Brand decay in Tiger Brands


In this article we explore the trajectory of brand decay at Tiger Brands, how other companies have managed to buck this global trend and lastly, whether there is any hope now for the once-mighty Tiger Brands.

The power of brands

Brands have value if they have an inherent differentiator that provides pricing power. This could be in the form of superior quality, taste, status, reliability, durability or after-sale services. These brands become intangible assets backed by future cash flows that (hopefully) cover their costs by a significant margin.

At their best, brands represent a competitive advantage for a company that competitors cannot replicate, like the taste of Coca-Cola, or the quality and after-sale service of Hansgrohe taps and mixers. Sustaining the cash-generating power of a brand requires ongoing investment in whatever gives the brand its strength. Coca-Cola needs to continually invest in marketing to remain front of mind and Hansgrohe will constantly have to invest in their after-sale service capability and quality of design.

The strength of a brand changes over time and the price premium consumers are willing to pay for branded goods can evaporate. Price premium and brand value might erode for a number of reasons, including market penetration, changes in consumer tastes and mismanagement of the brand.

So what happened at Tiger Brands?

Tiger Brands was heavily affected by the Listeria outbreak in 2017/2018, which saw many South Africans tragically losing their lives. One of Tiger Brands’ operating segments (Value Added Meat Products) saw operating profit fall from R104 million in 2018 to an operating loss of R547 million in 2019.

But there is something else eating Tiger Brands’ profitability

The price premium on Albany bread, the main driver of earnings in the grains segment (which contributed 50% of EBIT in the first half of the 2020 financial year), fell from just over 20% in 2012 to under 5% in 2019, and all but evaporated so far in 2020. This dragged operating profit margins in the grains segment down from 19.6% to 7.8% over the same time period.

In the case of Albany, competitors and private label producers closed the technology gap in many key products, making it difficult to differentiate from peers and commoditising the category.

Margins have declined for many global food and beverage companies

A comparison of current gross margins against margins ten years ago across both domestic and global food and beverage companies, shows that Tiger Brands is not alone in finding it harder to pass prices on to consumers and defend historic price premiums and gross margins.

Chart 7: Gross profit margin change over 10 years

Source: Capital IQ, Company Reports, Northstar Analysis (1 July 2020)
Note: Rhodes Food Group Data only from 2013 (listed 2014)

Only three of the 13 companies in the comparison managed to buck the trend over the last decade – Mondelez, Pepsico and AVI. The strategies these companies used to improve margins included pruning their portfolios and streamlining their operations, or investing in their brands and avoiding the urge to make serial acquisitions.

Chart 8 compares investments in brands and acquisitions over ten years for Pepsico (owner of brands including Pepsi, Lays, Doritos and Gatorade), and the fallen titan of the packaged goods space, Kraft Heinz (Heinz tomato ketchup, Jell-O, Kool-Aid). While Pepsico focused on building brands, Kraft Heinz went on an acquisition and cost reduction drive. Pepsico was rewarded with a share price increase of 88% since the Kraft Heinz merger, while the latter fell 20% over the same time period.

Chart 8: Offshore packaged goods comparisons

Source: Capital IQ, Company Reports, Northstar Analysis (1 July 2020)
Note: marketing /advetising expenditure and capital expenditure are used as a proxy for “Brand Investment”

Mondelez, which owns Cadbury, Nabisco and Oreo cookies, followed a portfolio-pruning approach. Their rationalisation spree saw them sell off 12.6% of their 2012 asset base that they deemed non-core, streamlining the business to core brands and boosting margins and returns.

A SA perspective

AVI (Five Roses, Frisco, Bakers, Lacoste, Yardley) invested approximately 44% more in its brands relative to Tiger Brands over the last decade. Tiger spent nearly four times more than AVI on ill-fated offshore acquisitions rather than focusing on brands at home. Over the 10 years, Tiger Brands returned -2.3% (R178.05 to R173.88) while AVI increased from R24.33 to R68.74, a return of 182.5%.

Chart 9: Domestic FMCG comparisons

Source: Capital IQ, Company Reports, Northstar Analysis (1 July 2020)
Note: marketing /advetising expenditure and capital expenditure are used as a proxy for “Brand Investment”

One could argue that Tiger Brands should have taken the Mondelez approach of exiting commoditised categories earlier and redistributing cash flows to stronger, more differentiated brands with profitable growth prospects. Or it could have simply placed more emphasis on growing and nurturing its own brands, like Pepsico did.

The good news is that all is not lost for Tiger Brands. It used to be known as the branded company that could deliver returns ahead of its cost of capital and ahead of the market. Poor management decisions and changing market structures have however, eroded those brands.

A new plan of attack could be fashioned by selling underperforming brands and deploying the healthy chunk of cash (R1.4 billion) on the balance sheet. The current cost restructuring, rejigging of formulations and smart private label penetration should lower operating costs relative to revenue. The company could embark on brand strategies in strong categories such as tiered branding, multi-brand offerings within categories, and unique innovation which could herald the return of brand premium and sustainably higher profitability. Group operating margins are at their lowest point since 1997 and the low price to earnings multiple harkens back to the time when Tiger Brands sold commodities such as chicken and fish.

Whilst we believe that Tiger Brands has the ability to restructure and reconfigure its portfolio, we note that the execution risk is high.

Tiger Brands still owns some of SA’s most loved brands and we believe that a strategy which can leverage such product lines would go a long way to improve company margins and returns over time.