Pioneer's 'functional food' category feeds healthy bottom line

[caption id="attachment_93475" align="alignright" width="300"] Sharks flyhalf Pat Lambie is a Futurelife brand ambassador
Image by: Supplied[/caption]

Local fast-moving consumer goods company Pioneer Foods has taken another step in its transformation under former Tiger Brands consumer brands head Phil Roux.

After announcing last week that it is buying 50% of the fast-growing Futurelife brand, Pioneer can now offer its own alternatives to its cereal brands.

Rumoured to be in the region of R400-million, the price of the deal is unlikely to be the focal point for Pioneer shareholders.

Futurelife is more important as a kind of shell brand under which Pioneer can roll out a series of add-ons at lower cost than Futurelife could achieve on its own.

Chris Wehmeyer, portfolio manager at PSG Konsult, said Futurelife would benefit from Pioneer's enormous manufacturing capability and distribution network. "It fits into Pioneer's mix and it's high-margin business, compared with a similar product like ProNutro."

Vunani Securities analyst Anthony Clark said details had been scarce because Pioneer was under no obligation to disclose them under JSE rules, given the size of the deal.

Pioneer Foods' market capitalisation is R43.7-billion. It owns brands such as Bokomo, Safari, LiquiFruit and Marmite.

"This deal isn't even a drop in the Pioneer bucket, but it's a great strategic asset. For them to build a functional foods brand, when functional foods are the flavour of the month, would have taken months, if not years, to have the brand penetration and awareness."

By buying the Futurelife stake, Pioneer got an established brand with existing shelf space across every retail chain in the country, Clark said.

"It augments already dominant cereal brands and allows them to enter a fast-growing new category: functional foods. Everybody thinks eating them is healthy for you.

"The world is going in the healthier, more nutritional direction - we've seen that trend for years. In a few years Futurelife has very quickly gained a market presence from nothing. It does seem a more appealing option compared with traditional cereals and there's the associated perception - and some actuality - of health benefits," he added.

Is this a fad that would make the timing great for Futurelife but a troubled buy for Pioneer?

"It's a growing international trend and I don't think it will change. That Pioneer felt they needed to augment their dominant cereals position by buying Futurelife shows they obviously believe they needed to be in that category," Clark said.

"Pioneer has a truly astonishing distribution network. They can take Futurelife to a place it could never have gone by itself. It's a marriage made in heaven. I can't fault Pioneer Foods for doing the deal."

Futurelife's founder, Paul Saad, will continue to run the business. Aspen Pharmacare, run by Saad's brother, Stephen, contributes some ingredients to Futurelife's product range, under licence, and Clark believes there may be all kinds of influences at play in how the product range develops.

"Aspen [has] intimated it intends moving into nutritional foods, primarily in the infant-care market. It's not a competition element, but that's the way the market is moving."

The deal will not move the needle for Pioneer, but that is not necessarily the point.

Pioneer is snapping up products in the breakfast category that are an alternative to the products it already offers.

"It's a good move, although it isn't a big one. It's a nice-to-have. Do I think it will end up being a multibillion-rand category for Pioneer? No, I don't. But I think it will be a nice niche category with higher margins, because Futurelife's price point is at least double that of a traditional cereal. It's all about perception and marketing."

AlphaWealth fund manager Keith McLachlan said this was a continuation of Pioneer's revised strategy, first demonstrated when it unbundled its Quantum Foods unit last year.

"Pioneer is focusing much more intensely on branded, premium products with pricing power. Their argument is that these products are more defensive, which will make the company more stable and less cyclical from a dependence on commodity prices and inputs. Quantum wasn't a bad business - arguably the best eggs business you can get - but eggs are a commodity driven by supply and demand, and the barriers to entry are low."

Futurelife is a highly recognisable brand and if eating fashions change, Pioneer can simply keep up with trends by launching new lines. "A cleverly structured brand is actually product-agnostic. Futurelife can adapt, the theory being that it has a relatively loyal customer base," McLachlan said.

Pioneer's profitability in the FMCG sector is volume-dependent.

"You want branded goods but as many as possible flowing through the company. If they can plug Futurelife into Pioneer's existing infrastructure and distribution channels, they can leverage it even more.

"I wouldn't expect Pioneer to tamper with Futurelife's pricing, so they can save 5% to 10% on costs at the back end that will fall straight through to the bottom line."

Clark and McLachlan expect Pioneer to continue picking up brands. The first of which should be Clover, which also has the potential to launch parallel products to its existing line and would fit neatly with Pioneer's stable.

"Pioneer could buy Clover without even having to issue a cautionary. It's another deal made in heaven," Clark said. -Brendan Peacock, TimesLIVE