You are currently viewing our desktop site, do you want to visit our Mobile web app instead?
 Registered users can save articles to their personal articles list. Login here or sign up here

Manufacturing industries that go against the tide

While a few sectors are thriving, as a whole the manufacturing industry seems to be in decline.

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
Astral R148.00 -37%
AVI R83.14 -20%
RCL Foods R9.80 -41%
Rhodes Food R14.00 -14%
Tiger Brands R202.30 -21%
Pioneer R106.30 38%

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.

Get access to Moneyweb's financial intelligence and support quality journalism for only
R63/month or R630/year.
Sign up here, cancel at any time.

AUTHOR PROFILE

COMMENTS   5

To comment, you must be registered and logged in.

LOGIN HERE

Don't have an account?
Sign up for FREE

IMO we should focus heavily on value add in food and agriculture processing. You can export a 200kg crate of certain plant pods for about R3000 value. Or you can employ 20 people, strip and refine, extract oils and airlift about 40kg of finished products worth over R40,000.

A competitive manufacturing sector is important and we should develop it, but then we have to develop it taking into account the fact that we don’t have tradesmen, we don’t have decent governmental policies, we don’t have productive employees, we don’t have…, well I guess the point is made. Given everything that hampers us, I’m not sure that our manufacturing sector will be the sector leading us out of this slump. The most vital part of the equation is for our political masters to get their heads out of their proverbials, so that a conducive environment is created, which will ensure continued economic growth. Until we have that, figures like these will rather be a reflection of manipulated inflation figures, rather than signs of true growth and profitability.

Agreed. The inputs are hopelessly distorted then you need 51% BEE ownership. Survival seems to depend on taxpayer subsidies for RCI and Astral and effective monopolies with limited oversight for a few of the rest. Not for me.

Paul,

The BEE stuff is relevant in certain customer markets but not all. If only you have quality and price that local buyers need, it becomes suddenly a bygone. If your clients are offshore, it is non-issue. Amazingly, nobody asks about your BEE credentials when you are their customer, unless of course they can try and get supplier development points, anyway imagine-able. Hopefully we can get our collective pessimism out of the gutter sometime soon or we are well and truly stuffed as a nation

What is profit margin? If it all goes to capex you still not making any cashflow/dividends.

Load All 5 Comments
End of comments.

LATEST CURRENCIES  

USD / ZAR
GBP / ZAR
EUR / ZAR

Podcasts

SHOP NEWSLETTERS TRENDING CPD HUB

Follow us:

Search Articles:Advanced Search
Click a Company: