South Africa: Retail looks ahead

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Following the arrival of global giant Walmart, 2011 will no doubt prove to be a game changing year for the retail market in South Africa. While competition is set to intensify dramatically as a result, South African retailers are nonetheless benefitting from a robust domestic market, thanks in part to new revenue opportunities through private labelling, online commerce and loyalty schemes.

According to figures from Statistics South Africa released in October 2011, retail spending in the country grew 7.4% year-on-year, with indicators suggesting crucial December holiday sales have returned to pre-recession levels. Ian Moir, the CEO of Woolworths, one of South Africa’s largest food and clothing chains, told OBG that “despite global events, given that South Africa is a predominantly resource-based economy … and benefits from a low interest environment, the upper income brackets – which account for most of the country’s retail spending – remain fairly confident”.

With the spending commitments of South African households having been squeezed by rising energy, transportation, health and education costs, the growth in retail sales over the past few months came as surprising news. While some of the uptick in activity can be attributed to consumers’ willingness to take on more debt in light of low borrowing costs, it may also be a result of a re-prioritisation of spending, with residents cutting back on big ticket items elsewhere, like holidays and new auto purchases.

The approval by the Competition Tribunal of Walmart’s 51% stake acquisition in South African retail group Massmart for $2.3bn may help underwrite further growth in the sector by increasing competition, although the deal was appealed by a number of labour groups over issues related to job security and local procurement, with a final ruling expected in the coming months.

However, while some terms and conditions of the initial deal may be revised, it is nonetheless expected to be upheld. The agreement represents a major shake-up for an industry that, while relatively mature and sophisticated, for a number of decades has been deemed as devoid of intense competition. The merged entity has announced it will open 100 new stores within the next three years, while setting out the ambitious target of growing into a SR20bn ($2.45bn) food retail business within the next five years.

Given Walmart’s reputation for aggressive pricing strategies and economies of scale, local supermarket chains are not sitting idle. Shoprite, the current market leader (with an estimated 36% share of the “formal” grocery trade), has announced it will be spending $416m to upgrade its distribution centres. Pick ‘n Pay, with an estimated market share of 28%, has also indicated it will be using part of the debt relief gained from selling its Australian operations to invest in and expand its domestic distribution system and network.

In addition to earmarking operational improvements, retailers are looking to adjust their offerings to capitalise on evolving shopping trends and consumption habits. “While South Africa has an advanced retail sector, many trends, such as online shopping and loyalty programmes, are still somewhat in their infancy,” Moir told OBG. Online retail sales presently comprise only 0.3% of total retail sales, for example, yet volumes are forecast to grow tenfold over the coming decade as bandwidth increases and prices drop.

Yet in spite of the steady performance of the domestic market, South African retailers are increasingly expanding their footprint across the African continent in a bid to strengthen long-term growth. The continent’s improving development prospects and ever-larger middle class have opened up noticeable potential for South African retailers to exploit their proximity to and familiarity with nearby markets. Walmart/Massmart, with 52 of its 315 African stores currently outside South Africa, has announced it will be opening an additional 150 outlets throughout the continent over the next five years. Woolworths, meanwhile, intends to open 16 new stores outside of South Africa, bringing its total to 60.

Local fashion retailer the Foschini Group has also announced it will be opening 57 new stores outside of its home territory, while Shoprite, the continent’s biggest grocery retailer (with a store count of over 1450), announced in August last year it will open 106 more African stores by June 2012. “As more and more people acquire cars and want to shop in secure places, the shift to ‘bigger box’ retailing over small neighbourhood stores will continue,” Shoprite CEO’s, Whitey Basson, told OBG.

While Africa undoubtedly provides a complex operating environment for retailers given the associated logistical and regulatory obstacles, the continent’s long-term growth prospects make it worth the commitment. “Africa at the moment accounts for around 10% of our turnover and we don’t see this increasingly dramatically over the next few years,” said Moir. “It’s a long-term play – for the time being it is all about securing first mover advantage and brand positioning.”

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