South Africa – Food & Beverages 2019

Dry Spell For South Africa's Food Manufacturers Continues

Published: 26 April 2019

Hope rests on export growth

Agricultural activities in South Africa range from state-of-the-art intensive farming, conventional cultivation in areas with winter and summer precipitation to livestock and sheep farming in dry and semi-arid regions. The country is characterized by a dual agricultural economy, comprising both a highly-developed sector and a more subsistence-oriented production.

In recent decades, the share of agriculture in the gross domestic product (GDP) has fallen steadily. Today, it is only 2.6%. Nevertheless, agriculture plays an important role: With around 740,000 employees, it is a big employer. Exports from the agricultural sector generate about 10% of total export revenue. In addition to that, the sector is a significant buyer of machinery and fertilizers and also a supplier for food processing, which is considered to be the most developed on the African continent.

The 2018/19 harvest season appeared to be safe in December 2018. In the third quarter of 2018, agriculture grew by 6.5% in real terms compared to the previous quarter. Favorable weather forecasts were initially present also in the 4th quarter. However, at the end of 2018, rainfall was lower than expected. This has put a damper on the situation. Moreover, some experts forecast drought in the second half of 2019 due to the El Nino weather phenomenon.

 

South Africa: Companies in the packaging industry (selection)

Company Comment
Mondi South Africa Founded in South Africa in 1967, the paper and plastics company is now an international packaging group with around 26,000 employees and production facilities in 31 countries. Headquarters are in Johannesburg, London, and Vienna.
Nampak With headquarters in Johannesburg and over 5,600 employees, Nampak produces metal, glass, paper and plastic packaging at 25 sites in South Africa, 18 factories in other African countries and 8 in the United Kingdom.
Astrapak Limited The plastic packaging manufacturer employs over 4,000 people in South Africa. In June 2018, the company acquired Spec Group, adding an innovation and design center to its portfolio.
Mpact With almost 4,000 employees, Mpact produces paper and plastic packaging in South Africa, Namibia, Mozambique, and Zimbabwe. Mpact is South Africa’s largest recycler of paper and plastics.
Consol Holdings Consol is the largest glass manufacturer in sub-Saharan Africa. The company has 4 production sites in South Africa and 2 further production sites in Kenya and Nigeria.

Source: author’s research

 

Wide range of agricultural exports

South Africa covers an area of 1.2 million square kilometers, comprising seven climatic zones: From the extreme desert in the Kalahari on the border with Namibia to the subtropical climate in the southeast and on the border with Mozambique.

The climate allows for a wide range of agricultural products to be grown in South Africa. Together with good infrastructure and generally competitive costs, this makes the country an important agricultural player on the world market. The most important exports include citrus fruits, apples, table grapes, wine, edible oils, beef, seeds, maize, and avocados. South Africa imports cereals, wheat, rice, and poultry.

The rainfall distributed over the year decreases from southeast to northwest, while temperatures rise at the same time. Water scarcity and irregular rainfalls are the biggest constraints to agriculture. Approximately 1.3 million hectares are under irrigation, with agriculture accounting for about 50% of total water consumption. About 12% of the land can be used for agricultural cultivation.

Food processing in the shadow of weak economic development

After a weak GDP growth of 0.8% in 2018, the economic outlook for 2019 remains bleak with an expected plus of around 1.8%. Uncertainties regarding the elections scheduled for May 2019, the need to consolidate public finances, external risks (rising oil prices, stronger US$) and possible social tensions might also slow growth in the medium term. Food processing will hardly be able to decouple itself completely from these trends.

On the other hand, after a long period of economic stagnation, a gradual turnaround cannot be ruled out. Under current President Cyril Ramaphosa, a thorough review of the pronounced looting tendencies of governmental and government-related groups under his predecessor Jacob Zuma (May 2009 to February 2018) is taking place. Ramaphosa, who is expected to be confirmed in office in 2019, can be trusted with business-friendly reforms.

Nevertheless, the decision to state the expropriation of land without compensation in the constitution is causing considerable uncertainty. As things are at present, the constitutional amendment would allow the government, under certain conditions, to expropriate whites without compensation. The ruling African National Congress (ANC) has repeatedly stressed that no mass expropriation of whites is planned. Nevertheless, the discussion is causing considerable uncertainty among the approximately 30,000 white farmers.

In addition to fighting corruption and creating better business conditions, investments in education and efficient poverty reduction are urgently needed. South Africa has a long way to go to realize its full economic potential.

Beverages and food are important sectors

The beverage and food processing industries play a central role within the manufacturing sector, each accounting for around 20% of added value and 18% of employment. The industry sources 65% to 75% of its raw materials locally and employs around 280,000 persons. Processed food is marketed through a well-developed wholesale trade, retail chains or supplied directly to the catering industry.

With enterprises such as Tiger Brands, Pioneer Foods, Nestlé, AVI, Rhodes Food, Clover, SABMiller, Distell, Astral, Quantum Foods and RCL Foods, South Africa has numerous large buyers of food and packaging machinery. Given the difficult market environment, the need for capacity increases in 2019 is likely to be limited. Savings, especially in energy, automation, and conversion to new products, will remain important.

Not only weak consumer spending but also a lacking framework for industrial policy and cheap imports are weighing on the industry. However, the Ramaphosa government believes that the value chains running from agriculture to processing play a strategically important role in creating labor-intensive growth.

Consumers want to decide for themselves

South Africa is a land with great socioeconomic differences. 56% of the population live below the poverty line; the official unemployment rate is over 27%. Purchasing power is extremely limited for many. Even the more affluent consumers are becoming increasingly price-sensitive as the cost of living rises and the economy weakens. Other important trends are an aging population, high crime rates (“safe shopping”), a growing number of single households, the expansion of the Internet and increasing health awareness.

Above all, the upper consumer classes have become more demanding in their purchasing decisions. Aspects of a healthy, sustainable and socially responsible diet are playing an increasingly important role in food. The reduction of plastic waste is also a topic. This trend includes factors such as single-use plastic (biodegradable polymers), circular economy and ethical supply chains.

However, implementation is often limited to individual projects. Measures to stop offering plastic bags etc. are only sporadically. The proportion of food packaging remains high – probably also due to the lack of confidence in freshness and food safety. Cost pressure, diversified demand, increased environmental protection requirements and more regulation increased the need for Big Data Management in order to better track and organize the value chain.

Trend towards focusing on export markets

While the domestic market is expected to grow moderately, higher growth rates are anticipated in the exports to Middle Eastern and Asian markets as well as to industrialized countries in Europe. For that purpose, South African companies will increasingly adapt their value chains to global competition.

Between 2010 and 2017, exports of agricultural goods (including beverages and tobacco) grew by an annual average of 2.5%. In the Arabian Gulf states, demand for high-quality beef is increasing. The European Union demands more and more high-quality tropical fruits especially during winter, which is supported by quotas for duty-free imports. In China, the consumption of wine and other alcoholic beverages is rising.

Last but not least, South African dairy companies are big players on the African continent. Dairy products are increasingly delivered from South Africa to the rest of Africa, which is poor in milk. The continent’s markets are also important for the South African beverage industry.

Cattle farming: good prospects despite various challenges

The annual production of beef, poultry and sheep meat in 2016 was over 31 million tons and had a gross added value of around EUR 1.96 billion. The South African meat and poultry sectors are highly vertically integrated: Breeding, mast, slaughtering as well as packaging and distribution are often in one hand. The various market segments are dominated by individual companies such as Karan Beef (beef), Cavalier Foods (sheep), Enterprise (sausage products), Eskort and Lynca Meats (products mainly made from pork) or Astral Foods (poultry farming).

Despite good growth rates in recent years, the meat and poultry industries are facing major challenges. These include recurring droughts in cattle breeding and the uncertainty surrounding the discussion about expropriation without compensation. Additionally, foreign markets are fiercely contested with the USA and Brazil as the most important competitors. Competition from imports is also putting pressure on the domestic market. Despite further consolidation and possibly falling cattle prices on the world market, growth rates of 5% can be expected for the industry.

The largest sector within the meat sector is poultry. However, the problems here are more serious than in cattle breeding. Cheap imports are damaging the local poultry sector. At present, especially imports from Brazil are a problem. Following the controversial imposition of protective tariffs on imports of frozen chicken parts from the EU, further measures are being discussed. Also, insufficiencies in the veterinary documentation of smaller local companies are restricting access to international markets, according to experts.

Moderate growth in dairy products

There are around 130 dairies and 88 independent dairy farms with processing facilities. The production is dominated by large companies such as Parmalat (market leader in cheese), Clover (drinking milk), Danone (yogurt) and Nestlé (non-dairy creamer). Other players are Douglasdale, Sontic Group, and Unique Dairy Products. With so many producers and large dairy groups, the market is fiercely contested. Further consolidation is expected.

Despite falling supplier numbers, annual milk production is rising. It accounts for around 7% of agricultural GDP. The positive health image of milk and milk products is boosting demand. However, the small consumer class of middle and high incomes is slowing the momentum. The import of cheese shows the potential for import substitution and further diversification of dairy supply, especially for low-fat products. Neighboring markets with low milk production could be developed to a greater extent as buyers. In 2017, 37% of the milk was used for the production of yogurt and cheese products, the rest for pasteurized and UHT milk.

Strong competition in the beer market

In 2019, as in the previous year, the beverage industry continues to be affected by the overall weak economic situation and remains reluctant to invest. Nonetheless, it has to cut costs and respond to trends. With the introduction of a sugar tax on sweetened beverages in April 2018 and the continuing trend towards more health and wellness, adjustments to the product range are necessary. The diversification of consumer demand requires more flexible production and warehousing.

In 2017, South Africa was the eighth largest wine producer in the world. Production is strongly export-oriented. The domestic market for alcoholic beverages is dominated by beer – including those based on sorghum, corn, etc. – as well as brandies, grape must and sugar cane/grain brandy.

In the beer sector, SABMiller (part of Anheuser-Bush InBev since 2016) and Heineken are facing strong competition. SABMiller is the dominant market leader. In addition to the large beer producers, there are 32 independent microbreweries. Soft drinks are dominated by Coca-Cola, which operates on the market via Amalgamated Beverage Industries (ABI). ABI belongs to SABMiller. PepsiCo products are bottled by Pioneer Foods. However, Coca-Cola’s competitor’s market share is small.

Shoreline Beverages sells the soft drink brand Coo-ee mainly in the province of KwaZulu-Natal. Distell, which belongs to Remgro, is a leader in the production of spirits, wine and must products.

Around one-third of the beverage industry’s production is exported to neighboring countries (Namibia, Botswana, Mozambique, Swaziland, and Lesotho) as well as Zambia, Zimbabwe, and Angola. These are mainly soft drinks and spirits.

Packaging industry must switch to sustainability

South Africa has a broad-based packaging industry, whose largest companies also fabricate in other African countries and beyond. At 45%, plastics production has the largest share in the packaging industry, followed by paper and cardboard (approx. 32%) and metals and glass. The relatively small market reduces the opportunities for cost advantages by producing larger quantities (economies of scale). On the other hand, larger packaging manufacturers can counteract the economic difficulties in South Africa through exports and their foreign locations.

Adding to topics such as cost optimization, energy efficiency in the face of rising electricity prices and the development of intelligent production systems, the packaging industry must also respond to the global negative image of durable plastics. The issues of recycling, bioplastics and the reduction of packaging volumes are becoming increasingly important.