Sustainable profitability and growth of agribusinesses in South Africa
Abstract
Sustainable agricultural businesses (agribusinesses) in South Africa are essential in the food value chain to ensure food security of the nation. This thesis studies the factors that determine profitability and economic growth in the summer and winter grain segments of the agricultural sector as profits have to be earned to ensure future growth and sustainability.
The research findings suggested that the most important determinants of profits in agribusinesses are the renewal of confidence, economic growth and the sound evaluation of investment opportunities and for growth to focus on the application of professional leadership and good knowledge of customers’ requirements. The most superior strategies to ensure profits and growth are a customer centric strategy, a people strategy and a strong balance sheet to ensure growth strategy. Agribusinesses which set these as priority achieved on average growth of 25.9 % and profits growing at an above average rate over the research period.
The empirical analysis of this thesis studied data from financial statements and reports and a survey conducted among the most important role players, managing directors and chief executive officers, in agricultural business. The latter provide information and contributed to a better understanding of agribusinesses and the strategies they employ.
Various statistical methods were utilised by means of advanced SAS computer software to analyse the profitability and growth of agribusinesses. These included multiple regression models for different data sets as basis, followed by panel data procedures. Econometric analyses, trend analyses of profitability and growth indicators, descriptive analyses, and semi-structured interviews explained the profitability and growth drivers, and identified the most successful strategies utilised.
Net profit after tax (NPAT) was explained statistically significantly between 1980 and 2013 by operational profit before interest and net current assets and during 2003 to 2013 by earnings before interest, tax, depreciation and amortisation (EBITDA) and retained earnings. Although the effect of current assets and property, and plant and equipment were not found to be statistically significant in generating net after tax profits (NPAT) they remain important to manage carefully to ensure sustainable profitability. External variables, such as rain and exchange rates, are important for the profitability and growth, but could not be statistical proven as determinants of NPAT. This highlights the importance of agribusiness management to follow the correct strategies.
The main focus of agribusinesses is on customer related strategies that offer increasing value to selected customers. Important strategies that form an integral part of the strategic focus of the agribusiness include a people strategy, a strong balance sheet supporting a growth strategy, a strategy of constant re-investment for growth, an alignment and incentivises for growth strategy, a risk management strategy, and fitness strategies. The first mover strategy and forward and backward integration were less important strategies utilised to a lesser extent. The successfulness or failure of the strategies realising profitability is illustrated by the achievements of NPAT profits for the period 2003 to 2013 and compounded average growth rate (CAGR) over the period.
Although different in terms of the importance rating of various strategies, the strategic approach of individual agribusinesses did not differ significantly, but the focus on the specific strategies of the various businesses differed significantly. The one agribusiness that followed a different strategic package achieved the worst financial performance.
This study shows that sustainable profitability and growth is possible in the grain segment of the South African agricultural sector. Although difficult and complex, sustainable success is possible for agribusinesses. The findings of this thesis will be of particular value to managers of agribusinesses, strategists, policy makers and also management in other fields of business, assisting businesses to develop from average to exceptionally great businesses