JSE Direct with Simon Brown

The pie price wars (#408)

July 15, 2020

Simon Shares

Day 112 of lockdown and Covid-19 cases are still spiking in South Africa and no drink again.

  • Load shedding. An economy on its knees now without power.
  • Quantum Foods (JSE code: QFH) still booming as Astral (JSE code: ARL) buys a 6.42% stake to protect their broiler supply.
  • Bell Equipment (JSE code: BEL) trading update says HEPS to least 80% lower.
  • CPI for May 2.1%, (3.0% in April and 4.1% in March) below the target range albeit helped a lot by petrol that has since increased.
  • The Foschini Group (JSE code: TFG) buys Jet for R480million.
  • Tsogo Sun Hotels (JSE code: TSG) sells its 50% interest in Seychelles Resort for $27.8million.
  • The UK economy shrinks 19% in three months to May.
  • The US CARES act expires on 25 July. Currently, this gives extra support ($600/week) to unemployed Americans. If it is not extended past the 25 July deadline when the last cheques will be sent, then things will get real bad real quick. Currently, the average US households get over 6% of their household income from unemployment benefits. Pre-Covid19 this was around 0.2%. So either the CARES Act is extended or there will be a massive hit.
  • We've also seen in the results of Citi, JP Morgan and Wells Fargo make a significant increase in provisions for bad debts. From a collective total of some $4billon six months ago, it is now almost $30billion. The problem is that the actions put in place back in March assumed a much better scenario in July then the US is currently seeing with 40 states still reporting increasing Covid-19 cases.

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The pie price wars

I lived in Pietermaritzburg in 1994/5 and it was the time of the great pie wars as the price for pies kept on falling. It was great for me as a pie eater, but a horror for the pie makers, of which there were many. The many in part why there were pie price wars, everybody dropping prices to try and push others out. In the end, I suppose it worked for some, but at the time of dropping prices, profit was out the window.

The point is that if your only edge is the price, you're in trouble because somebody will just make it cheaper.

Now sure, quality matters as does the ability to supply. Cheap pies in Pietermaritzburg didn't help people living in Durban never mind Johannesburg.

We've seen this in construction when back in the 70s/80s ability was really important. I remember the firm my father worked for hiring a German engineer to help with a project and it was a big deal to have the skills be brought to the business. Finding him and getting hin to South Africa was a challenge. But now that sort of skill is a click away on LinkedIn so what is your edge?

If it is the price you're in deep trouble. Hence we've seen a number of construction companies locally and globally move away from traditional construction while the specialist construction companies (think roads) are under pressure as everybody becomes a road builder.

So when investing always be considering what is the edge and is it defendable?

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