Consumer brands conglomerate AVI — owner of Five Roses tea, Bakers biscuits and Willards chips — boasts enviable returns on the JSE food producer and beverage sector. But could the returns be even fatter if the group slimmed down to its market-leading snacks and beverages brands?
Some punters reckon so, what with the group weighed down by iffy performances in its cosmetics and fashion segments. Then there’s the legacy holding in fishing, via hake producer I&J, that adds an element of commoditisation — not to mention operational risk — to AVI’s consumer brands portfolio.
Despite this drag it seems unlikely there will be a break-up or sell-off of assets any time soon at AVI, which, readers might remember, received an offer for its snacks and biscuits business from consumer brands giant Mondelēz International just before Covid. A dozen or so years before that Tiger Brands took an unsuccessful tilt at AVI — a development some market watchers think could be revisited if Tiger is determined to get its claws into more market-leading food brands.
Recently released interim results confirmed the strength of AVI’s best-selling food and beverage brands, with the highly regarded management team, led by respected CEO Simon Crutchley, again achieving the delicate pricing balance to sustain margins and market share.
Investec equity analyst Anthony Geard says that based on the operating margin of its food and beverage brands (excluding fishing), AVI is the most profitable food company in the world. “If you take the operating margin of the groceries businesses [Entyce Beverages and Snackworks] over the past 12 months, it’s 25.8%. If you look at all the big food businesses around the world — Unilever, PepsiCo, Nestlé or Mondelēz, as well as companies in China, Africa, Colombia or wherever — there’s nothing I’ve come across that comes close.”
Geard says AVI should be applauded for its performance in an economy that has not really grown. “What it has achieved in this economy is astonishing.”
There has been some speculation about whether positioning AVI’s snacks and beverages brands as a standalone business wouldn’t be smart corporate restructuring at this juncture. He says there’s only a slim chance of that happening. “I think AVI will look pretty much the same five years from now.”
He does not expect international buyers to invest in South Africa at this point, adding that AVI is too big for private equity. That said, private equity of the larger international ilk might drool at the prospect of breaking up AVI and gearing up the food and beverage core for further growth.
We would have liked to have bought other brands. But, in general, multinationals don’t sell their brands
— Simon Crutchley
AVI grew revenue 1.1% to almost R8.5bn in the six months to end-December. Retail expert Chris Gilmour points out that more than three-quarters of earnings and profit comes from two sources, the Entyce tea and coffee segment and the food segment, which revolves around the Snackworks brands. “The basics keep chugging along nicely … though Snackworks didn’t have a great year, with a lot of competition on the snacks and crisps side.” Operating profit was down 3% to R763m.
A breakdown of AVI’s interims shows food and beverages pushing operating profit up 16% to almost R1.6bn, driven by a 44% profit rush in Entyce. The fashion brands had a 12.6% dip in operating profit to R437m, with the personal care contribution down 19% to R92.5m and footwear and apparel down 10% to R289m.
Fashion’s out-of-step performance might worry some shareholders. But Gilmour notes that there have been times when clothing and footwear have made substantial contributions to the group. “I can see the rationale for having other strings to their bow, with the exception of I&J.”
Sumil Seeraj, an equity analyst at SBG Securities, believes AVI’s fashion business could fit well into some of the listed retailers. “AVI’s Spitz and Kurt Geiger businesses are cash retailers [that only extend] lay-bys, so they’re not credit dependent, but it’s quite an exclusive portfolio of brands. The fashion division is much smaller than the other local fashion retailers and would fit quite nicely into these credit retailers.”
In the short term, AVI might be doing the opposite of selling assets. In the recent results presentation, Crutchley said AVI would continue to look at acquisitions “where appropriate”. He stressed any acquisitions would need to bring on board a strong portfolio of brands to counter South Africa’s volatility, inflation and competitive environment. “Strong retailers have their own countervailing place in the equation; it isn’t possible to do that unless you have a brand that you can use and leverage. There are brands like that and it would be wrong to say we haven’t tried to acquire them.”
But he cautioned that such brands are hard to come by, both in South Africa and internationally.
“We would have liked to have bought other brands. But in general, multinationals don’t sell their brands … and the brands we might have liked to acquire in South Africa Inc are part of large portfolios and have also not been for sale.”
Meanwhile, AVI continues to launch new brands. The group launched an affordable rooibos version in the interim period, while a new roll-on deodorant line is being commissioned in the second half as well as a new footwear or apparel brand.
Reassuringly, AVI is taking tough decisions too. It is closing the retail portion of specialist footwear business Green Cross and will continue with the wholesale segment of this brand (selling through Spitz). “What we’re seeing in the middle market is there really isn’t a lot of scope for a brand like Green Cross. People are trading either very low or at a premium level, such as the Spitz business.”
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