Premier Group returned to the JSE on the 24 March 2023 after 18 years as an unlisted company. Their long-term strategic partner, Brait, maintains a 47% shareholding.
We evaluate the dynamics of the fast-moving consumer goods (FMCG) industry in which Premier operates and the opportunities for it to deliver value to shareholders.
An extensive brand portfolio
Through strategic acquisitions and investment into their facilities over the past decade, Premier has focused on capacity and portfolio expansion. In addition to their substantially upgraded traditional milling and baking operations, they now also produce sugar confectionery, and home and personal care products. Premier now boasts an annual turnover of R14.5 billion and employs over 8 100 people across its various operations – comprising 13 bakeries, seven wheat mills, three maize mills and various other manufacturing plants across its regions. Flagship brands include Snowflake, Blue Ribbon, Impala, Iwisa, Manhattan Sweets, Super C, Crown Select, Dove and Lil-Lets.
Deep milling and baking roots underpin growth
Premier’s bakery division is its largest contributor to group revenue (below), delivering 1.8 million loaves of bread daily to 42 000 outlets through its Blue Ribbon and other bread brands, with more than 60% of sales made through the informal retail channel. To minimise transport costs, Premier’s wheat mills are strategically located close to its bakeries. Vertical integration within production has brought about a more consistent supply of bread ingredients. Flour that is not used for internal baking purposes is sold under the Snowflake brand, which currently contributes approximately 18% to group revenue.
Notably, Premier is the third largest producer of maize in South Africa, with Iwisa and other maize brands produced at its three maize-milling facilities, reaping a 17% market share locally.
Acquired product diversification
In March 2015, Premier acquired Companhia Industrial da Matola SA (CIM), a leading manufacturer of biscuits, pastas, rice and animal feed products in Mozambique. CIM currently generates 8% of Premier’s revenue, servicing the Mozambican market and exporting into other SADC countries. Operations are located on a single integrated site, which achieves economies of scale as volumes grow and harnesses their centralised distribution strengths.
Premier entered the sugar confectionary category through its acquisitions of Manhattan and Super C. The 2021 acquisition of Mister Sweet resulted in Premier becoming the second largest sugar confectioner in South Africa, with a 16% market share. The integration of the Mister Sweet business has resulted in R50 million in cost synergies in the first half of 2023. This business segment is specifically growing in Namibia and Angola and management has sought to double its operating margins through volume growth.
Feminine hygiene brand, Lil-Lets, contributes around 5% of Premier’s revenue with operations in South Africa and the UK. Personal care products are also supplied to Sainsbury’s in the UK at good margins and are exported to the Middle East, Ireland, the USA (through a partnership with Amazon) and other EU markets, where there are clear opportunities for expansion.
Bread industry dynamics
Together with other daily staples (maize meal, pasta and rice), bread is a convenient, versatile and relatively healthy food that is aﬀordable for millions of consumers. We estimate that the South African bread market comprised revenues of R42 billion in 2022 and bread volumes have grown at 3% per annum over the past 15 years. We expect volume growth to average 2% per annum for the next five years as population growth, continued urbanisation and gradually rising income levels result in continued demand growth.
Following the deregulation of the South African baking industry in 1991, the bread market remains concentrated, with three main bread manufacturers: Premier, Tiger Brands and PepsiCo (through Pioneer Foods). As tabled below (left), Tiger brands is the national leader with 24% market share through its Albany brand, followed by PepsiCo (19%) and Premier (16%).
Within the formal retail channel, South Africa’s major food retailers oﬀer private-label bread products or store-baked loaves that are cheaper than branded oﬀerings (although have a shorter shelf-life). These are often used as loss-leaders by supermarkets, attracting customers into the store and accounting for around 10% of local bread sales. This is low by international standards, where private label typically accounts for 20-30% of developed economy bread markets.
Each of South Africa’s three main bread producers sell more than 50% of their bread into the informal retail channel (eg spaza stores). Here they have strong pricing power, although distribution costs per unit tend to be higher than for the formal retail channel given the greater dispersion of stores. An eﬃcient intra-regional supply chain results in a key cost and quality competitive advantage.
Investment delivers rising returns
Premier has invested over R5 billion in its milling and baking division since 2011 (above right). Consequent eﬃciency enhancements have led to Premier becoming the lowest cost bread producer in South Africa. They are currently operating at approximately 90% capacity, which is higher than their two main competitors, with further capital expenditure planned to increase capacity. This will include machinery upgrades in coastal bakeries aimed at improving quality, thereby justifying higher bread prices and boosting operating eﬃciency. Recently, Blue Ribbon has traded at a premium to its main competitor, Albany, up from a 10-15% discount a decade ago.
Expansionary capital was also deployed to add additional lines at existing bakeries, resulting in a per-unit reduction in the cost of bread. Business profitability has therefore improved with the combination of lower production costs and higher price points. Furthermore, bakery acquisitions have increased Premier’s footprint in coastal provinces, cementing its dominance in these regions.
Recently however, Premier has focused its capex endeavours inland where market share is lower relative to competitors. Gauteng is the most populous province in the country and accounts for almost 35% of total national bread sales. North-West, Mpumalanga and Limpopo are the most under-indexed provinces based on per-capita sales, presenting an opportunity for Premier to win market share as consumption is most likely to grow there.
Premier plans to replicate the success of their coastal bakery strategy, with significant investment into a new Pretoria-based bakery, that can produce 16 000 loaves of bread an hour and deliver approximately 128 million loaves of bread per annum. This improved facility will enable the closure of several older, less eﬃcient inland bakeries, shifting production to a single low-cost, high-eﬃciency bakery positioned adjacent to its flour mill. Additionally, over the next 18-24 months, Premier will seek to expand the capacity of its Aeroton bakery in Gauteng by another 9 500 loaves of bread per hour. Machinery upgrades at these two bakeries should enhance product quality and increase volumes. As a result, the profitability of inland operations should improve, aligning them more with the profitable coastal regions.
Strong prospects from astute investment
In a concentrated South African baking industry, Premier has actively grown its market share and profitability through focused investment. This continues to improve eﬃciency, operational integration and product quality – positioning them as a top quality, low-cost, growing bread producer. This bread baking strength and growth is augmented by the prospects of geographic expansion and volume growth from its broader, diversified product range. Premier oﬀers investment value directly or via investment in Brait.