It's the largest food company in SA, with nine brands bringing in R1bn a year, and yet Tiger Brands has taken a thrashing, with its share price 24% lower than a year ago. In this context, CEO Lawrence MacDougall could have done without a looming class action lawsuit for the company's role in the largest outbreak of listeriosis ever. But the case says a great deal about Tiger's culture of accountability and regard for its consumers 05 December 2019 Rob Rose, Penelope Mashego and Siseko Njobeni It was the sort of pointed question no CEO would expect from the usually polite and respectful analyst community. It was November 22, and Lawrence MacDougall, the CEO of Tiger Brands, had just finished giving a 40-minute presentation on why the financial results for the year to September were so dismal. As the floor opened for questions, Anthony Geard from Investec Securities took the microphone: "Lawrence, I only have one question; I think it is the burning issue. It really seems, over the past four years, Tiger has imploded. Do you think that you're the right person to take the company forward?" Tiger's FD, Noel Doyle, who was seated next to MacDougall, stared at his shoes, while MacDougall gamely tried to cobble together some sort of a response. "Whether I'm the right person or not is something the board needs to deliberate. Please feel free to give them a call ... But I'm feeling good: we've got the capability, we've got the wherewithal, our balance sheet is strong, and we're investing behind our brands," he said. But Geard has a point. Since MacDougall entered the CEO suite at Tiger's Bryanston head office on May 10 2016, the share price has tumbled 39%. If you'd invested R10,000 in Tiger Brands that day, it would now be worth R6,066. Had you put that R10,000 into rival food producer AVI instead, it would today be worth R9,524 or R10,770 if invested in the wider JSE all share index. This should never have happened to a company with such a sackful of enviable brands. Walk into any household and chances are you'll find one or other Tiger Brands product on the shelves. As MacDougall put it: "We have nine R1bn brands: so, each of these brands, on their own, exceeds R1bn in turnover." You'll know them: baby food brand Purity, All Gold tomato sauce, Koo tinned food, Crosse & Blackwell mayonnaise, Albany bread, Tastic rice, Golden Cloud wheat flour, Oros orange juice, and Ace mealie meal. And yet, the financials were a mess: revenue inched up 3%, operating profit dived 20% and profit margins withered. Tiger's market share is slipping too. Its slice of the bread market, through Albany, dropped one percentage point to 29%, with similar declines in grains, maize and cereals. Tastic rice's portion shrank from 46% to 43%. What happened? Sure, shoppers are battling to buy groceries in a country with GDP growth of less than 1%, but people must eat. In a fascinating research report last week, brokerage HSBC cites a TymeBank survey that shows 76% of South Africans run out of money before the end of the month. This tallies with the claim by Doret Jooste, head of FNB's money management unit, that "more than half of middle-income consumers spend their income in less than five days after receiving it". In this context, HSBC says "price and value-for-money will be the key drivers of sales growth" in food retail. In other words, shoppers are abandoning premium brands for lower-cost options and Tiger is bearing the brunt. MacDougall pointed out, for example, that 70%-75% of goods in the average shopper's basket are now being sold on promotion. At the same time, the new phenomenon of "private label" products (essentially no-name products sold under a supermarket's brand) has gobbled market share. Private-label goods now account for 15% of the grocery market, and this is rising fast. "Despite some evidence of brand loyalty, we believe Tiger will continue to face intense competition from both peers and private labels in major categories such as bread, rice, pasta and certain groceries," HSBC says. But the problem is deeper; Tiger has lost ground to peers such as AVI, Pioneer Foods and Libstar, which face the same challenges. So, it's not just a wider problem with the market. What went wrong inside Tiger? After his confrontation with MacDougall, Geard published a lacerating research report, entitled "Tiger in Freefall: Enough is Enough". He wrote: "A once proud company is on its knees ... we have no confidence that the company, as currently constituted, can be restored to even a semblance of its former glory." Profit margins in the three biggest divisions have collapsed, he said, and its exports were loss-making in the second half of the past financial year. "We reiterate our 'sell' recommendation," he said. Damon Buss, an equity analyst at Electus Fund Managers, finds neither Tiger Brands' strategy, nor management's ability to execute it, convincing. Tiger's "matrix" operating structure, implemented in 2016/2017, has added complexity, reduced innovation and increased the time it takes to meet changing trends. "This has allowed nimbler, more focused competitors such as AVI, Libstar, Rhodes Food and the retailers' private-label offerings to continue to gain market share. Tiger Brands has become the Edcon of the fast-moving consumer goods sector," says Buss. Perhaps, he suggests, Tiger Brands should sell businesses like rice and pasta where it can add little value. Being compared to Edcon (SA's largest fashion retailer, which floundered under private equity owners) should be a wake-up call. But the other part of the story is a series of events that MacDougall euphemistically referred to as "own goals". In particular, there has been one event that has exposed Tiger's culture of accountability, its attitude towards customers and the way the business is run. For this, it now faces a class action lawsuit with potentially ruinous consequences. But neither MacDougall nor Doyle uttered a word about it in their results presentation listeriosis. The class action is lodged on behalf of those who contracted the deadly ST6 strain of listeria, which was traced to Tiger's Polokwane Enterprise factory where processed meat like polony and viennas are made. The outbreak was the worst ever, anywhere in the world, affecting 1,060 people between January 2017 and July 2018. It led to the deaths of 218 people 93 of them babies younger than 28 days old and nine of them between a month and 14 months old. More than 100 women miscarried. Until now Tiger Brands has taken zero responsibility. Its professional indemnity insurers have hired bulldog lawyers Clyde & Co to raise every technicality in the book. In the context of the human tragedy, it's an astounding act of moral agnosticism. Speaking to the FM from her home in Krugersdorp, Marlize Pienaar breaks down describing how her 76-year-old mother-in-law, Johanna, fell ill in November 2017. In hindsight, she traces it to a hamper Johanna had bought with polony and viennas. "Ouma was never ill, and she was always busy she'd drive the kids around, go to their sports games. But it was on my birthday, November 27, that she began complaining about headaches and nausea." It got steadily worse and, over the next few weeks, Johanna was in and out of the Netcare Krugersdorp hospital. But if anything, she deteriorated. "Around December 13, we rushed her to hospital. She was vomiting, she couldn't eat, she had no energy. My husband, Freddie, had to carry her into hospital. From there it spiralled downhill: she began sleeping the whole time, and she got meningitis," says Marlize. On December 31 she died from what had, by then, been diagnosed as listeriosis. Marlize says the scars haven't healed. "You trust the food you buy. You think it's safe and fine. I wish I could explain to people that listeriosis may sound silly, but if you see that person in that bed, how traumatic it is. In the last few days, her whole body swelled up and I couldn't take my kids to see her because they were traumatised enough." The FM has heard many similar stories in recent weeks. Busisiwe Elsie Maphanga, who lives in Mashishing, swears she'll never touch any ready-to-eat processed meats again after she contracted listeriosis. "I don't ever want to see it again. I hate even seeing it on the shelf. I'll eat it when I'm dead, because I don't know which one is safe and which one isn't," she says. "You can't be saved twice." An unemployed mother of five, who gets a disability grant from the government because she's partially blind, Maphanga says it all started with a bout of nonstop vomiting and diarrhoea. "I wondered what was happening I got cold, then I got hot." After she was admitted to hospital, Maphanga says she "heard the nurses whispering, saying I have listeriosis". Unlike many others, she recovered. But she still suffers from a variety of side-effects including dramatic weight loss. "My skin has darkened, it's scaly like I'm a fish," she says. After speaking to a friend, who had lost his wife to the virus, she went to attorney Richard Spoor in White River. It is Spoor, the volatile, pull-no-punches lawyer who earlier this year won a headline-grabbing settlement from the mining companies over asbestosis, who brought the class action lawsuit against Tiger Brands. REGENT BUSINESS SCHOOL (RBS) - January 2021 21

Promise Mbatha, who lives in Joburg, tells the story of how she was admitted to the Chris Hani Baragwanath hospital in April 2017. "I started having stomach pains at night; when I went to the hospital I was vomiting and I had diarrhoea," says Mbatha. She was pregnant at the time, but her baby wasn't due for another three months. "I was in so much pain, I ended up going into labour, but my baby was not breathing properly so she was sent to the ICU. At 2am, they called me to the ICU, when I got there, the [doctors] told me my baby had passed away." While she was initially told the baby girl had died from natural causes, a team of researchers contacted her six months later to say she had been infected with listeria. For Mbatha, who'd loved eating Enterprise polony and sausages, it was a bitter pill. "What saddens me the most is if I had known, I would not have eaten the products, but now there's nothing I can do," she says. In Secunda, a coal-mining town and the home of Sasol, Zine le Grange was packing when the FM visited, preparing to move to join her husband, Christoff, in Hong Kong, where he's a pilot for Cathay Pacific. She gestures at baby Stephan on her hip: "It was basically just him [who had listeriosis] and that is the weird part about it." Like most babies, he didn't consume the meat; his mother did. Polony was Zine's go-to snack when she was pregnant. On Good Friday last year, a day after a routine check-up, she started having contractions. It took her 30 minutes to get to the hospital and in 45 minutes Stephan was born but he was in severe distress and his heart rate didn't pick up as it should have. Stephan spent 28 days in ICU, where he was diagnosed with listeriosis. "I felt so guilty. It was my fault that he became very ill, he did die for a few minutes, so that was very bad," Le Grange says. Four months later, he was admitted again. Stephan, unlike the 93 other babies, recovered. While Le Grange doesn't expect Tiger Brands to admit guilt, she feels it could have taken a more humane approach. "I'm more angry for other people who lost their babies and that's why I joined [the lawsuit], just to make this case stronger," she says. It's a valid point. Clyde & Co is now pretty much running the show but has shown vanishingly little compassion. In Tiger's 27-page plea in response to the class action, it denies almost everything: that the outbreak was caused by contaminated products from its Polokwane factory, or that "children who were born to mothers who had consumed the contaminated products contracted listeriosis and suffered harm". Yet Daniel le Roux, a partner at Clyde & Co, told the FM on November 6 that he objected to the characterisation of his company as "cold-blooded" and "heartless". "The rights of the insurers are defined in the policy ... They give to the insurers the right of control over any action. "And the insurers here have exercised that right," he says. For example, the lawyers have the right to "vet" any public statements made by Tiger Brands and MacDougall. (And presumably, to gag MacDougall from saying anything the lawyers don't like not exactly helpful to Tiger's efforts to rebuild its reputation.) "It's not a question of being disinterested or cold to the interests of the people who suffered ... There is nothing that [the claimants] have given me as yet that links my product to those people who form part of the members of the class," he says. In fact, says Le Roux, Tiger Brands has implored the state-run National Institute of Communicable Diseases (NICD) to provide the data that links Tiger Brands to the outbreak but the institute refused. "We are dealing with facts ... we had asked the NICD, give us the information on which you based these reports. We said to the department of health, give us the information and they flatly refused." Now, the insurers have sought to subpoena the data from all the NICD labs around the country, because, says Le Roux, "eminent experts" have told him "there may well be another source" of the outbreak. When asked who these "experts" are, he won't say. Le Roux admits that in recent weeks, Tiger Brands has received some information, but argues that "none of [it] goes to the core of giving us the technical information". "That's not true. As per protocol, the samples were taken by the department of health practitioners [and] we sent the results to them," says Juno Thomas, head of the Centre for Enteric Diseases at the NICD. Thomas says in addition "there was a subpoena process and they were provided with all the results". And this was early in the process too, she adds. Le Roux's claim that Tiger's lawyers have simply been kept in the dark is also undercut by the fact that nine NICD researchers published a research paper in the global peer-reviewed journal "Food Pathogens and Disease" in July. The seven-page paper details the exact laboratory activities and the genome sequencing process used to trace the outbreak to the Tiger Brands factory. That factory was first inspected on February 2 2018, and a number of samples were taken. In the end, 374 samples containing the ST6 strain were submitted to the Paris-based Institut Pasteur. Of these, 372 "had no more than four allele differences between each other ... [which] indicated that these 372 ST6 isolates were highly genetically related". In other words, say the authors, this suggests "the source of the listeriosis outbreak in SA was ready-to-eat processed meat products manufactured by Enterprise Foods". Another critical point is that Tiger Brands did its own investigation into the outbreak. And, as the company admitted in a statement: "On April 24 2018, Tiger Brands received independent laboratory tests which confirm the presence of listeria ST6 in samples of finished ready-to-eat processed meat products from its Polokwane Enterprise Foods manufacturing facility." Surely this is enough for the lawyers? Not for Le Roux, it seems. "We have only one side of the coin ... To link what I have with what the NICD says caused the infection, we need both sides," he says. This is why, Le Roux says, Clyde & Co has subpoenaed information from the NICD. "The issue relating to what has been provided by the NICD and what we contend has not been provided is part of the application in which the NICD seeks to set aside the subpoena we served on it," says Le Roux. But Spoor told the FM it's clear that Tiger Brands actually has everything it needs to proceed with the case but is playing for time. "There are publicly available results, which have been overseen by the World Health Organisation and verified through whole genome sequencing. That is already freely available, so what more do they really want?" He says the NICD has already given him everything he's asked for, so why would it be withholding data from Tiger Brands? The scientific evidence, he says, is so overwhelming that "to deny it at this point, would be like denying the Earth orbits the sun". The truth, says Spoor, is that Tiger Brands is on a fishing expedition, issuing subpoenas to every laboratory in the country "to see if there is someone else, somewhere, who might possibly be implicated in another outbreak of listeriosis. It's laughable." Why would Tiger did this? Spoor responds: "The only way I can understand it is that the longer this drags on, the more pressure comes on the victims to settle on a deal. They're doing this to strengthen their bargaining position." Le Roux hotly denies this. "I have a very busy practice. I do not need to stretch out a single case ... I want to give you the unequivocal assurance that neither Tiger nor us have any interest in delaying or dragging this out," he says. "There is nothing to hide." Yet there is one secret that Tiger Brands is refusing to divulge: the identity of the insurers actually pulling the strings in the listeriosis case. At last week's results presentation, MacDougall told the FM: "We're not sharing [the names], that's it. We don't need to." In the interview with the FM, Le Roux also clammed up: "I'm not permitted to say ... all I can say is that they are reputable world-class insurers." Why then hide their identity, while claiming there is nothing to hide? Do they also fear being accused of being heartless and cold-blooded, like Clyde & Co? "That is not material to the facts in dispute ... It has got nothing to do with the case," says Le Roux. Yet it is Tiger Brands shareholders who are really paying the secretive insurers, who are now handling (or mishandling, in Spoor's view) this case with deep implications for the company's reputation. The company's approach flouts the King code of corporate governance, which commits directors to being "honest, open and transparent" with the public. It's a principle you'd think the board whose directors include chair Khotso Mokhele, former Sanlam executive Cora Fernandez, ex-SA Breweries executive Monwabisi Fandeso, former Unilever SA CEO Gail Klintworth and Nelson Mandela Foundation trustee Maya Makanjee would want to demonstrate But this demonstrates that Tiger Brands isn't really in control of this case; the lawyers are. Which creates a dissonance: Tiger's reputation can take a hammering, as lawyers take an overly legalistic view, but the insurers have no incentive to worry about this. As Le Roux says: "There is a policy, we are acting in accordance with the policy. The public reputation that you talk about is distinct from the legal liability. But the legal liability is what I'm concerned with." Asked if Clyde & Co, in "vetting" MacDougall's public responses, had gagged him from speaking openly, Le Roux says: "I can never answer that it's client privilege." But he says bluntly that if Tiger Brands "were to make an admission of liability, then they will be in breach of the policy". In other words, MacDougall is forbidden from admitting to anything. "That is applicable to every policy I have in all my years seen ... it is a standard way in which insurance policies operate," says Le Roux. This has created some farcical moments in the scandal. Most notably, when Tiger Brands held its first media conference on the listeriosis matter in March 2018, when MacDougall appeared entirely cold and dispassionate in front of the cameras. "There is no direct link with the deaths to our products that we are aware of at this point nothing," he said flatly. Tiger was immediately slated for the "alarmingly high levels of insensitivity" to the families of those who died. Bill Marler, a US lawyer once described by New Yorker magazine as "the most prominent and powerful food-safety attorney in the country", wrote an article last year entitled "Free Advice to a Food Company CEO During a Listeria Outbreak". "After being involved in every major food poisoning outbreak since the E.coli outbreak of 1993, I have seen it all. I have seen good CEOs act badly and make their and their company's problems worse, and I have seen bad CEOs handle the outbreak with such aplomb that they become associated with both food safety and good PR," he said. In the Tiger Brands case, Marler says that given the NICD findings, the company has "nothing to argue" about the source of the outbreak. As a result, Marler says that for MacDougall to say what he said at that media conference was "both heartless and stupid". (Marler is acting alongside Spoor against Tiger Brands.) Professor Ilse Struweg, from the University of Johannesburg, says the company "came across as cold and unsympathetic ... Tiger Brands will be remembered for trying to deny responsibility and refusing to apologise". In an interview with the FM last week after the results presentation, MacDougall admitted the March 2018 media conference didn't "go very well at all". "Initially, I think we could have [handled it differently], I agree with you. Did we create the right impression upfront? Probably not. And I think we've tried to be totally open and transparent since then," he says. He concedes that it created an image in some quarters of Tiger Brands as a heartless corporate, which isn't exactly a desirable image for a company whose business is, after all, selling food to consumers. Remarkably, MacDougall blames Spoor for this. "I think Richard is fuelling a lot of that, for whatever reason. And it's one of the things that concerns us the most, because we are not [an unfeeling corporate]," he says. Asked if he has to get permission from Clyde & Co to speak about this case, MacDougall says: "Of course we ask their advice if we want to say [something the lawyers aren't happy about], we'll have a debate." But he says he doesn't entirely agree with the view that Tiger has outsourced its reputation management to lawyers, who couldn't care less what happens. "When you lead a company, and you have an insurance against some liability, you can't just put up your hands and say: 'Yes, I'm guilty, here's some money.' You can't do that." But, he hastens to add: "We're human it hurts us to go through this." And yet Tiger Brands seems to be blundering into conflict with customers fairly regularly. In 2007, there was the hapless response to the bread price-fixing at Albany. It tried to hide the fact that its executives were involved, which led to another pummelling and the departure of its then-CEO, Nick Dennis. As BizNews put it last year: "Tiger Brands' second disaster in a decade stems from skewed priorities. The lengthy risk management section of its 2017 annual report ranks 'product quality' last of nine listed risks to the business ... when you're in the food business, how can anything possibly outweigh killing your customers?" But this case goes beyond just being a reputational risk; there's a deeper financial risk too. Spoor's class action isn't just looking for the usual sort of damages claims, it is also seeking to recover punitive damages for the families of those who died.There also seems to be a dispute between the insurers and Tiger Brands as to who is on the hook for this. Doyle told the FM at the results presentation that Tiger Brands believes the insurers would cover any "punitive damages", whereas Clyde & Co believes Tiger would have to. Amid this confusion, investors are wary. In a research report last week, JPMorgan flagged the risk of "the quantum of the class action lawsuit [which] may exceed our expectations and the insurance cover in place may be insufficient to cover the settlement cost". Other analysts have factored in no extra payments. Partly because of this risk, Tiger has put the entire Enterprise unit up for sale. MacDougall says it's impossible to ensure the meat-slicing machines in a supermarket haven't been contaminated by someone else's product. "We don't have control over that route to market. We don't want that reputational risk." He says there are "several" bidders keen on buying Enterprise, all of whom have been "astounded at the quality of our facilities" favourably so, apparently. But even if Tiger Brands can flog Enterprise, the listeriosis case is another example of self-harming that has led to the company becoming a less-than-enticing investment despite its powerhouse brands. Analysts at Bank of America Merrill Lynch point out that last year, its volumes were "the weakest in the SA food producer peer group". In fact, over the past decade, its domestic business's operating profit has grown by just 0.9% a year. Prescient Securities is even more gloomy. "No improvement is in sight, as Tiger continues to price its product at a premium to key competitors, resulting in likely further market share losses," it says. This is particularly true because it's exceptionally difficult to differentiate yourself when it comes to products such as maize, pasta and rice, flour and bread. And, with the rise of private-label supermarket brands, the profit margins are under serious threat. Ron Klipin, an analyst at Cratos Asset Management, tells the FM he doesn't believe Tiger Brands is a compelling investment now. "I would rather be invested in a more nimble and focused food business such as Rhodes Foods or Libstar," he says. Klipin says the market will decide if MacDougall's management team is on the right track. But if the share price continues its descent, you can expect the calls for MacDougall's head to grow. Asked by the FM about Geard's question as to whether he should continue as CEO, MacDougall is philosophical. "Look, I think CEOs get those questions, you have to be able to deal with it. It's a fair question. Performance hasn't been great. And the leader of the business has to take accountability, so those are the discussions I need to have with the board," he says. Accountability for what went wrong at Tiger would indeed be a nice change. If only MacDougall could convince the secretive insurers about this approach.

QUESTION (20 MARKS)

Provide a comprehensive "turnaround" strategy for Tiger Brands.