Cash-strapped consumers place pressure on food producers

This is the view of Sasfin senior equity analyst Alec Abraham, who spoke to Moneyweb on the lacklustre stock price performance of JSE-listed food producers.

He says while lower income consumers are battling from a cost-of-living perspective, food and consumer goods manufacturers are struggling to control high input costs, forcing producers to push the price burden onto the struggling customer.

This push-and-pull dynamic between the producer and the consumer is causing a headache for investors in the sector, with some steadily backing away.

It has underperformed the JSE’s benchmark All Share Index (Alsi), which is up around 16% in the last 12 months.

The listed food producers sector – which boasts over a dozen members – is up around 8% during the same period.

In a year-to-date (YTD) comparison, the food producers sector declined by around 15% while the Alsi is up over 5%.

JSE Alsi vs Food Producers Sector

“Basically, what the food producers are showing is that consumers are under an extreme amount of pressure, particularly the lower-end consumer … The lower income consumers are the most vulnerable in terms of suffering from job losses and no opportunities in the low-growth economy,” says Abraham.

He adds that although the Alsi’s growth is largely supported by major companies like Richemont and Naspers, food producers that are not diversely exposed across the different income scales will continue to lag in growth.

Statistics South Africa (Stats SA) this month released the retail trade sales figures for April which showed a 1.6% decline year on year. The biggest contributors to the decline were general dealers (-1.8%) as well as retailers in food, beverages and tobacco in specialised stores (-6.2%) and all ‘other’ retailers (-4.2%).

Tiger Brands, which is more exposed to the lower and middle-income consumer, has seen its share price lose around 19% in value this year alone, while AVI, which has more exposure to the higher income consumer, has declined by over 8%.

“AVI is better positioned [in that] your higher income groups tend to be a little more resilient in economic downturns. So, given the fact that AVI has a slightly higher buyer in terms of income groups it’s in a better position than Tiger Brands,” says Abrahams.

Tiger Brands and AVI’s share price YTD

Long winter ahead

The most recent Producer Price Inflation (PPI) and Consumer Price Inflation (CPI) data signals that consumers may be in for some respite.

PPI for final manufactured goods in April continued to slow, dropping to 8.6% from 10.6% in March 2023, while CPI for the same month was reported at 6.8%, down from 7.1% in March 2023. However, recent levels remain higher than pre-pandemic levels and price increases for food and non-alcoholic beverages remains stubbornly high at 13.9%.

Small Talk Daily analyst Anthony Clark believes it may be a while before consumers begin to see material differences in prices.

Although the market has begun registering a softening in key soft commodity prices like white maize, yellow maize, soya, sunflower and wheat, he says food producers are still spending a lot more on fuel and distribution.

“These aspects ultimately keep operating costs high and necessary to share with the consumer.”

“I would not start nibbling at the food producers quite yet. I think we’ve got a very difficult winter to get through with potentially increased load shedding costs for the food producers’ sector,” says Clark.

“Traditionally in winter, consumers spend more of their disposable income on heating and keeping warm and something has to give, which is generally food.

“Only as the spring and summer season starts to kick in … should we see a recovery in the earnings of food companies, probably that will be seen in the March 2024 period.”

Protein shift

Poultry producers have arguably suffered the greatest impact from high operating costs.

In the last few periods the three listed players – Astral Foods, Quantum Foods and RCL Foods – have reported on the devasting impact rolling blackouts, feed and fuel costs, as well as the highly pathogenic Avian influenza has had on earnings.

Unlike other proteins, chicken has enjoyed a dedicated spot in freezers of households across the income spectrum, mainly because of its affordability. The same goes for eggs, a staple in many people’s diets.

However, elevated input costs for producers coupled with threats to egg supply in certain parts of the country – due to scattered bird flu outbreaks this year – is likely to place more price pressure on consumers, forcing them to think twice about purchasing both a tray of eggs and chicken.

Price shocks in the poultry sector have proven beneficial for the seafood segment of the food producers’ sector, as consumers look to trade down, looking for protein sources that will further stretch their rands.

Fishing company Oceana is evidence of this, having reported a 20.9% growth in Lucky Star’s sales volumes during the six months to March 2023.

The tinned fish brand sold a record five million cartons as Oceana says consumers are in search of “affordable and shelf stable protein”.

The current state of play in the sector places fishing companies at an advantage and makes them the stocks to watch, according to Clark.

“Fishing companies [are] my top performing sector because one, their products are in global demand, two they can export, three they can push up prices, and fourthly the weakening rand has meant that they have been able to get significantly better prices internationally and locally,” he says.

“Unlike bread and mealie meal there is only so much fish you can actually catch. This means it’s supply and demand, if demand is still there you can actually push up the price because the supply is tight.”

Of the chicken producers, Astral Foods – which has a direct line to consumers through its frozen chicken brand County Fair while also serving the quick-frozen restaurant segment – is better positioned to withstand current economic pressures due to its exposure to different segments of the market, according to Clark.

“Where we see that is … in the real growth in food groceries which has been below the population growth rate whereas the real growth in takeout has been higher than the population growth rate,” says Abraham.

“So, [for a producer] like Astral, you’ve got pressure on people buying frozen chicken, but you’ve got some structural strength on the supply of the quick service restaurant industry,” he explains.

Listen to Fifi Peters speaking to Simon Brown on the performance of listed food producers: 

Source: moneyweb.co.za

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