SIMON BROWN: Food-related shares: something to chew on

Food would seem to be one of the easiest places to invest and make money. We all need to eat, right? But as the recent Pick n Pay results show, it’s not as clear-cut as that.

It’s important to understand the various subsectors in food: there is the primary producer (of chicken, fish, maize and so forth), the food manufacturer (of biscuits, juice and so forth) and of course the retailer.

The primary producers are a wild ride, the recent Astral update indicates.Over the past decade the share is up only 13% while dividends have added another 50% or so. Avian flu, maize prices and imports all make for an extremely bumpy ride, and none of these troubles can directly be managed by the company.

Fishing is the same, with quotas, low catch rates, high diesel costs and, as a recent set of results pointed out, high winds, all hurting. This is a subsector for trading, and even then, only for the brave.

The food manufacturers have two challenges: volatile input costs and being squeezed by the retailers for the best price possible. The Tiger Brands share price over the past decade is down by almost 30%. Now, sure, the company has had to deal with the deadly listeriosis outbreak, but that’s hardly any reprieve for shareholders.

AVI, on the other hand, is up more than 50% in a decade. It has a different strategy from that of Tiger Brands: it protects margins at all costs. It will sacrifice volumes to keep margins, whereas Tiger Brands seems to be happy to let margins slip to hold on to volumes — but then the volumes slipped, and now raising prices will be tough.

The problem with both these subsectors is that food is largely a commodity. Sure, we have to eat, and sure, some brands have managed to get up the value chain and hence charge higher prices. But generally eggs, tinned fish and the like are much of a muchness and consumers will shop on price and value. Only a few are extremely brand loyal.

Some products, like Coke, are brand icons, but that’s as rare as a stress-free farmer … and then even Coke has had challenges over the years.

This leaves the food retailers, because we still need to buy the food we’re eating.

Here margins are wafer thin, with recent data from The Food Industry Association of the US showing operating profit margins for US grocers averaging 1.6%, after being as low as 1% in 2019.

Fumbles and losses are the new reality, as Pick n Pay has discovered to shareholders’ horror.

This is why Shoprite really is the easy investment in our local food sector, with world-beating operating margins of just below 5%. This is blended across the company’s various divisions, but is still a staggeringly high number.

We do all need to eat, but not all in the food sector is the same, so choose your fighter carefully. The nuances from farm to plate are significant for investors.

*The writer holds shares in Shoprite