There have been ululations in the market about the fact that food and beverage giant PepsiCo wants to invest in South Africa through a R24-billion offer to buy JSE-listed Pioneer Foods, but concerns are also being raised about the investment in a sector that is highly concentrated.
Local and international agencies, including the World Bank and the International Monetary Fund (IMF), have expressed worry about the high degree of concentration in some sectors of the South African economy.
The government now has a new tool in the Competition Amendment Act, passed in February this year, which allows it to tackle concentrated sectors by enabling the entry of smaller businesses.
President Cyril Ramaphosa, speaking this week at a conference at the University of Johannesburg, said the IMF and World Bank had found that a key economic problem in South Africa is the dominance of monopolies. “They have a stranglehold on the economy … That was what was designed in the past and it was so designed that it ensured that there were a few insiders. It so happened that the insiders were white controllers of the economy and that has continued right until today,” he said.
Ramaphosa used the the dominance of the country’s top four banks as an example and did not refer to the food sector, but research by the Centre for Competition Regulation and Economic Development at the University of Johannesburg in 2017 showed the ownership in the food sector is highly concentrated, with a few large companies holding considerable market share.
Pioneer, which focuses on wheat, maize, rice, pasta, beans and dry vegetables, includes the Ceres, Heinz, Weet-Bix, Liqui-Fruit, Sasko, Marmite, ProNutro, White Star and Bokomo brands in its stable. It has a market capitalisation of R22.8-billion and is one of the largest players in the food sector. It reported revenue of R20-billion in 2018.
PepsiCo generated $64-billion in net revenue in 2018 and has a market capitalisation of $182.8-billion with well-known brands such as Frito-Lay, Gatorade, and Pepsi-Cola. The multinational giant said it entered into an agreement to acquire all outstanding shares of Pioneer Foods Group for R110 a share, a 56.5% premium on Pioneer’s ruling share price over 30 days to July 15.
Pioneer’s share price responded to the offer by jumping to R101 from R77.60. The purchase will be funded through a combination of debt and cash, and has been unanimously approved by the boards of directors of both companies.
The purchase will allow PepsiCo to tap into markets in Africa and introduce its products to areas Pioneer Food distributes its products, to which it said.
Anthony Clark, an analyst at Small Talk Daily, said there are certain elements of a transaction that will fit very nicely into the international PepsiCo portfolio. “My view is Pepsi wants Pioneer Foods because it wants to own an amazing distribution channel in this country and into parts of Africa,” said Clark. Clark said that Pioneer Foods has been struggling in the current economic climate because it offers brands that are susceptible to weak economic conditions, but noted that PepsiCo is “international [and] has a number of businesses — so [Pioneer’s] Bokomo brand could be seen on international shelves”.
The Centre for Competition Regulation and Economic Development report looked at the biggest manufacturers in the country, including Astral Foods, Pioneer Foods, RCL Foods, Rhodes Food and Tiger Brands , among others.
The report found that the sector is concentrated: for instance, RCL Foods and Astral have a combined 46% market share in the broiler meat production market (poultry); Rhodes Food group has a 66.3% market share in canned meats; and Tiger Brands has 48.6% market share of the retail value in the sugar confectionery market.
Pioneer’s White Star super maize meal brand has 25.3% of the market, and Tiger Brands’ Ace super maize meal holds 22.5% in white maize milling. Pioneer Foods and Tiger Brands together held 56% of the breakfast cereal market in 2015-6, and 54.9% in baked goods.
The centre’s Anthea Paelo said: “The sector is highly concentrated with high barriers to entry. In order for a business to enter the sector they are faced with very high capital requirements, also because the sector is vertically integrated.”
Paelo said that from farming to production until the product is in the store, you find the same company in charge of the entire process.
Tracy Ledger, of the Public Affairs Research Institute, agreed and said the high concentration is due to historical factors: under the apartheid government there was a complex network of legislation that governed everything, including price guarantees and controls.
Ledger said even when the law changed in 1996 with the introduction of the Marketing of Agricultural Products Act, which did away with the restrictions, the effects of the old law are still being felt. This is why you find small groups controlling the sector and enjoying advantages.
Paelo said there needs to be deconcentration so new players can enter. “I am not sure if there is a way to achieve it other than through the Competition Commission, but one of the key things is just to support entry. We need to support [new businesses] through capital, skills and improve access to increase routes to market,” she said.
Tshegofatso Mathe is an Adamela Trust business reporter at the Mail & Guardian