A proposed consolidation strategy for agri–businesses in South Africa

Abstract

Agriculture has always been a very volatile industry, mainly due to fluctuating commodity prices (specifically white maize) and irregular rainfall patterns. Furthermore, the agricultural industry is confronted with finite resources of which limited arable land and water scarcity are among the most troubling. Many agribusinesses in the industry have also achieved a level of maturity as far as market share is concerned, leaving little room for further growth. On the other hand, most of these agri-businesses are organisations with shareholders and investors demanding acceptable and sustainable returns on their investments. This situation invariably creates challenges relating to growth, profitability and sustainability. One of the few ways of addressing this problem is for stakeholders in the industry to combine their resources, capabilities and efforts through consolidation strategies, like acquisitions, mergers and strategic alliances, among others. This includes an extended presence and involvement throughout the value chain by means of forward and backward integration. The aim of such consolidation activity is to improve the long-term sustainability of agri-businesses and the agricultural industry as a whole. Agriculture is extremely important in terms of its contribution to the national economy, employment and job creation, earning foreign exchange through exports and improving food security and safety as well as the affordability of and access to food. Agri-businesses fulfil the functions of handlers, processors and marketers of agricultural produce, suppliers of production inputs and services including mechanisation solutions and support as well as being financiers of farmers and farming activities. However, there are too many role players and intermediaries involved in the agricultural industry which only aggravates the problem of limited growth potential within the industry. This study focuses on one of the leading agribusinesses in the industry while at the same time aiming to obtain the opinions of other industry stakeholders regarding the desirability of such consolidation strategies, the nature and extent thereof and the probability of successfully executing such strategies within the industry. Qualitative empirical research was performed by using a semi-structured interview schedule and conducting personal or telephonic interviews with a selection of executives, directors and other senior managers of several agri-businesses, regulators and controlling bodies associated with the South African agricultural industry. The themes covered included growth and sustainability, strategic leadership, consolidation as strategy, the different consolidation approaches, consolidation methods to be used, motives for consolidation, possible legislative restrictions on consolidation, the steps in the consolidation process and the preferred business approach to execute a consolidation strategy. The results of the empirical study indicated that consolidation does support growth and sustainability and that sound strategic leadership is of strategic importance to agri-businesses. The majority of participants confirmed that consolidation does form part of their current strategies and agreed that a combination of the three different consolidation approaches will be most effective in the execution of a consolidation strategy. Of the different consolidation methods, strategic alliances was the most preferred method as well as being selected as the method most likely to successfully achieve industry consolidation. Value creation was the overwhelming choice as being the primary motive for consolidation and was also selected as the motive with the highest probability of achieving success in consolidating the agricultural industry. The restrictive nature of the South African Competition Act (89 of 1998) and the competition authorities was highlighted by the responses obtained from the interviewees. Even though the negotiation phase was described as the most important step in the consolidation process, the results showed that is critically important to accommodate all the different steps in the process to ensure the success of the entire consolidation project. Finally, there was no clear preference regarding the business approach to apply in executing a consolidation strategy, being either a focuses business approach or an integrated business philosophy. The recommendations contained suggestions to increase consolidation activity among stakeholders in the industry and to develop and establish sufficient consolidation skills and capacity to aggressively pursue a consolidation strategy. It was also suggested that agri-businesses should reverse previous decisions to limit shareholding within these organisations. Any consolidation approach and consolidation method which is based on willing and amicable participation of the parties involved, benefits these stakeholders and the industry. These transactions must hold some benefit or value for those parties involved as well as other stakeholders in the industry. The principle of embracing the competition authorities and the requirements of the South African Competition Act (89 of 1998) as part of the consolidation process was strongly advocated. Ultimately, the business approach which best supports the organisation’s strategy is the obvious choice, but the reality is that it might include characteristics of both an integrated and a focussed approach.