Pioneer Food may have inadvertently benefited from penalties imposed by the competition authorities for anti-competitive practices, as the condition that it lower bread prices seems to have helped it steal market share from rival Tiger Brands.
In a trading update on Friday, Pioneer said revenue for the four months to January rose by 2.3 percent to R5.5 billion as sales volumes in all business units rose by 5 percent in the group’s average product basket.
Last week competitor Tiger Brands said that at the trading level rice, groceries, beverages, home and personal care categories had achieved good volume growth for the current financial year to date. But its overall sales volume growth had been constrained, with volumes being under pressure primarily in the maize and wheat categories. Flour volumes, in particular, had softened as a result of the highly competitive trading environment.
Pioneer chairman Zitulele Combi said that, as agreed with the competition authorities, price reductions in defined wheaten and bread products were implemented in early December and “we’re making good progress”.
Tiger Brands was also implicated in the bread price fixing scandal, but settled with the commission, whereas Pioneer put up a fight and received hefty penalties.
Andrew Bishop, an analyst at Element Investment Managers, said that in the maize and wheat categories Pioneer’s performance appeared good in relation to Tiger Brands.
Pioneer had to reduce prices in the Sasko division due to the settlement with the commission, which might have helped Pioneer’s volume growth at the expense of Tiger Brands’ volume growth, Bishop said.
Looking ahead, Pioneer warned on Friday of inflationary pressures, pointing to among other things the impact of widespread rain on output of wheat and yellow maize.
Combi said the unusual weather patterns were a concern, adding that the production of wheat and yellow maize in particular were impacted by the abnormally high summer rainfall.
The raisin crop is expected to be substantially lower this year due to flooding in the Orange River basin.
As a result, “inflationary pressure in our product basket is expected to increase again as the supply of key commodities remains under pressure in these volatile production environments, leading to anticipated increases in food prices in months to come”, Combi said.
Pioneer said in the four months to January cost pressures related to fuel, electricity and payroll expenses and grain commodities such as wheat and yellow maize had increased by more than 20 percent in rand terms in the current financial year alone.
Bishop said Pioneer’s concerns over the South African maize crop were surprising. International maize prices have increased significantly over the past year especially relative to prices on the SA Futures Exchange “thanks to our large crop and a strong rand last year”. International wheat prices have also increased significantly.
Bishop said several emerging markets were already experiencing high food inflation. Many were adjusting their consumer price index (CPI) baskets to better reflect the reality of food prices and ironically these recent adjustments had actually pulled the CPI down.
“South Africa has been shielded from overall food inflation by the strength of the rand last year, but as this reverses, inflation follows. The exchange rate remains the key risk to food inflation,” he said.
Abri du Plessis, the chief investment officer at Gryphon Asset Management, said the effects of the weather and floods would have a bigger impact than initially thought. “It will have an industry-wide impact,” he said.
Du Plessis said food producers were moving into a higher inflationary environment in which they would face a constant battle with retailers to pass on higher prices, so margins would be under pressure.
On Friday Tiger Brands fell 0.14 percent to close at R180.74. Pioneer fell 6.1 percent to R54. – Samantha Enslin-Payne