lucky Star’s market presence. Typically consumers purchase three or four cans of Lucky Star every two months.
However, Soomra believes that by enhancing the versatility of canned fish as a meal, and elevating the status of the brand to appeal to a younger market, Oceana can increase household buying to between five and six cans every two months. "This would represent significant growth in this category."
That sort of growth would be a great catch for Oceana, considering its canned fish and fishmeal division is the biggest contributor to its bottom line. Though Oceana is diverse — it also has significant horse mackerel, hake and cold storage operations, as well as the Louisiana-based fishmeal and fish oil specialist Daybrook — it is Lucky Star that is critical to the group’s longer-term fortunes.
In the half-year to March, the local canned fish and fishmeal division increased revenue 6% to R2bn. But, more encouragingly, it showed a 30% gain in operating profits to R222m.
The operating margin also fattened from 9% to 11%, which would have those fretting about imported costs scratching their heads.
It turns out that the increased intake of imported fish has actually honed production efficiencies at Oceana’s canneries.
Soomra says the reliable supply of imported frozen pilchards has meant that significant volumes can be shunted through the canneries more efficiently than with pilchards landed locally. "We can meet market demand and be a lot more consistent in our production. We can also plan well ahead rather than having production dependent on when local fish was landed. The canneries are now operating 4½ to five days a week," he says.
Fortunately, Oceana, through its cold storage subsidiary Commercial Cold Storage, has more than enough capacity at its Cape Town facility to store the increased pilchard supply.
Soomra says investors need to recognise that the pilchard import bias is the new normal at Oceana. It’s a situation that might rectify only over three to five years if the local pilchard resource is replenished.
The import model does, however, limit Oceana’s ability to push through price increases on Lucky Star products in the medium term. "There’s not a lot of room for price increases," says Soomra. "But we will drive performance at Lucky Star by affordability and consistency of supply … not by price increases."
Though it’s clear that Oceana has made the most of a difficult situation, Soomra is reluctant to give too much detail on the difference in margin between imported stock and local pilchards. "Local is cheaper and imported more expensive. We don’t disclose margin difference," he says.
Perhaps a bigger worry then over the next few years — assuming the local pilchard resource does recover — is whether Oceana is certain of a constant supply from Morocco and Mauritania.
While a breakdown in supply would be a serious blow, Soomra says there is scant risk of overfishing in the group’s main pilchard supply waters. "We believe that if we need to increase supply out of regions like Morocco and Mauritania, we can do so very quickly."
At the moment, Soomra seems confident that local demand for Lucky Star remains strong, and that the second half should see steady growth in canned fish volumes.
With additional efficiencies likely to help in the second half of the year, the canned fish and fishmeal division is likely to land encouraging profits. A stronger rand would certainly slap extra sauce onto the bottom line.
Investors will be hoping so. After a year in which Oceana’s share price has ebbed 11.2%, there’s no better time for good news.