Highlights

Masley Notrica, managing director, Speciality   Revenue increases by 8,9% to R547,8 million   We lead the sector by providing international brand principals with data-mining capabilities   Efforts stepped up to ensure high on-shelf visibility and optimum in-store space   Aggressive promotions mounted and couponing campaigns launched   Demand tested for strategic move into convenience store market

Strategic positioning

In a market where many competitors simply take on the role of stockists and suppliers, Patley’s adds value as the brand-building partner of brand principals. We provide ideas and market intelligence, optimising every opportunity to maintain or wrest category leadership.

Sustainable development

Patley’s has built its brand around quality. We comply with SGS inspection standards and the SABS standard for meat and fish products following quality programmes initiated well ahead of the Consumer Protection Act.

Talent retention remains a challenge. We have achieved 55% black middle management through internal development, but unfortunately lost good candidates at senior management level.

Initiatives continue to reduce environmental impacts and the consumption of fuel, electricity and water. We invested R250 000 in energy-efficient warehouse lighting and now use recycled paper as normal business practice. Despite fitting trucks and commercial vehicles with tracking systems, fuel consumption has not fallen significantly. Monitoring of resource consumption will enable like-for-like comparisons next year. Additional sustainability information is available on the Bidvest website.

Performance

Revenue increased by 8,9% to R547,8 million while trading profit dropped by 13,0% to R29,8 million. Cash flow is constrained by operational factors. Lead times are rarely below three months and payment prior to the arrival of shipments may be requested. As most items in the brand bouquet are imported, forward cover is necessary to manage foreign exchange volatility.

Benchmarks

Sales benchmarking is from a zero-base against various criteria, including region, city, town, customer and individual stores. Sales volume growth was generally satisfactory, but margins came under intense pressure.

Strategic dynamics

Macro-factors created a “Perfect Storm” of adverse conditions. We have contended with rand fluctuations on many occasions. The same is true of food commodity price increases, low economic growth and plummeting consumer confidence. On this occasion, all of these factors applied simultaneously while the degree of magnitude increased.

Industry dynamics

Inventory control and margin management were complicated by price volatility and the extent of foreign exchange and food price movements. At various stages, milk prices were up 60% while the price of rice went up 300%. Many prices doubled. Rand depreciation of 40% was followed by rand appreciation of 20%.

Consumers cut back; first by lifestyle changes (restaurant visits plummeted), then by trading down. Upper income groups – Patley’s underlying customers – traded down as well, confirming the extent of the recession.

In such circumstances, a business committed to the long term such as Patley’s becomes vulnerable to opportunistic importers that make speculative forays into brand categories without forward cover. Consumers rarely appreciate that long lead times translate into a slow rate of price correction. They pressure retailers who pressure suppliers, resulting in substantial margin erosion.

Brand dynamics

Perrier and Vittel replaced Evian in the brand bouquet. Arcor (sugared confectionery) was added. Relationships with brand principals were strengthened by making available precise sales statistics, sourced from the data-processing specialists at Synovate Aztec. We are the first importer and distributor in South Africa to provide international brand principals with data-mining capabilities.

Operational dynamics

Efforts were stepped up to ensure high on-shelf visibility and optimum in-store space. Aggressive promotions were mounted and we encouraged principals to engage in couponing campaigns that delivered unprecedented savings.

Sales volumes were maintained or grew on brands for which there were no cheap local equivalents. In other cases, significant price reductions were necessary to induce sales activity.

New initiatives

Costs were well managed, though two new investments were made.

We anticipate the purchase of additional multi-temperature trucks. Additions to the fleet are not only necessitated by volume growth. The opening of new stores by our customers and increasing road congestion also make the investment necessary.

Investment was also made in staffing and delivery resources to support a strategic move into the convenience store market. There are now an estimated 2000 “garage stores” nationwide. In the final quarter, a Gauteng task team was assigned to test demand in these stores for impulse-purchase items from our range. If the test proves successful, the initiative will be rolled out to other regions.

Risks to the business

Business risks – interest rates, currency movements, consumer buying preferences and the state of the economy – are well understood and managed by experienced executives well versed in the sector. Forward cover is taken as a matter of policy. That policy stays in place, despite a stronger rand.

Road and port congestion and the effect on fleet costs is a relatively new challenge. Warehouse-to-store delivery remains the norm in South Africa. Major retail groups are investing in centralised depots. Ultimately, this will help distribution businesses better manage fleet costs.

Loss of a brand principal remains a key risk. This is managed to some extent by the development of our own private brands. However, the risk of loss is best addressed by operating as a partner of the principal to achieve shared objectives. This is core competence at Patley’s.

Organisational culture

The culture is little changed. Speciality is a national distributor and industry leader, but it behaves as a family business. This is reflected in a stable staff complement.

Future

Further deflationary pressure is anticipated in the first quarter of the new year. However, the extended lead times that contributed to pricing and inventory management challenges will soon have worked their way through the system.

Our entry into the convenience store market is expected to roll-out in the coming year. Early response was positive.

As economic pressures ease, consumer demand for quality foodstuffs is traditionally the first to recover.

All of these factors suggest there are prospects for renewed growth in 2010. Our target is a 10% increase in revenue and trading profit. In the medium to long term, we will look to maintain our record of doubling revenue every five years without acquisitions.