Food manufacturing giant Tiger Brands says the rising cost of food is driving consumers towards more affordable retailer private label brands, cranking up the competition and making it tougher for its well-known brands to fly off the shelves.
The house brands are gaining strength in the marketplace generally, Tiger Brands CEO Noel Doyle tells Moneyweb.
Consumers will take from the number two and number three brands first before they take from premium brands like Tiger Brands.
And what house brands tend to do is lower the value of a category so they can put pressure on your pricing, says Doyle.
So I think house brands are here to stay and [are] definitely going to be an ongoing competitive threat to our brands. Thats why we have to work very hard on making sure our products are different, making sure that we are bringing new innovations to the market that will allow us to keep the consumer interest in our brands alive.
FNB Wealth and Investments portfolio manager Wayne McCurrie says the pressure of house brands is not a new phenomenon. He tells Moneyweb that private label brands have been upping the competition for food producers for a while, but ultimately, they can only cause so much damage for the group.
Says Doyle: House brands have been putting pressure on the branded manufacturers for a very long time now, this is not new. But theres a limit to how much damage house brands can do, because people are extremely brand loyal surprisingly enough and dont just shop on price.
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Getting into the game
To avoid missing out on the private label boom, Tiger Brands says it plans to up its play in the space by leveraging its capacity where available to supply retailers with house brand products where Tiger does not already have a leading market share in a category.
Where we have capacity to expand and where we have maybe lower market share and not necessarily a number one [position] in the marketplace it would make sense for us to leverage that capacity to lower our own unit costs so thats something we are dealing with on a category-by-category basis, says Doyle.
The progress has been slow, but it is something that we intend to continue to pursue.
You have a choice when faced with a proliferation of brands you can either cannibalise yourself or be cannibalised by somebody else, says Doyle.
And what can happen is if you allow somebody else to start a business supplying house brands to the retailers, then eventually they will try to do their own brands and you can end up with an additional competitor in your category space.
Intellidex senior equity analyst Tinashe Kambadza tells Moneyweb Tiger Brands deciding to explore opportunities in house brands is not a bad idea and may bode well for the company, if done correctly.
As weve mentioned, with the microeconomic environment obviously getting tougher for consumers with disposable income under threat because of inflation, slow economic growth and the high cost of living it means that consumers are always going to be looking for some kind of value, and theyll always be looking for the best that they can buy for the budget that they have.
So we know that Tiger Brands has very strong, well-known brands, and if youre able to offer something that is an alternative but still under your portfolio of products, in that instance you may be able to protect market share and in other instances potentially capture market share, says Kambadza.
High food prices
Over the past year, food prices have been on a steep rise, affecting many consumers pockets and buying power.
The South African Reserve Bank (Sarb), in releasing its final interest rate hikes for the year in late November, reported that food and non-alcoholic beverages increased by 12% year on year from 11.9% in September.
The Sarb forecasts that local food inflation will reach 8.8% in 2022, and come in at 6.2% in 2023 and 4.2% in 2024.
Tiger Brands has however reported benefitting from the tight inflationary environment, noting in its full-year financials that its 10% gain in revenue to R34 billion for the period was largely driven by higher food price inflation.
They are one of the beneficiaries of high food inflation. So, what happened is they could reprice their products in the second half of the year and get a higher margin and thats why their earnings are up, says McCurrie.
So its quite normal in an inflationary environment for the food producers to actually do quite well.