Growing the mushroom business

FMCG SUPPLIER NEWS

Foodstuffsa.co.za - Sep 28th 2011, 09:56

Denny Mushrooms, recently sold by AVI as branding mushroom products was no longer viable in the face a wide range of cheaper imported products, will look to grow its business by increasing sales among upper-income black consumers. 

This is one of the strategies the business will pursue, reports Business Report, after it was recently bought from AVI for R263.5 million by a consortium that includes management, RMB Ventures and Pan-African Private Equity Fund 1.

Denny chief executive Roger Coppin says that growth plans included reaching new consumers in the huge untapped emerging black market, where few consumers were aware of the nutritious value of mushrooms.

Denny’s strategy to remain the country’s leading supplier of fresh mushrooms would not change as this business was performing “exceptionally well”.

AVI recently reported that in the year to June Denny’s revenue rose by 7 percent to R385.2m and operating profit increased by 8.9 percent to R50m with the operating profit margin increasing from 12.8 percent to 13 percent.

The group said Denny had performed well in the fresh mushroom category with improved output facilitating more aggressive trading and promotion, which led to higher sales volumes despite increased supply from other growers. However, the value-added business, comprising soups, sauces and canned mushrooms, had been affected by the sustained supply of cheap canned mushroom imports, which partially offset the improvement in the fresh mushroom business.

Coppin said AVI sold the business because it not longer fitted with its strategy of building big brands, not because the business was not doing well. Globally fruit and vegetables have become more commoditised as more retailers are packing house brands.

Annual sales of fresh mushrooms in South Africa total more than R600m, of which Denny accounts for about half. Coppin said 75 percent of revenue was from fresh mushroom sales and the balance from value-added products.

The increase in imported canned products was a negative factor, but Coppin said only 5 percent of the business was under pressure from imports of canned mushrooms.

Chris Gilmour, an equity analyst at Absa Investments, says Denny is a strong brand, but the challenge was that “a mushroom is a mushroom” and it was hard to differentiate the product from competitors.

It was also likely there would be a continued increase in cheaper imported canned foods, including mushrooms. “This is only going to get worse with the entry of Walmart into South Africa.”