‘Big five’ costs major influencers of snacks market

Extruded corn snacks, hard and soft, still dominate appetites in the lower-income market for snacks in South Africa and most of the rest of Africa. But there is potential for other local substrate (carbohydrate) materials to be used in extruded snacks, and for incremental innovations in flavours for this market Chico Sclanders, MD of Snack Seasonings of Johannesburg, says his company makes flavours for snack manufacturers. He says in the extruded corn snacks market, the ‘big five’ costs are: corn, oil, packaging, transport and flavourings.
Recently in South Africa and in most African countries, the price of corn has increased sharply because many African currency exchange rates have weakened against the dollar.
Worsening exchange rates have also been one of the reasons for large increases in costs of transport and other elements of the big five.
“Snacks are light, low-margin goods, transported by large diesel trucks, and those costs are mounting,” says Sclanders. But of all the big five costs, the costs of flavourings have increased the least, he says – even though these too are largely imported and therefore pricing varies with exchange rates. And, he says, despite the cost pressures on snack manufacturers and their narrowing profit margins, he has not experienced a demand for substitution with cheaper flavours. This may be because flavours form the smallest of the big five costs – in some cases only 3% of total costs, he says.
But the pressure on profit margins is resulting in large snack producers doing everything to increase volume sales. This is playing out in sharper competition for smaller and medium-sized snack manufacturers and has resulted in a number of the latter closing, he observes.
He says that brand loyalty among the hawkers who buy extruded snacks in bulk and repackage them to sell to consumers, is poor. For a slight price decrease, they will switch brands – repackaged products which they sell to consumers are generally unbranded.
The low income end consumer also has relatively low brand loyalty. Cheaper biscuits, fruit and peanuts are also always competitors in this market.
Bright colours
A ubiquitous feature of the lower-income market, he says, is the bright colour of the snacks, using artificial flavourings.
Consumers assume that a bright colour correlates with strong flavour.
Although these low-income consumers are generally conservative in their tastes, there has been a considerable shift in the flavour profile of snacks appealing to this market in that cheese has declined from its dominant position in recent years, Sclanders says. “Cheese flavoured snacks used to account for about two thirds of all extruded snack sales in South Africa in the lower-income market; now they are around 40%,” he says. “Spicy flavours like chakalaka and sheshebo have taken market share. Similar trends are seen in the rest of Africa.”
Ronel Venter, MD of flavour house Season to Season of Johannesburg, says: “I am not always sure whether it is the consumer who is conservative or the producer. What I find in the informal market is that they always order cheese, BBQ, tomato, chutney and chicken. These popular flavours are available with a twist – for example, with added chilli to create BBQ chilli or tomato chilli; or maybe some meaty notes to create a very successful spicy beef flavour. Consumers in the informal market like bold flavours and very bold colours. In the formal market, on the other hand, consumers like to experiment with new flavours, but also always come back to the trusty old flavours.”
Gary Boast, sales director of Nicola-J Flavours and Fragrances of Johannesburg, confirms that price is very much the controlling factor in the mass market. “Almost by definition these snacks have to be cheap. The unfortunate implication (of the price constraint) for flavours is that the flavour quality is often not good – they are very basic and simple flavours.
“There are only three major cost ingredients in the manufacture of a snack food: corn, oil, and flavour. Of these flavour – including colour – is the most variable and therefore offers the biggest opportunity for cost saving. Costs can also be reduced substantially in packaging, but the visual appeal of the product and the packaging is very important so it is not always advisable to save there.”
Although Africans do indeed generally prefer intense flavours (both sweet and savoury), Boast says, “This is often so controlled by the cost factor that very bland, non-intense-flavoured snacks are produced. I have tasted many extruded snacks in Africa in which the flavour is so weak as to be barely identifiable and I believe that this is because the product is being produced to a certain price point.”
He confirms that extruded puffs and naks are the most common snack formats throughout southern Africa, mainly because of their ready acceptance and ease of production. Raw materials and machinery for production are also readily available. Potato chips have potential, but require a reliable source of raw materials and are more expensive.
“There are some regional favourites (such as flavoured nuts in Nigeria), but these do not seem to translate well to other areas.”
Boast agrees that flavour innovations are mostly confined to snacks produced for higher income consumers. “Research
done for the mass market has little value as most producers tend to go with the established basics as the risk factor is
much lower. Innovation comes with high risks and potential for failure in terms of investment in production and packaging, so most producers stick with the established basics. Most of our manufacturer-customers know what they want and are also guided by our suggestions.”
Boast’s company supplies both flavours and colourants, and can assist with transport arrangements and export documentation.
Jeff Rossouw, MD of Heat and Control, says the African snack industry has grown considerably over the past few years as
companies have been keen to invest in an industry that offers sure growth.
Heat and Control is an international supplier of food processing equipment and Rossouw heads its office in Cape Town.
Rossouw says the global trend is positive for the snack industry and some snack companies in Africa have started to take on US and European models.
“Africa has plenty of opportunity to receive benefit from a growing snack market but there are also significant barriers”, he says.
In South Africa, international and national brands (‘tier one processors’) dominate via traditional retail outlets such as Pick n Pay, Checkers, Shoprite, Spar, Woolworths and have strategies that are similar to US/Europe companies, with innovative flavours leading the way, rather than new products. In this tier, potato and corn chips dominate with unique flavours such as chutney, spare rib, Caribbean onion and balsamic vinegar, Mexican chilli, sweet chilli pepper, Nando’s peri peri, etc. Also in this tier are premium-priced pellet snacks, fabricated potato chips and kettle-style chips, although these hold much smaller market shares.The reason for the smaller shares is not necessarily consumer preference or the need for significant equipment
investment, but prohibitive import duties on raw materials.
South African companies also face limitations in exporting to neighbouring countries because their products are landed at premium prices which can often only be afforded by high income consumers.
Second tier processors in South Africa and elsewhere in Africa channel their products through either wholesalers or informal retailers such as street vendors and home shops.
Low investment cost
In informal settlements the most popular products are generally extruded corn snacks, which are baked or fried. This stems from the reasonably low equipment investment required by a processor/producer. But these markets are often limited by distribution channels and poor roads. Baked snacks in particular do not travel well and in-bag damage often occurs.
Unlike in formal retail, shelf time for informal products is often a few days only and nitrogen gas flush is uncommon.
In such a competitive market, pointof-sale cost is critical and so price wars are common. As a result, says Rossouw, prices in this market (in South Africa at least) have remained almost stable for the past 10 years, despite commodity prices being highly volatile.
In very hot and humid countries, processors often use thicker BOPP (biaxially oriented polypropylene) film in an attempt to increase shelf life rather than address quality problems resulting from the combination of climate and poor processing practises.
Outside of South Africa, and especially in East and West Africa, homemade snacks are sold through street vendors. Many of these home-style snacks do not always lend themselves to commercial processing. With many subsistence farmers producing the raw materials for these – such as potato, cassava, yam, taro and plantain – quality is still a subjective term.
High quality raw materials for industrial production can only be ensured through the most modern agronomy.
Barriers to entry for new processors are primarily import duties, raw materials, transit services, and reliable energy supply.
For instance, in the case of pellet snacks, the potential is huge since equipment investment is reasonably low and the producer can run any number of different raw pellets and offer a basket of products with bases such as corn, potato, rice and multigrain, off one machine and in a reasonably small floor space. But prohibitive import duties on raw materials or significant equipment investment, rather than consumer preference, often determine future trends.
In South Africa, for example, raw pellet snacks are subject to import duties of 5–20% (depending on the base ingredients). A real barrier to entry is also the capital tied up as stock in transit, when shipping product from abroad. For example, a small processor importing raw pellets and producing about 100kg per hour (45t/month) would require three 20-foot containers (45t), plus another two to three “on the water”, to meet his demands, says Rossouw. This results in approximately R1.5-R2m ($115,000-$155,000) tied up on stock in transit.
Despite a huge consumer base,certain countries pose unique challenges for processors. Nigeria, for instance, struggles with continuity of electrical supply, has poor infrastructure and limited support services – all of which are critical to operate a factory. And clearing from its ports can take 15 days or more.
One day trade
“With a 150 million-plus population, Nigeria should be a big market for all kinds of snacks, but these challenges and the political environment impede it from being a major player,” he says.
The product range for the smaller, entrepreneurial type of processor so often found in Africa is very limited and initial
investments are out of reach for most. “The typical system that would replace roadside woks would be a small gas or
electrically heated batch fryer. But the availability of gas, electricity and the fact that these types of units are not mobile, pose a challenge as most vendors pack up their shops at the end of a trading day. These units are more suitable to fixed
premises with services supplies in place.”
Rossouw says a common mistake made by first-time and inexperienced processors or investors is to buy on price alone, or buy second hand equipment which has a reputable brand (the latter often through an equipment broker).
“The cheaper equipment often has no history of research and development, so equipment failure and reliability is common. The OEM (original equipment manufacturer) parts used are often unknown brands and not readily available for emergency maintenance. “And the big brand second hand equipment is often more than 20 years old and has been modified over the
years – for instance, the broker’s filter fryers and heat exchangers are then not designed to function together.
“Almost every call we receive regarding secondhand equipment which bears our brand (Heat and Control) is a case of the latter, and it results in endless problems.“Investors also often do not take into account the cost of running equipment that is older than 15–20 years. These systems are from an era when energy resources were cheap.”
Despite the problems, Rossouw says that there are some opportunities. For instance, he says, there is a strong Indian influence throughout Africa, and there are opportunities for producing Namkeens (Indian snacks) with an African twist.
And there are plenty of nuts – especially tree nuts (macadamias and cashews). Many of these are still being exported from Africa to other emerging countries such as India, where they are further processed to add value. “If this trend can be reversed, a whole new industry can be established. Coated spicy nuts have also become established as a good product line in certain regions, for instance.
“Currently, cassava and plantain processing enquiries dominate West Africa, while corn and cassava enquiries dominate East Africa. Egypt in recent years is becoming a major player in the snacks market and there is movement in Maputo, Zambia, Nigeria, Ghana and Cameroon. Although corn puffs are common to most countries, staple diets play a big role in taste preferences. For example plantains are already a traditional home-style snack prepared in West Africa, with mandazi or
tumbua (a fat cake-like snack) in East Africa.
“Also remember that for the consumer in emerging markets, very often snacks are a replacement meal and not a snack in
the true sense of the word. “Do not be surprised to see a corn or cassava chip soaked in milk to be eaten as breakfast, or
mixed with a meat sauce or texturised vegetable protein (TVP) as lunch or dinner.
“Heat and Control has been in the industry for over 60 years, with its origins in the early stages of the US snack market, in which continuous processing innovation was changing the way companies made potato and tortilla/corn chips.”
Snack Seasonings: Tel +27 11 314 7253; chico@snax.co.za
Season to Season: Tel +27 11 796 5275; ronel@seasontoseason.co.za
Nicola-J Flavours and Fragrances: Tel +27 11 315 6582;
gary@njflavours.co.za