Astral Foods, SA’s biggest poultry producer, is gearing itself up for tough negotiations with retailers as it looks to try and cover higher input costs and recover some of its Covid-19 losses.
Astral CEO Chris Schutte said this week the group faced a challenging time, including that in the first half of its 2021 financial year, which began in October, it will have to have some “tough negotiations” with retailers about price increases as Astral tries to mitigate the high feed costs weighing on the traditionally “paper-thin” profit margins of the poultry sector.
Schutte was speaking after the release of the group’s results for the year ended September 30, in which operating profit declined 5% to R838m as the full effect of the Covid-19 lockdown was felt in its second half. During hard lockdown there was an oversuppy of frozen chicken as activity at quick-service restaurants ground to a halt. While this supply demand dynamic has stabilised with easing lockdown restrictions, raw material prices continue to rise.
Though maize, a key feed stock ingredient, experienced a bumper season in SA during the period under review, strong demand from China ensured prices remained far higher than expected. The price of soy beans, another key input, secured mostly from Argentina and Brazil, is also on the rise.
This price is determined in Chicago, so Astral has to contend with the pressures of a volatile rand-dollar exchange rate, said Schutte.
Small Talk Daily analyst Anthony Clark said Astral Foods’ first half in its new financial year was probably “going to be very, very challenging”.
“Higher input costs and the in/ability of Astral to fully recover soaring soft commodity inputs” via increased pricing per kilogram “is challenging due to a tough consumer environment and retailers' unwillingness to accept price increases, and means that its first-half earnings to March are going to be difficult.”
[Retailers] often tell us the price will be determined by the market, not by Astral.
— Chris Schutte, CEO, Astral Foods
Clark said Astral had indicated it would have to push through an up to R2/kg price increase on frozen portions of chicken, which is a “10% price increase on a basic consumer staple. It’s very difficult to do and they’ve admitted that. And that doesn’t fully recover the costs of the inputs into 2021.”
Clark said retailers use frozen chicken as a “loss leader” to attract customers into stores and will be unwilling to accept price increases “in the competitive festive retailing landscape”.
Schutte said calculating the pricing of its product is “not a science, but rather an art form” that requires a “balancing act”.
“It's about us going to them [retailers] and asking for a price increase and we substantiate a reason for that with facts like raw materials input costs.
“But that’s not their [retailers’] concern and, as they often tell us, they don’t owe us a living and that the price will be determined by the market and not by Astral. I think a part of that is very, very true. Supply and demand will eventually be the major price decider,” Schutte said.
“It’s just hard negotiations and when there is a slight surplus of chicken around SA, obviously the buying power is with the retailers, and when there is a short- to medium-term shortage of chicken then some of the pricing power moves a bit in the favour of poultry producers. But most of the time the pricing power is with the retailers.”
He said that overall, poultry stock in the country at the moment is “lower than what we thought it was going to be”, which “might just give us that small little edge to use in that pricing power battle between us and the parties who on-sell”.
Christo Wiese, the departing chair of Shoprite, which is the biggest retailer of chicken in SA, said there is “no general rule” that one party always has the “pricing power”, be it the producer or the retailer.
“It varies as the seasons change. Sometimes the producer has the pricing power and sometimes the retailer has it.”
Wiese said Shoprite isn’t the only poultry buyer in the country so the group has “no particular pricing power”.
“It [Shoprite] obviously does get good deals because it buys in huge quantities, but it runs the same risk that the producer runs. If some other retailer, although unlikely, gets it cheaper, then Shoprite will have a problem. You have to see the whole picture.”
He said the idea that the “middleman makes all the profits” has been around a long time, but that this is not the case.
“I grew up in a farming community and you constantly heard complaints from farmers that they got R10/kg for mutton but by the time it is sold in the supermarket the consumer has to pay R30/kg. They would say it’s always the middleman who makes all the profits.
“But you only have to look at the profit margins of food retailers to show this isn’t the case. Profit margins are razor-thin, a few percent. On every R100 retailers buy and sell they have a gross take of R10 or R15, and then all their costs come into play and they make a R1 or R2. It’s a razor-thin margin.”
Though time will tell how much headroom Astral will be able to secure in its negotiations with retailers, Schutte believes the “R1 to R2 per kilogram” price increase that Astral needs to offset feeding costs will not affect the ultimate value proposition of chicken because its current price of R22/kg or R23/kg is “still an excellent offering”.
Schutte said another factor in Astral’s favour is that apart from pork, chicken is still significantly cheaper than other animal protein such as beef, mutton and fish.
"[Chicken] is still the preferred meat choice for the majority of our nation and R2 a kilo is definitely going to have a small impact, but it won’t kill poultry as a value proposition.”
