Pioneer eyes Africa as earnings slide
East Africa is high on Pioneer Food’s radar, as the food producer looks to Africa’s booming economies to boost growth.
The fast-moving consumer goods sector is poised to benefit from the rapid pace of urbanisation on the continent as middle-class consumers move up the income chain.
"Kenya would be a good East Africa base and then on the west coast (we’re looking at) Ghana, Nigeria, Angola but they are taking strain with currency deprecation given the oil price," CEO Phil Roux said on Monday.
The maker of ProNutro and Weet-Bix breakfast cereal on Monday reported a 10% decline in earnings for the six months ended March as charges relating to the spin-off of its loss-making chicken unit, Quantum Foods weighed. Pioneer has been shedding underperforming and noncore assets as it focuses on its consumer products business.
When it comes to expanding into Africa, the group either exports out of SA, establishes co-packing relationships with players to manufacture its beverages or it acquires existing operations. Earlier this year it announced its first major foray in Nigeria in a $7m deal where it took a majority stake of newly formed company Food Concepts Pioneer, with Lagos-based partner Food Concepts.
African expansion can however go awry, as seen with competitor Tiger Brands’ ill-starred acquisition of Dangote Flour Mills, which has seen it suffer a nearly R1bn write-down since the Nigerian food business was bought in 2012.
With all their promise, operating in Africa’s thriving countries can be thorny as currency swings, infrastructure and bureaucracy pose challenges.
"What all of us must be mindful of is that while you have populous and high growth on the rest of the continent, its fraught with all sort of vagaries from currencies to capital flows. It’s difficult doing business there so you have to be really cautious before you launch into expensive assets," Mr Roux said.
Pioneer’s half-year results reflect the progress on its strategic delivery of the twin objectives of strengthening brands and expanding margins.
Revenue increased 8% on the prior period to R9.5bn. Headline earnings declined to R627.2m in the six months ended March 31 from R694.9m a year earlier, which includes R203.1m associated to a Phase 1 black economic empowerment transaction for Quantum, which the company spun off last October.
In its groceries segment, revenue increased 9% to R2.6bn. Beverage volumes, excluding Pepsi, rose 8%.
Pioneer will not be renewing its bottling contract with US-based PepsiCo and will stop distribution of the firm’s soda brands in July.
Euromonitor sub-Saharan Africa research manager Thomas Verryn said consumers were simply not as aware or familiar with Pepsico’s brands, and were therefore less likely to consider buying it, compared to Coca-Cola’s products.
"Brands such as Pepsi have limited regional representation which results in goal incongruence when outsourcing distribution to third parties, evident in the recent withdrawal of Pioneer Foods in distributing the Pepsi brand in SA."
Mr Verryn said investment by Pepsico to increase distribution, awareness and brand equity of its products would be needed to change consumers’ perceptions "or lack thereof, as consumers simply did not know some of the brands of its brand portfolio.
"The company would have to invest more in terms of research and development as well as product promotion."