Integrated Annual Report 2021

The maturing food retail environment in South Africa remains particularly competitive, both among food producers and within distribution channels. New producers are establishing strong premium brands and successful niche products, challenging traditional market leaders, and placing significant pressure on industry margins. While supermarkets remain the leading distribution channel in packaged food, the channel is seeing strong competition from mixed and wholesale retailers, independents, and emerging informal players. Food retail generally has diversified, with increasing online engagement and digital sales. Retailers have hardened their procurement practices, and in many instances built successful private labels on core staples and key niche products. As convenience and value have become key drivers of consumer choice, and informal players capture consumers closer to home, a shift to alternative pack formats has enabled market expansion and affordable price points. Heightened promotional activity has undercut margins, runs the risk of damage to price perception, and inspired competition and differentiation towards richer value propositions that threaten brand dominance.

Innovation and speed-to-market is increasingly necessary to meet consumer trends and gain market share. The pressure on food safety governance and management has mounted, as has the need and benefit of adopting digital technologies and new ways of working to drive smarter, more efficient operations. While digitalisation brings valuable performance benefits, it also brings cyber security risks. These various dynamics reflect the complexity of the market and the relentless intensity of competition. In this context we are challenged to reinvent our historic brand advantage, and to ensure the sophistication of our operations, but are inspired to build our agility and capability for innovation.

Shifting patterns of consumer behaviour are leading to significant changes in the food system, driven by increasing urbanisation, digital connectivity and mobility, the rising number of single households, and changing personal priorities. Dietary shifts reflect these changing global patterns and economic aspirations, with growing public health concerns offset by the consistent uptake of processed products, and convenience foods, snacks and beverages. In the emerging post-Covid-19 environment, consumers across income-groups are typically shopping less frequently, across fewer categories, and at fewer retailers, for bigger baskets. E-commerce channels have become markedly more important for middle and higher-income groups. The practice of home cooking, stocking pantries, and extending product life has increased broadly, along with momentum towards more health-conscious purchasing.

Middle and high-income consumers are increasingly sensitive to the social and environmental practices of retailers, brands and products. The profile of goods favoured has shifted for each income-group, with consumers needing to spend more for the same, driving growth in value for food businesses but lower growth in volumes. The overriding rise in the price-consciousness of consumers has increased demand for value and affordability. The increase in health-consciousness has increased product scrutiny and an emerging social and environmental-awareness is prompting the search for added value. These multifaceted shifts in consumer needs present a significant opportunity for innovation.

Increasing consumer and investor activism on ESG issues, and emerging regulatory interventions, reflect a growing concern to address the negative nutritional, health and environmental outcomes of the food system, placing greater pressure for industry action, transparency and accountability. Globally, the food system has been identified as “the single strongest lever to optimise human health and environmental sustainability*”. Locally, South Africa has profound food-related health challenges, characterised by high levels of obesity, lifestyle-induced non-communicable disease (NCD), and persistent hunger and malnutrition.

The SDGs provide a benchmark for clear targets and an increasing number of global industry initiatives demand collective action. Enhanced regulatory and voluntary interventions have introduced new marketing, health and environment-related control mechanisms, regulations and taxes. An increased threat of litigation threatens resources and reputation. Higher-income consumers are more willing to trade-off on price for health and sustainability, with increasing demand for brands-with-purpose, sustainable and local products, plant-based proteins, ethical marketing and front-of-pack nutrition labels. These shifts challenge some traditional business approaches and encourage the adoption of purpose-led innovation. We are increasingly pressured to align with global agreements and voluntary initiatives, proactively address environmental impacts, accelerate social transformation and prioritise value creation that aligns with public health interests.

* EAT/Lancet Commission (2019) Food Planet Health

The Covid-19 pandemic had a material impact on all business across the food producer sector, despite much of the sector being classified as an essential service. The pandemic has increased complexity in the operating environment and amplified existing macro-economic challenges, placing further pressure on consumer spending and driving changes in consumer needs and expectations. It has impacted local and global supply chains, increased the costs of production, contributed to production setbacks, and presented new challenges in terms of employee engagement and wellbeing. The rise of new Covid-19 variants, the slow vaccination roll-out in South Africa, and a potentially widening gap between the recovery of developed and emerging markets, means that the Covid-19 pandemic will continue to impact the economy and directly shape our plans and prospects for the next few years.