OUR OPERATING ENVIRONMENT
Our business landscape remains highly dynamic and uncertain, with important implications for our business model and strategy. Our ability to create value, and to deliver on our purpose, is significantly influenced by various changing dynamics in our external operating environment. We have identified three priority and interconnected trends that impact on our business model and that have informed our strategy. Our six strategic priorities have positioned the company to respond effectively to the risks and opportunities emerging in association with each of these trends.
A CHALLENGING MACRO-ECONOMIC ENVIRONMENT
The global economy has slowed down, interest rates have gone up, inflation has returned to a level not seen for decades and there are profound uncertainties associated with the ongoing conflict in Ukraine.
Low economic growth, combined with high unemployment, comparatively low wage growth and surging food price inflation, continues to suppress consumer spending in South Africa, compounded by challenging market conditions globally. Recent increases in food commodity prices, as well as higher packaging, transport and logistics expenses, have placed significant pressure on input costs, which remain difficult to recover in the subdued consumer environment, placing sustained pressure on margins.
Food inflation soared this year with record highs reported in South Africa. In July 2022, the country's annual producer inflation reached a new high of 18%, above market forecasts of 17,6%. Bread and cereals inflation has continued to quicken, with the annual rate rising to 13,7%1. A recent SA retail report2, shows significant declines in sales volumes of items such as frozen meat, cooking oil and fresh milk, reflecting the impact of consumer inflation's acceleration to a 13-year high.
This tough macro-economic environment and sustained pressure on household incomes has contributed to reduced demand for discretionary and premium products, increased consumer uptake of value offerings, and heightened price competition. Volumes and margins are threatened, and cost recovery ahead of inflation remains a challenge. The outlook is not encouraging, with a tougher trading environment anticipated due to the flat economy, downward pressure on our currency, continuing high rates of unemployment and indebtedness, and ongoing electricity supply constraints, on top of local political uncertainty and the potential for social unrest.
Our strategic response
- Given the subdued economic outlook and our exposure as a premium priced brand in staple products, securing growth will require an intense focus on driving efficiencies, as well as a step-change in our innovation practices and in our customer and consumer engagement initiatives.
- Two years ago, we introduced a more systemic approach to delivering cost saving and efficiencies across the business, changing the governance structures, improving accountabilities, strengthening our central revenue management capability within each of our business units and improving our SKU rationalisation. This year we maintained our focus on this efficiency drive, delivering R387 million in savings over the year.
- To improve productivity and secure long-term cost savings across our supply chain, we have made further investments in improving our manufacturing operations. We are strengthening our centralised procurement function, and we have made initial progress in implementing an ambitious logistics transformation programme.
- We have completed the development and approval of a comprehensive digital strategy that defines the key areas of focus for the business and serves as a comprehensive framework and roadmap for our business initiatives over the coming years.
- To meet the needs of the value conscious consumer, we have been driving innovation and renovation in our product offerings including price-pack architecture, as well as investing in more effective advertising and marketing to highlight the value benefits of our brands. We are continuing to rationalise our brand and product portfolio, seeking to preserve margins by focusing resources on our best performing lines and we have been identifying and delivering commercially viable opportunities to manufacture private label products, albeit small.
- In striving to play our part in addressing some of the underlying socio-economic challenges facing the country, we are continuing in our efforts to boost economic opportunities and improve the livelihoods of thousands of people across our value chain through a deliberate focus on supporting black/black women farmers and owned enterprises as part of our enterprise and supplier development activities, and our preferential procurement practices.
- To mitigate the immediate impacts of declining food security and growing nutritional challenges among children in South Africa, we have recently launched a multimillion-rand child nutrition programme, Isondlo, that supports 10 000 food-insecure children and their families with a monthly food hamper for a nine-month period.
SHIFTING CUSTOMER AND CONSUMER DYNAMICS IN AN INCREASINGLY COMPETITIVE MARKET
Changes in consumer behaviour and an increasingly competitive retail environment are impacting the way in which our customers are servicing shoppers, and in turn, informing how we engage with our customers and with consumers.
In the context of reduced disposable incomes, increasing digital connectivity, a rise in urbanisation, and shifting consumer aspirations relating to health, nutrition and sustainability, shoppers are changing their purchasing patterns, demanding more in terms of affordability, convenience and product quality. Consumers are typically shopping less frequently, across fewer categories, and at fewer retailers, for bigger baskets, with growth biased towards essential categories. E-commerce channels have become markedly more important for middleand higher-income groups, while the practice of home cooking and stocking pantries has increased broadly, along with momentum towards more health-conscious purchasing. Many middle- and high-income consumers are now looking behind the brand to assess whether the operating practices and impacts of food producers and retailers are aligned with their values and priorities.
Responding to these changing consumer dynamics in the context of intensifying competition within the sector, food retailers and wholesalers are looking to defend and grow market share by being more precise and deliberate in their consumer engagement strategies. Retailers are strengthening their analysis of shopper behaviour, leveraging basket data to segment their stores to satisfy specific shoppers through targeted ranging, pricing and promotions. At the same time, we are seeing some fundamental shifts in our route-to-market, with supermarkets facing strong competition from mixed and wholesale retailers, independents, and emerging informal players, as well as from convenience retail solutions such as forecourts and e-commerce. Retailers and independents are increasingly entering the general trade market, with Shoprite and Pick n Pay both venturing into the wholesale arena. These developments are requiring us to revise our channel strategies and further strengthen customer engagement and service levels. As competition intensifies, with retailers driving "always-on" price promotions, this has reinforced the importance of strong revenue management practices and robust pricing data and analytics to ensure that our product prices, placement and availability are properly aligned within each customer segment.
In addition to competitive pressure among customers, we are seeing heightened competition in the food producer environment, with some recent market entrants challenging traditional market leaders and placing significant pressure on industry margins. We are continuing to see aggressive competitor pricing, as well as increasing sophistication in private label penetration, both of which are placing pressure on branded product volumes and margins. As convenience and value have become key drivers of consumer choice, and informal players capture consumers closer to home, a shift to smaller pack sizes 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.
Our strategic response
- We have been working to embed shopper-centricity into our segmentation of stores, deepening our understanding of broad shopper profiles to ensure greater customer alignment, more impactful trade execution, and increased shopper conversion through targeted pricing and promotions and appropriate price pack architecture.
- We have strengthened our customer marketing teams, established key account forums and joint business plans with major customers, and refined our pay-for-performance trading terms with clearer performance metrics to incentivise customer performance aligned with our strategic growth drivers.
- We are pursuing various initiatives to expand our reach in general trade and forecourts, grow our e-commerce presence, and strengthen our position in neighbouring countries.
- We have stepped up our innovation efforts across the group, focusing on fewer, larger innovation projects – on value, nutrition, and convenience/snackification. Our recently established Venture Capital Fund made its first investment this year in a local startup established with the goal of making healthy, plant-based foods accessible and affordable in South Africa.
HEIGHTENED STAKEHOLDER EXPECTATIONS ON ESG PERFORMANCE
There has been a marked increase in investor and stakeholder engagement on companies' environmental, social and governance (ESG) performance and disclosure, with a growing expectation on companies to show sustainability leadership.
The recent uptake in investor interest on ESG themes – evidenced for example by the growth in assets under management of ESG-aligned funds – reflects the impacts of some broader trends, including growing recognition and concern around the extent of environmental and social challenges, heightened stakeholder expectations on business to lead in addressing these challenges, and an increase in regulatory and voluntary initiatives on companies' sustainability performance. With the food system identified globally as "the single strongest lever to optimise human health and environmental sustainability", and with South Africa having some profound food-related health challenges – such as high levels of lifestyle-induced non-communicable diseases, and persistent hunger and malnutrition – we are seeing greater stakeholder scrutiny specifically on the role and responsibility of the food sector in addressing the nutritional, health, and environmental outcomes of the food system.
Higher-income consumers are more willing to trade-off on price for health and sustainability, with growing 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. Some large global companies are applying increasing pressure on their suppliers to proactively address environmental impacts, accelerate social transformation and prioritise value creation that aligns with public health interests.
Our strategic response
- Our sustainable future strategy supports delivery of our core purpose, communicates our forward-looking approach to sustainability, and orients the business towards improving our ESG performance. The strategy comprises three clear focus areas: health and nutrition; enhanced livelihoods; and environmental stewardship.
- We have made further progress this year on our commitment to enabling consumers to improve their health and wellbeing, providing food products that are more nutritious and affordable, developing best-in-class nutritional standards and leveraging our brand and marketing activities to promote consumer nutrition.
- We have continued to invest in strengthening product quality and food safety across the company to ensure that we have robust systems, qualified people, and a strong quality and safety culture, achieving external certification for all our manufacturing facilities against globally recognised food safety standards.
- We are continuing in our efforts to improve the livelihoods of thousands of people across our value chain, using our procurement practices and our investment in supplier and enterprise development, to stimulate economic opportunities, including through a specific focus on supporting black/black women farmers and owned enterprises.
- We are striving to reduce our environmental impact by implementing innovative solutions that optimise energy and water consumption in our operations, reduce the negative impacts of packaging, and minimise waste, effluent and emissions. We are exploring opportunities for circular economy initiatives that stimulate sustainable economic opportunities, using our marketing activities to inspire positive behaviour change in consumers.