Franchise association on power crisis and poultry shortage

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FIFI PETERS: The Franchise Association is calling on government here in South Africa to take urgent action to solve the energy crisis. It says that load shedding is causing the sector to suffer from significant losses, as the operating environment is becoming untenable because of the power outages.

We’ve Tony Da Fonseca, the past chair of the Franchise Association of South Africa and the CEO of OBC Better Butchery, on the line for more on this story. Tony, thanks so much for your time. Just give us a snapshot of what the impact of load shedding and I suppose the more aggressive power cuts that we have experienced in the recent while have had on the franchise sector so far.

TONY DA FONSECA: Hi, good evening and thanks for the opportunity just to express some of our frustrations, I guess. Obviously there is no doubt that these disruptions are causing national inconvenience – and cost, of course – certainly in the retail sector at the end of the day. You introduced me as a past chairman of the Franchise Association, so I’ve got a little bit of an insight into other areas across franchising but, certainly in the retail sector that I as the CEO of OBC am ultimately concerned with especially in the butchery game and in the retail space.

We are high energy consumers and of course the cold chain is very important in the maintenance of ensuring food safety and the food integrity of what we sell our customers. So when we get to Stage 5 and Stage 6, the costs are just exorbitant in terms of trying to maintain the cold chain to ensure that we give our customers food that is food safe, of course.

So it’s adding an enormous amount of cost to our stores. It’s reducing profitability. In some instances the unintended consequence of this [on] some of our stores, depending on the time – not only some of our stores, but retailers in general. Depending on the time of load shedding, what they would rather do is actually stay closed because in not so busy periods the investment doesn’t justify the returns. So the unintended consequence is that staff is being put on short term, coming in a bit later because it’s not worthwhile opening at this time.

So besides the exorbitant costs of a small business like ours per branch, I’ve seen anything from a R100 000 to R180 000 worth of extra diesel to keep generators running to make sure that our products stay food safe. So besides starting to make these businesses less than attractive in terms of profitability, it’s also having a knock-on effect on our staff, where hours have been cut and that type of thing.

So not only from that, obviously we look at the supply chain where in some instances it’s across the chain, not only [for] perishable products. Obviously we’ve heard a lot in the media about what’s happened to the poultry industry, which has had a devastating effect on the quick-service restaurants.

But even sometimes some of our suppliers can’t get enough glass bottles or plastic bottles to pack juices. So I don’t think we’ve even begun to understand the food impact and detrimental effect it has on our business and our economy in total.

FIFI PETERS: When you talk about the impact on food production specifically, a story that comes to mind for most of our listeners and most South Africans is the recent one where a poultry farmer in the North West had 40 000 of his chickens killed as a result of the power outages – and what that did to the production process.

Would you say that perhaps load shedding is hitting the retail sector the most, or is it across the board in terms of the devastating impact?

TONY DA FONSECA: I think it’s equally across the board and is affecting all sectors across the board. Obviously some of the well-known fast-food chains recently – and I think this still continues – over the festive season actually had to close some branches because they couldn’t get enough poultry. It was also reported extensively in the media that one producer had to destroy ten million chicks because they couldn’t process them.

Again, it’s got to do with plants not running, so birds can’t get slaughtered at the correct weight, at the correct time, and so on and so on. So in the food sector it’s had a devastating effect. If you think of some of the very well-known chicken food franchises, if your core business is chicken and you haven’t got raw material your only alternative is to close your doors.

So in chains like that it’s been devastating. In our case, in the butchery sector, offering a range of products, what we are also finding is consumers are buying smaller because they are also having losses at home due to lack of electricity, sadly. We hear lots about solar and alternative energy, but the reality is the bulk of our consumers simply cannot afford that. So we’re finding that people are starting to buy more tinned food because you they obviously can’t run the risk of the food perishing. So really it’s vast.

You’ve mentioned the one breeder that had to destroy 40 000 birds. We are hearing of farmers where, in the allocated time when they’re supposed to irrigate the crops, there’s load shedding. They can’t irrigate their crops.

This is becoming a threat across the board in terms of enough food for the country. Food stability is now becoming an issue in the poultry game. We’re starting to find that prices have increased radically.

Today it was in the news that one of the major poultry producers is [finding that] it’s costing an extra R1 million per day on fuel to keep the operation going. That’s going to have a knock-on effect on the consumer. Either that producer is going to stop producing, because the more birds they produce it costs them money, or obviously it has to be passed on to the consumer. And if the market can’t bear it, the producers are going to cut costs because it’s pointless producing more birds while it’s costing you money to put it out in the market.

So not only will there be a shortage because of the extra input cost, food inflation is going to be way above and [the prediction is] that food inflation will be way above the national average of inflation.

So it’s across the board.

FIFI PETERS: [I was] making reference there to Astral Foods listed there on the JSE. They said it’s costing them a million rand in diesel per day.

You also touched on the shortage, and particularly the shortage of chickens. I recall going to one of the fast food outlets during the festive season to buy a fast food chicken meal. They had no chicken, so I couldn’t buy anything from them.

But I wanted to understand how acute the problem of the poultry shortage is right now, in your view, and to what degree it extends to other meats, like in your butchery. Are you seeing shortages across other lines as well as a result of load shedding?

TONY DA FONSECA: Yes, we are, especially in the poultry sector that’s so reliant on energy. In the beef environment – obviously poultry production is under a very strict and controlled environment, not that other meats aren’t. But certainly in the poultry, if you look, chicken houses are maintained at a certain temperature, [chickens] obviously slaughtered at a certain temperature and those types of effects.

Certainly in the beef game it’s raised slightly differently, but what we’re finding is that some of the farmers are actually having to cull their cattle a little sooner, or try to work around the schedule. So again it’s pushing up price.

And then course [those who] maintain the cold chain are equally affected by extra energy costs to try and maintain the product fresh. And what we have found is that some of the farmers are actually saying they’re cutting the volumes that they’re producing because they run a higher risk of losses, which again will have a knock-on effect on food prices. So it really is across the board.

FIFI PETERS: Tony, thank you for that. You have [painted] the current picture in the franchise industry and the challenges that are being experienced as a result of the power cuts. You’re asking government for some relief, on top of urgent intervention to solve the crisis. What can government do to support the franchising sector right now?

TONY DA FONSECA: Probably one of the most frustrating things is there doesn’t seem to be much clarity in terms of what action’s being taken.

We are in Stage 6 [load shedding], next week Stage 2, then we are in Stage 3, then we’re back up to Stage 5.

There seems to be no clear plan, so that could be the first thing.

Where are we going, and what’s being done?

Obviously the easiest [thing] would be to ensure that we have sustainable energy, and at least a reliable schedule that we can count on, [so] we can plan our production around it.

If we’re at Stage 2, Stage 3, people can plan around that work shift. But when you’re anything at Stage 5 and Stage 6, which literally happens within a couple of hours, it’s very difficult to replan production schedules.

So some consistency would be good, and obviously some relief in terms of if we look at the enormous amount of diesel and other consumption. And if you look at the portion of taxes we are paying on fuel, it’s just adding to the cost.

What we are finding is that, even though the energy isn’t available to us because we are sort of peak-demand users, certainly our energy bills aren’t reducing.

So really [it’s about] having a realistic view on what’s feasible, and obviously communication to the market so that people can plan.

A lot of our suppliers plan on how they’re going to do their production, work late, work around the schedule – and it changes. So some consistency would be ideal.

And obviously there are a lot of businesses that are going to need a lifeline – whether it’s from tax incentives or [to] keep these business sustainable while we go through this – because at the end of the day with these energy costs there’ll be a lot of businesses that simply aren’t going to make it, which has got a knock-on effect on employment.

So certainly these type of interventions are going to be absolutely critical to try and keep businesses alive while we wait and try and work through [this] and find solutions for it.

So certainly more of an open dialogue, so at least people can understand what’s going on and how much longer they have to make allowances and plan around it. And of course, any concessions in terms of keeping businesses and their doors open, so we can keep people in jobs is absolutely critical.

FIFI PETERS: Tony, thanks so much for your time. We’re going to have to leave it there, but hopefully one or two – or perhaps even more – officials in government have been listening to some of the relief measures that you believe will be helpful in keeping the franchise industry afloat. That was Tony Da Fonseca, the past chair of Fasa, as well as the CEO of OBC Better Butchery.