Entrepreneurs and investors alike can learn something from Statistics SA’s latest financial report on the manufacturing industry. Although the survey to collect data from manufacturers was conducted in 2017, the results remain relevant in that they show changes and trends in the sector since 2005.
Of interest is that the manufacture of food products and beverages seems to be the one industry in SA that is growing steadily and producing good returns, while employing large numbers of workers who have seen their average salaries grow handsomely year after year.
That was the case in 2017 anyway.
Recent results from listed food companies such as Astral, RCL Foods, Rhodes, Tiger Brands, Pioneer and AVI show that the situation has changed drastically since then.
Brave investors might see something else when looking at the long-term trend since 2005.
The recent dip in the fortunes of big listed food companies could present opportunities for recovery, with most having seen their share prices decline sharply.
For instance, RCL Foods – owner of Rainbow Chickens and producer of Epol animal feed, Dogmor pet food, Nola Mayonnaise, Ouma rusks and Yum Yum Peanut Butter – has seen its share price fall by more than 40% during the last 12 months. Tiger Brand hit a new 52-week low last week.
Food producer share prices in the past 12 months
|Share||Current price||12-month change|
Source: Moneyweb data
The fall in share prices and rather disappointing results from listed food producers during the last financial year flies in the face of the trends identified by Stats SA in its analysis of the manufacturing sector.
The analysis of ten different manufacturing sectors shows that the food sector performs the best in several aspects over the longer-term.
Of all the different manufacturers, food producers have enjoyed the largest increase in income since 2005. They have also seen their profit margins increase year after year. The Stats SA research shows that the net profit margin (after tax) for food producers increased from 7.7% in 2008 to 12% in 2017 – the highest of all the sectors in the manufacturing industry. This is after the profit margin decreased to only 4% in 2014.
The report is based on a large-sample survey of manufacturing concerns that are registered for value-added tax (Vat). The research is conducted every three years and covers all the main manufacturing sectors, such as textiles and clothing, wood and wood products, petroleum and chemicals and basic metals, metal products and machinery.
The food sector has seen its income increase from R156.9 billion in 2005 to nearly R540 billion in 2017, producing a net profit after tax of R63 billion.
It is the only sector that was able to increase its profit margin between 2005 and 2017. The profit margin in all other manufacturing sectors decreased.
Within the food industry, the manufacturers of alcoholic and non-alcoholic beverages enjoyed the highest profit margins of all manufacturing sub-sectors. The profit margin of 28.3% probably reflects the fact that cool drinks and beer are very popular and cheap to make.
Within the food industry, sweets and chocolates are nearly as popular and profitable, with a profit margin of 16.9%. They were pipped to the post for first place in the entire manufacturing industry by the 18.6% margin enjoyed by the manufacturers of ovens and fireplaces.
Top ten manufacturing sectors in terms of profit margin
|Alcoholic and non-alcoholic beverages||28.3%|
|Ovens, furnaces and furnace burners||18.6%|
|Sweets and chocolates||16.1%|
|Paper, pulp and paper board||10.7%|
|Medical and surgical equipment||10.4%|
|Industrial control instruments, measurement and navigation||10.2%|
|Electricity distribution and control apparatus||9.9%|
|Basic chemicals (excluding fertiliser)||9.4%|
|Carpets, rugs and mats||9.3%|
|Glass and glass products, non-metallic minerals||8.5%|
Source: Compiled from Stats SA reports
Unfortunately, the manufacturing sector as a whole seems to be in decline in terms of profitability and employment.
While the sector’s turnover increased from R1 428 billion in 2008 to R2 516 billion in 2017, its profit increase was far more muted – from R114 billion to R138 billion. This means the profit margin decreased from 8% in 2008 to only 5.5% in 2017.
The Stats SA report shows that employment in the manufacturing sector decreased steadily, with fewer people employed in the sector every three years the survey is conducted.
“Employment in the manufacturing industry declined from a high of 1.34 million in 2008 to a low of 1.17 million in 2014 (a loss of 171 602 jobs),” says Stats SA. “The biggest loss in employment between 2008 and 2017 was in the textiles, clothing, leather and footwear sector, which lost 84 124 jobs.”
An increase in employment in the chemical and petroleum industry, as well as wood, paper, publishing and printing, helped increase total employment slightly in 2017.
The data about average salaries in the manufacturing industry might be behind the decline in the employment in the sector. Stats SA notes that “average salaries and wages in the manufacturing industry increased from R84 597 in 2008 to R225 499 in 2017, an annualised growth rate of 11.5%”.
This means salaries increased at around twice the rate of inflation.
It also means salaries and wages increased twice as fast as the selling prices of manufactured products over the past 10 years. This is another factor that explains the decline in profitability in the sector.
Other figures in the report seem to show that larger businesses opt for capital-intensive rather than a labour-intensive production. Stats SA says larger businesses with an annual turnover of R306 million or higher earned nearly 80% of the total income in the manufacturing industry in 2017, but employed only 49% of the workers in the industry. It follows that smaller firms created more than 51% of the jobs while earning slightly more than 20% of the income.
Unfortunately, the Stats SA report does not disclose detailed income and expenditure figures by business size to enable a proper analysis of the profitability of businesses of different sizes.
Overall, the report shows that manufacturing is still very important in the SA economy, quoting another Stats SA report that concluded that manufacturing contributes more than 13% to the total value added to the GDP every year (in current prices), even if the contribution in constant prices declined from 3% in 2011 to only 1% in 2018.