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Agribusiness: Tiger loses its stripes

By Mark Anderson
Posted on Monday, 4 April 2016 16:18

Capturing new African markets has not been easy for Tiger Brands. In May last year, South Africa’s largest food producer sacked the managing director of its Kenyan business, Haco Tiger Brands, after he ordered subordinates to stash cereal, energy drinks, rice and pasta in a third-party warehouse to give the impression that sales targets had been met. “They were key executives right at the top. It was difficult to pick this up,” Peter Matlare, Tiger Brands’ chief executive officer at the time, told reporters.

[Tiger Brands] got caught up in the ‘Africa rising’ narrative and decided they had to move really quickly and they basically came off the wrong side of both those transactions

Nigeria has provided further headaches. In December, after three years battling stiff local competition, government bureaucracy and currency devaluation, Tiger Brands sold 65% of its stake in its Nigerian business, Tiger Branded Consumer Goods (TBCG), back to the Dangote Group for $1 and an immediate cash injection of $46.1m. Tiger Brands paid $200m for its stake in the firm in 2012 as part of an ambitious strategy to expand its presence across the continent. It wrote off $120m from the operation in late 2015.

Before he tendered his resignation in September, Matlare had fought hard to boost the company’s presence in Nigeria. He paused production at some of its mills and tried to introduce flour and pasta products with higher profit margins. However, an abundance of competition, including from heavyweight Nestlé Nigeria, stifled these efforts.

“We got a lot of [the initial purchase of TBCG] wrong, and for that there are consequences, and those consequences are playing out,” Matlare said in an earnings call with investors ahead of the sale. He added that the Nigerian fiasco that happened under his watch “will be my Waterloo”. At the time of his resignation, Matlare warned, however, that Tiger Brands will not grow strongly if it focuses on the South African market alone.

Tiger Brands reported an unexpected 2% drop in its full-year profits due to the Nigerian write-off. When Matlare announced that he would step down at the end of 2015, saying it was “the right time for new leadership”, the firm’s share price rose to a four-month high.

Governance deficit

Tiger Brands’ chief operating officer and acting chief executive Noel Doyle dismissed suggestions that Dangote might have deceived Tiger Brands about the profitability of its Nigerian business. He blamed Tiger Brands’ management for the failure of its Nigerian venture.

This assessment is shared by Aly-Khan Satchu, a Kenya-based analyst: “You’ve got to ask, internally what’s happened? I don’t think [Tiger Brands] have been able to transfer their skills out of South Africa and when it comes to acquisition I don’t think their due diligence stacked up. The problem is a corporate governance deficit in a lot of these [South African] corporations and there- fore what might look wonderful on paper in fact has not transpired to be the exact reality.” Satchu adds: “[Tiger Brands] got caught up in the ‘Africa rising’ narrative and decided they had to move really quickly and they basically came off the wrong side of both those transactions, in Nigeria and in Kenya.”

But other analysts point to external factors in the breakdown of Tiger Brands’ foray into Nigeria. “Tiger management faced the perfect storm of events just when they entered, including higher wheat tariffs, deteriorating growth with consequent price competition, a depreciating currency and of course Boko Haram’s impact in northern Nigeria, where Tiger had material exposure,” says Jiten Bechoo, an equities research analyst at Avior Capital Markets. In the quarter ending 31 December 2015, TBCG reported a pre-tax loss of N975.3m on stagnant revenue of N10.57bn as compared to the same period in 2014.

Tiger Brands’ board is due to name Matlare’s permanent successor at the end of March. The company declined requests for comment from The Africa Report about its recent problems and its plans to turn its African activities around.

Cancelled deals

The troubles in Kenya and Nigeria call into question Tiger Brands’ strategy of growth through the creation of joint ventures and buying majority stakes in other African companies. Tiger Brands had also run into difficulties in previous Kenyan deals. In February 2014, it announced it had bought Rafiki Millers and Magic Oven Bakeries – a flour milling and bakery company, respectively – before cancelling the deals in March.

The vision for the agribusiness giant’s expansion is certain to be a key factor in the appointment of its next leader. Chief executive Matlare had been in his post since 2008, so the change in leadership is likely to lead to a shift in strategy.

Acting chief executive Doyle said that Tiger Brands must expand its presence in new and existing African markets if the company is to offset its losses at home. It already has manufacturing centres in Cameroon, Ethiopia, Kenya, Nigeria and Zimbabwe, and it sells its products in 20 African countries.

Kenya is likely to be a priority country in the expansion strategy. A growing population, rising incomes and growing financial inclusion spurred by the country’s mobile boom have helped Kenya’s economy to create solid growth. Analysts at research firm Business Monitor International have forecast that Kenyan households will increase their spending by 4.8% this year. But last year’s dismissal of Geoffrey Kiarie, who had been in charge of Tiger Brands’ Kenyan business, leaves the company in search of strong leadership in East Africa’s biggest market.

Another possibility is that Tiger Brands will go after some of Africa’s fastest-growing cities, like Dar es Salaam and Kinshasa, which are becoming lucrative markets in their own right. But Tiger Brands’ plans for expansion will face a series of challenges, including spikes in the price of maize and wheat, and a weak South African rand, which will lead to higher production costs and lower consumer purchasing power.

“Tiger’s grain margins will decline in the year ahead, and this division is a material contributor to group profits. Lest we forget, that competition is likely to intensify in these tough times,” Avior Capital’s Bechoo explains.

Salvation in chocolate

With higher food prices in drought-stricken areas, Tiger Brands is looking to cut costs rather than pass on the rising prices to consumers. At home in South Africa, Tiger Brands has been raising its historically low spending on marketing in order to defend its market share from rivals like Pioneer Food. Another area of focus in its home market is investing more in developing new product lines. However, there are some positive signs that Tiger can boost its business around the continent.

Chococam, the company’s Cameroonian snacks business, shows promise. The Cameroonian subisidiary, which makes chocolate, chocolate spread, candy, gum and powdered beverages, posted 12% growth in operating income and volume growth of 9% last year. “Although discretionary in nature, it appears as though the business has the right formula going,” Bechoo argues. Analysts agree that Tiger Brands is right to prioritise expansion across the continent, but the debate is on how to do it well.

Satchu concludes: “The Africa-wide strategy is the correct one – you’ve got much faster growth, admittedly from a lower base.” But Tiger Brands, he adds, “has to recalibrate its strategy.” ●

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