Tiger Brands' CEO Tjaart Kruger has just begun his second year reshaping South Africa’s largest food company to boost margins and returns on invested capital.

Further brand disposals form part of his strategy as the ex-Premier FMCG chief embarks on a plan to consolidate production across Tiger Brands’ 40-plus manufacturing facilities and focus on regional business development.

Just Food’s Simon Harvey chats with Kruger on the priorities ahead as the company notched up almost R38bn ($2.1bn) in annual revenue but with pressure on volumes and challenges around local inflation and affordability.

Simon Harvey (SH): What was the thinking behind the plan to reorganise Tiger Brands’ operations into six business units?

Tjaart Kruger (TK): The whole reason for that was to get decision-making as close to the rock face as possible. We had too many products. Our service levels were not great. We must look at what is not core to us and what are the businesses that we should sell, within the framework of a capital-allocation model.

For a business that's not giving us the returns, can we get it delivering those returns over a four- or five-year plan? If it can't, we must make some strategic decisions.

The baby wellbeing business does comply to those returns criteria but it is not something we focus on.

SH: How far has the portfolio reshaping got to go?

TK: We've identified around 20% of SKUs to be reduced. We've identified about 16 brands we really want to punt, we want to make big and we want to put proper marketing money behind to make them good consumer propositions. Mega brands that are recognised by the consumer, where we can get economies of scale and run efficient factories.

In the personal-care business, we've sold about 11 brands over the last two years. We've got four brands that we're focusing on now.

We’re comfortable with the progress we're making. Some of these deals are closer than others.

We want to focus the business regionally, focus on fewer things and make those fewer things bigger.

We want to be a southern African play. Eighty per cent of our turnover is in South Africa. We want to focus the business regionally, focus on fewer things and make those fewer things bigger. To really drive categories where we can get scale, get unit costs down and get to price points where we can compete with our dealer own brands [private label] and our competitors.

SH: Are you able to put a value on the 20%?

TK: It’s roughly cutting 980 SKUs, something like that, and half of those SKUs are making a loss. The Pareto principle, if you list all your SKUs, the top ten makes 80% of your turnover. Our rice business, which has got about 80 SKUs, two SKUs make 80% of the turnover. We must get that right.

Innovation is a big part of our goals but we must innovate cleverly. We can't innovate into niche products when that's not our business. Our business is to sell huge volumes of branded products that consumers love.

SH: Are you able to give a sense of the revenue targets from your new focus on snacking, health and nutrition?

TK: It's what we call the growth platforms – ‘snackification’, health and nutrition, and affordability. We were way off a year ago on affordability because our products were too expensive, so we're busy fixing that.

Health and nutrition mean different things in different places. For someone living in New York on the 70th floor, nutrition and health might mean eating peanuts and salads. Nutrition in the townships in South Africa means getting a meal that fills me up.

We're fully on board with sugar and all those things but health and nutrition in poorer communities means something slightly different to what it means in developed countries.

If you look at snackification, that's a big thing. We haven't focused on that a lot. This past year, we're fixing the base and resetting the business, launching things like energy bars and breakfast bars.

A big focus in South Africa in convenience is bread. You buy a loaf of bread and you can eat it, and you don't have to put a topping on it if you don't have money for a topping. That's a big business. Albany is our biggest bread brand. We've got by far the best brand in the category or the most recognised brand.

But we have become unaffordable compared to our competitors. Consumers are not prepared to pay that type of premium. That's where we've lost out in the last couple of years.

SH: That must be a challenge, with Tiger Brands’ price inflation at 7% last year?

TK: If you look at CPI for the year, it's about 4%, maybe just above that. But food inflation is about 6-7% and our price increases were similar to that.

We've had heavy food inflation in a couple of products. Rice, which is a big part of our business, prices last year went up about 25%. Maize in South Africa is the highest price it's ever been. I've been in the game for 40 years and I've never seen maize prices where they are now. Maize in South Africa is more expensive than wheat and I've never seen that before.

As you go forward, you'll see a bit of deflation in rice. Through our efficiencies we've got in the business, we'll have the capability to be clever with our price points but we don't want to discount everything to death.

SH: Your outlook points to revenue growth above the rate of inflation. Can you explain?

TK: What we meant by that statement is we want to see volume growth. We want to see revenue growing ahead of inflation through volume growth.

If the rand remains quite strong, that puts us in a good position, our cost base comes down and we can probably be below inflation with pricing. But then we must grow volumes, and then our turnover will be ahead of inflation.

SH: Is that a balancing act with volumes down last year?

TK: You must look at this past year as two halves. The first half, there was very little I could do, it was what it was. We only saw the turnaround in the second half with these new policies coming into play.

The first quarter in the rice business, for instance, last year was an absolute disaster. India had a bad crop, they closed their borders and world prices went up. We weren't procured well enough, then a quality issue happened, then we were out of stock and then we had to replace it with very expensive stock because the prices went up 25%.

Now our rice business is trading extremely well, our volumes are doing quite well, our margins are good. The Indian market opened about a month or so ago and drove world prices down.

Last year, we fixed a lot of basics and were happy to walk away from some volumes. We're not happy with the volume decline but it was deliberate.

As we go into this financial year, it's a different ballgame. Now we're back into growth, we've got an efficient business with an opportunity to make it more efficient. A lot of the work we're doing is not fully implemented yet. It will come in as we go along.

SH: I guess it’s about cutting SKUs to raise capital for reinvestment but that must be a challenge with the number of manufacturing plants?

TK: There’s about 45. We're looking at the manufacturing footprint in bakeries. We're going to put up a super bakery, which will probably replace six existing bakeries.

We've got some plants that are relatively old.

In our culinary business, we're looking at our tomato sauce plants. We've got a plant in Cape Town, which does chutneys and quite a few other things. We're looking at developing that, what we would call a mega site, and close down smaller sites.

We've got some plants that are relatively old. In our jellies business, we've got some equipment that's 40- to 45-years-old and still works, so it's not a train smash. But if you put new equipment in, it takes 20% of the floor space, 20% of the power, it's got five times the capacity, it's much more automated and uses less labour.

SH: What is the ultimate goal – driving the bottom line, operating profits or gross margins for instance?

TK: If you only looked at one measurement, it's return on invested capital (ROIC). There are three main drivers of ROIC. You must have an efficient balance sheet. Then your gross margin and EBIT margin, which means we must sell the right volume at the right price. That must be closer to 30% and it's about 28% at the moment – maybe not this year but certainly in the next two or three years.

We must get volume growth to produce the gross profit margin north of 30% and get the right operating margin, which must be north of 10%. Then, if you manage your working capital well, you'll get a ROIC of above 20% and that's what we're aiming for.

SH: What’s the status of the deciduous fruit business your predecessors were trying to sell?

TK: It doesn't fit our capital allocation model. We can't get that to deliver the results or returns we're looking for and we are still looking to sell it. We are very close to a deal.

SH: Are the power shortages still plaguing South Africa?

TK: We haven't seen load-shedding for a couple of months. We must have 60 standby generators in the group and they haven't worked in four months, which is a lovely problem.