Chief executive officer’s review
Chief executive officer
As we approach Tiger Brands’ centenary, amidst the turbulence of an already fragile economy devastated by the impact of Covid-19, the company is facing a critical inflection point. Looking at Tiger Brands’ recent history, we have seen the company set back by a series of failures with little in the way of meaningful successes. Understandably, many of our stakeholders are looking at us with a degree of healthy scepticism, questioning whether the company will be able to effect the long-awaited turnaround and recover from its under-par performance.
The company’s executive team, assembled largely over the last two years, is fully aware of the significant challenges that the company faces. As a team, we are determined to ensure the creation of a Tiger Brands that will thrive and grow into its second century, a company fit to compete in the “new normal”. There is no doubt that this is going to be challenging, but I believe that we have the capability to turn this around, with the right strategy, operating model and management team in place to ensure our resilience and growth. In this report, we seek to provide our investors and other interested stakeholders with the information needed to make an informed assessment of our ability to create long-term value.
A positive response to the Covid-19 pandemic
Although this was a challenging year, we are beginning to see signs of stabilisation, suggesting that we are turning a corner and building momentum.
|A particular highlight among all the challenges has been Tiger Brands’ response to the Covid-19 pandemic, with the company acting positively and proactively to protect both lives and livelihoods.|
In responding to the pandemic, our main objectives were to keep our employees safe, to ensure the consistent availability of our products, and increase food support to communities most in need.
In the face of Covid-19, we acted rapidly to protect the safety and wellbeing of employees, prioritising remote working where possible, introducing health screening and testing for staff at essential services sites, accompanied by daily deep cleaning and rigorous hygiene and sanitisation protocols, as well as numerous other measures to ensure employee wellbeing. I am saddened to report that 11 of our employees died after contracting the virus. I extend my deepest sympathies to the families of all those who have been severely affected. In the context of these profound challenges, the response of our staff was superb, with record levels of attendance at essential sites during the first six weeks of lockdown, notwithstanding high levels of anxiety and uncertainty around the science of the virus at the time.
Following the introduction of the government’s strict lockdown requirements in late March 2020, Tiger Brands was quick to ensure a continuous supply of product in response to initial panic buying and pantry loading. We developed and implemented response protocols to ensure product safety, worked with suppliers, logistics and customers to limit disruptions, and provided effective communication to address concerns around food security. These efforts were accompanied by a strengthened focus on our numerous community food and nutrition programmes for families, school children and frontline healthcare workers and hospitals.
The role of Tiger Brands as an “essential service provider” highlighted the importance of our business as a key contributor to food and nutrition security in South Africa, as well as reminding us of our responsibilities in protecting the wellbeing of our employees and communities. This has brought new life to the societal purpose at the heart of our company, “to nourish and nurture more lives everyday”.
Subdued performance in a tough trading environment
Our financial performance this year reflects the tough operating environment, with the combination of reduced consumer spend and rising input costs placing pressure on volumes and our ability to recover costs. In addition, the year’s performance reflects the impact of Covid-19 in terms of related costs and supply chain disruptions. Notwithstanding the difficult trading environment, the company experienced sustained demand in certain categories in the second half due to increased at-home consumption influenced by Covid-19 response measures. However, there were corresponding headwinds in terms of consumer demand in Snacks & Treats, Beverages, Out of Home and Baby. Exports were adversely affected by a trademark dispute with a former distributor in Nigeria, restricting sales into that country for most of the year. The subsequent resolution of this dispute resulted in the resumption of sales into Nigeria, which has provided positive momentum going into the new financial year. In addition, a rebound of our export volumes into Mozambique is evident after several years of underperformance.
Revenue from continuing operations increased by 4%, underpinned by price inflation of 6% and partially offset by an overall volume decrease of 2%. Declining volumes in certain categories, coupled with the inability to fully recover significant raw material cost push, placed gross margins under pressure, resulting in group operating income declining by 18% to R2,6 billion (2019: R3,2 billion).
In August this year we entered into two separate sale-of-business agreements for our VAMP business units. The acquisition of the abattoir business at Olifantsfontein by Molare Proprietary Limited became effective on 28 September 2020, while the disposal of the VAMP processing facilities was successfully concluded post year-end. A significant outcome that we achieved in selling these businesses as going concerns is that we safeguarded the jobs of almost 1 000 employees, a key consideration given the escalating unemployment in the country.
Our strategic priorities: balancing short-term impact with long-term growth
In 2017, we completed a comprehensive review and update of our five-year growth strategy in which we agreed a clear set of commitments for each of the four strategic focus areas – Drive Growth, Be Efficient, Great People and Sustainable Future. Our strategic focus this year has been on delivering against these commitments and embedding the strategy more broadly across the company. We have placed particular emphasis this year on driving those operational initiatives that will improve the performance of our current portfolio and deliver an effective turnaround over the short term, while setting us up for longer-term growth.
It is important to recognise that while any initiatives we take should be limited to those that will have a meaningful impact with a higher probability of success, our response cannot have the luxury of a single-minded focus.
Ensuring a much-improved performance in FY21 is a non-negotiable to restore investor confidence – and to secure the time needed for our turnaround strategies and investments to show results – but this cannot be done at the expense of longer-term growth.
In managing our time and resources we need to find the right balance between the short-term pressure to deliver results, and the need to facilitate longer-term growth, recognising that we are behind in this regard.
In seeking to find this balance, we have identified the following five immediate priorities for restoring value:
- We will be accelerating the pivot towards consumer and shopper orientation, strengthening our focus on meeting consumers’ needs. While we are mindful of other key consumer trends – such as health and nutrition, “snackification”, at-home consumption, and the shift to e-commerce – our priority focus for the next three years will be on delivering value to the consumer, given the particularly constrained consumer environment. In addition to driving our relevance in the value segment by building the clear benefits of our current brands through marketing best practice, we will meet the needs of the value consumer by driving innovation and renovation in our product portfolio, implementing price-ladder opportunities within specific brands and categories, and identifying commercially viable opportunities to manufacture private label products to our benefit.
- A critical enabler of our growth plan is to improve our supply chain. We are placing particular focus on restoring competitiveness in our manufacturing activities, improving overall equipment effectiveness and service levels, reducing wastage, and completing our key site optimisation planning, with a continued emphasis on ensuring robust food quality and safety systems across the company.
- We will maintain a relentless focus on reducing costs across all areas of the income statement in a systemic, urgent but measured fashion, with a view to ensuring the sustainability of these cost savings. To deliver on our ambitious efficiency targets, this year we introduced a step-change in how we engage the business on cost savings, changing our governance structure, introducing clear steps from the identification to realisation of savings, implementing stronger levels of transparency and accountability, and beginning to improve our SKU rationalisation through the development of a process map and the roll out of activity-based costing.
- In addition to improving our current performance, we will be creating the right platforms for us to grow. In terms of organic growth: we are optimising our portfolio, focusing on those categories with high attractiveness and competitive strength that should be protected, invested in and grown; we are driving innovation within existing and into adjacent categories; we are pursuing a range of customer and channel initiatives, underpinned by trading terms that work for us as well as the customer; and we are identifying and realising opportunities for category growth in selected African markets. While our primary focus is on driving organic growth, we are continuing to explore opportunities for inorganic growth.
- Delivering on these objectives is ultimately dependent on us having the right culture. Our fifth priority focus is thus on igniting our people to instil an agile performance-based culture where calculated risk taking is encouraged, recognised and rewarded. For too long, too many of our teams have been internally focused and risk-averse, acting in silos and focusing on short-term returns. Our goal is to create a culture of accountability that delivers long-term growth through consumer-focused innovation.
While our immediate priority is on addressing the commercial exigencies we face, we have not lost sight of our strategic commitments to a sustainable future – and our associated goals on health and nutrition, enhanced livelihoods, and environmental stewardship – and it is encouraging to see some initial progress made this year. It is fair to say that in the past Tiger Brands has been somewhat insular from its broader role and responsibilities in society. Recognising the significant social and environmental challenges within the food system, it is imperative that the company is clearer in acknowledging and managing its broader societal responsibilities. Going forward, we will be more active in using our influence for the greater good, with a confidence borne of competence, but tempered with genuine humility.
To deliver effectively on all of these priorities, we have revised our operating model with the aim of providing the individual business units with the benefits of Tiger’s scale, but with sufficient autonomy, accountability and flexibility so that this benefit is not eroded by the inertia of command and control from the centre.
The Tiger we are looking to build is not the clichéd oil tanker – too big, too bulky, too cumbersome to make the necessary changes – but rather a convoy of sleek destroyers, close enough to each other to maximise mutual benefit, but far enough away to avoid a single catastrophic incident and nimble enough to be able to make their own evasive and offensive moves. A convoy that changes shape and composition from time to time, but retains its essential form, with the individual business units focusing on excellence in execution, and intimacy with consumers and customers.
Maintaining our strategic enablers
Delivering on these strategic priorities requires a continued focus on good governance, robust food quality and safety systems, employee health and safety, and stakeholder responsiveness, all areas that we review in more detail in this report. There are two issues that I wish to mention briefly upfront.
Firstly, on employee health and safety. While Tiger’s response to protecting employees during the pandemic has been admirable, we still have work to do in areas of our occupational health and safety. I am saddened to report that there were three work-related fatalities this year. In February 2020, Adam Makhado was involved in a motor vehicle accident, and in July 2020, Mboniseni Innocent Sithole died in an attempted robbery in Daveyton. Both were employees of Albany and were delivering bread at the time of the incidents. In October 2019, a contractor at Davita, Kuda Sithole, suffered fatal internal injuries when the machine he attempted to instal fell on him. My sincere condolences go out to the families. We have provided support and counselling to the families of our employees and are implementing appropriate response measures to minimise the potential for future such incidents. There continues to be a concerning number of violent route-tomarket incidents, particularly with bread deliveries. We acknowledge the magnitude of the challenge and are resolute in addressing it. Our immediate efforts include undertaking regular risk assessments of all delivery routes and developing tailored response measures. We are exploring longer-term solutions such as enhanced use of technology for more effective security provision, as well as the use of digital payment systems.
The second issue to highlight is our continued strong emphasis placed on food safety and quality and the various measures we have taken to ensure that we have robust management systems, qualified people and a strong quality culture embedded across the organisation. We have further strengthened our audit and assessment processes, achieving external certification for all our manufacturing facilities against globally recognised food safety standards such as FSSC 22000 and HACCP, and started the certification process for our warehouses. It is encouraging to report that we maintained an improving trend on our quality KPIs, ending the fiscal year with zero public recalls, a 25% reduction in market-place incidents and another 5% reduction in consumer and customer complaints.
There is no doubt that we face some tough times ahead, with an already weak economy further impacted by the after-effects of Covid-19 lockdown measures, the economic downturn is likely to be significant. The anticipated volatility of the rand and increasing levels of unemployment will negatively impact both the supply and demand dynamics of our business, with consumer disposable income under profound pressure. Huge uncertainty remains regarding the longer-term outlook for the Covid-19 pandemic. Recent developments in Europe and elsewhere suggest the potential for a second wave, placing possible pressure in terms of export bans and port facilities in terms of imported inputs. At the same time, as markets open up, we are likely to see less consumer funds dispersed across a broader range of categories, highlighting the need for an absolute emphasis on value offerings and cost containment.
Given this challenging outlook, I believe our strategic approach and revised operating model presents the right foundation to ensure our resilience, enabling us to harness the diversity of our product portfolio, the strength of our heritage brands, the quality of our customer relationships and distribution networks, and the health of our balance sheet to absorb the anticipated headwinds. Doing so requires that we find that critical balance between delivering a short-term turnaround that stakeholders understandably are expecting, but not at the expense of longer-term growth.
This has been an incredibly eventful and challenging start as CEO of Tiger Brands. Despite the significant challenges, at a personal level it has also been stimulating thanks to the dedication demonstrated by Tiger’s employees and my colleagues on the executive team, particularly in their response to Covid-19. I wish to extend my thanks to my colleagues on the executive team for their support, and to the Tiger Brands’ board for their advice under the leadership of our chairman, Dr Khotso Mokhele. After thirteen years on the board, and almost four years as chairman, Dr Mokhele will be stepping down with effect from December 2020. I wish to thank him for his dedication and contribution to the company and wish him well in his future endeavours.
We are pleased to welcome Ms Geraldine Fraser-Moleketi who was appointed as independent non-executive director and chairman designate in September 2020. She will assume the role of chairman with effect from January 2021, bringing valuable experience and fresh perspectives. We have also been joined on the board this year by Ian Burton and Olivier Weber, both of whom have extensive expertise in leading innovation and growth in the FMCG sector globally.
We face some challenges ahead, but I am confident that together the company’s employees and leadership teams will ensure that Tiger Brands delivers on its potential in creating long-term value.
Chief executive officer
19 November 2020