Lockdown in China hurts RFG
Cake decorations and parties took a back seat in China as consumers stopped socialising in the midst of the Covid-19 outbreak, and the change in demand has been costly for food company RFG, which saw an 11.3% decline in exports of its canned fruit. This week RFG Holdings, which changed its name from Rhodes Food Group, released a trading update that showed it had made limited exports to China since January.RFG's eastern hemisphere market includes Australia and Asia, which make up 50% and 35% of the company's sales respectively.In an investor call after the update, RFG CEO Bruce Henderson said at least 17.5% of the company's canned fruit exports went to China.RFG produces fresh, frozen and long-life food brands, which include Bull Brand, Magpie and Ma Baker. The company's canned peaches are its biggest seller in China and are mainly used for decorative purposes on cakes or in products that are consumed in social settings outside homes."It's really a premium product that goes into that market and largely into cakes and into the trendy emerging coffee shops," said Henderson.He explained that the decline in demand over the past few months had had a big impact on the business and it was unlikely that there would be a recovery in the second half of the year."There's no way that is going to be made up in the balance of the period - those cakes have simply not been eaten and it's unlikely everybody's going to rush out and eat two cakes in the second half," Henderson said. The group has attempted to compensate for the loss by exporting its excess canned fruit volumes that were destined for China to other Asian markets.Henderson said the move had paid off so far and the canned fruit had fetched "good levels of profitability".He added that RFG will have to move some of the products into less profitable markets in the second half of the year. Turnover for RFG's international segment declined by 1.7%.Lester Davids, a trading desk analyst at Unum Capital, said RFG's trading update reflected a satisfactory performance in the context of the high competition in the fast-moving consumer goods industry."In terms of second-half performance, much will depend on whether we see a recovery in China amid the outbreak, while other international markets should be monitored closely as the virus has since spread and has seen most major global markets being affected by Covid-19," said Davids.Gryphon Asset Management portfolio manager Casparus Treurnicht said although there should be a recovery in exports to China, other logistical problems could emerge for RFG locally."There is also a marked slowdown happening in global growth, which will weigh on its performance," said Treurnicht. He added the current global environment had generated more competition as food producers fought for market share.As for the company's performance, he said: "RFG underperformed investor expectations for multiple years in a row and it still appears to be expensive. Good dividend returns never materialised."RFG's regional segment, made up of SA and the rest of the continent, increased its turnover by 9.3%.In SA, RFG saw a spike in demand this month due to consumers stockpiling goods as the virus outbreak spread. The company will continue to provide products during the lockdown and will meet urgent demands should they arise.RFG's competitors, Tiger Brands and Pioneer Foods, have also put measures in place to ensure that retailers don't run out of supplies. Tiger Brands spokesperson Nevashnee Naicker said: "Tiger Brands is in a position to increase production capacity on key food products if this is required. We have processes in place to meet demand on a national level and are working with all our partners to manage this in a co-ordinated and calm fashion." At Pioneer Foods, business is continuing as normal but the company is ready to ramp up production if necessary.Pioneer Foods CEO Tertius Carstens said: "The big drive for us now is to plan for the lockdown period because as an essential service we are intent on keeping supplies of all food and beverages intact", while keeping staff safe. He said that load-shedding was a risk for the company but as electricity usage would be lower during the lockdown it was unlikely to be a problem.