Cape Town - Although eggs added a bitter taste to an otherwise appetising bottom line at Pioneer Foods, MD Andre Hanekom is adamant the food giant won't be selling off the egg business.
Fin24.com, citing Landbou magazine, reported on Monday that Pioneer Foods faces a legal claim of almost R100m from a group of disgruntled egg producers, as well as a possible new investigation by the competition authorities.
In the year to end-September, the profit contribution of Pioneer's egg business was markedly down after capacity increases in the industry saw an over-supply situation erode trading margins.
The egg business sits uncomfortably with Pioneer's efforts in recent years to build food brands outside its core bread (Sasko) and cereals (Bokomo) divisions.
For one thing, eggs are fungible: they are difficult to differentiate by means of branding because an egg essentially remains an egg whether the packaging is plain grey or carries a picture of a grinning Humpty Dumpty. Interestingly, Pioneer holds three egg brands: Nu-laid, Quantum Eggs and Barn Eggs.
Secondly, the barriers to entry are low. It might not be an exaggeration to say that anyone with a large backyard, a few metres of chicken wire, a couple of hens and an iota of salesmanship can start producing and marketing eggs.
Scrambled margins
For Pioneer, it's been a double whammy. More eggs on the market squeezed market share and scrambled margins, while a revolt from a segment of its suppliers (who are claiming a rather large amount of money) risks disturbing the smooth running of operations.
One could easily forgive Pioneer if it simply abandoned the egg business at this delicate juncture.
But Hanekom stressed Pioneer is content with the return on capital achieved by the egg business over the longer term.
"We have been in this business for 15 to 20 years, and we are comfortable with the return on capital."
Hanekom acknowledged the egg business was cyclical, and that in the bad years there was always pressure to back out of the industry.
"At a recent board meeting we had a long discussion about the egg business. But we need to be there, and have taken a long-term view."
Hanekom is also unfazed by the claims by a number of egg suppliers, who are alleging that Pioneer is being particularly hard-boiled in threatening a marked cut in egg prices if the pending legal action is not abandoned.
Basically the disgruntled egg producers are locked into a contract to supply to Pioneer as well as buy hens, feed and medicine from the group. The producers are claiming R96.5m from Pioneer for alleged negligent practices, which stymie efforts at profitable egg-rearing.
Hanekom said Pioneer was acting in line with the original contract, which had been running for a number of years with egg suppliers.
He stressed that only a few of the suppliers were making claims against Pioneer. "Other suppliers are still working to the contract."
While wryly observing that the public airing of the claims seemed coincide with Pioneer's year-end results presentations, Hanekom said the company was happy to defend the matter in court. "Why go the press when you can go to court?"
- Fin24.com