Home to one of the continent’s most sophisticated retail markets, South Africa boasts a wide variety of retail formats and distribution channels to match the diversity of the country itself. The retail sector has played an important role in helping South Africa rebound from the 2008-09 financial crisis relatively unscathed, as social grants, increases in public sector employment and rising real wages contributed to higher household disposable incomes and encouraged spending. Consumer spending makes up nearly twothirds of economic activity in South Africa.
However, recent years have proven somewhat more difficult, with retail sales over the course of 2014 increasing by around 2% over the same period a year prior, compared with year-on-year increases that averaged over 5% between 2004 and the end of 2013. Amidst a deteriorating consumer position of high personal debt and slow credit growth, anaemic job creation, a worsening rand and a rise in living costs across the board, households have slowed their spending. However, a number of the largest local retail groups have a footprint that extends well outside of the country to markets in West and East Africa, as well as closer to home – which is helping to buffer balance sheets against the slowdown in domestic sales.
Mixing It Up
In Deloitte’s “Global Powers of Retailing 2014” listing of the top 250 global retailers, five South African companies made the grade, demonstrating a size and clout on par with their multinational peers. Statistics South Africa figures for domestic market share broken down by retail category from January through September 2013 show general dealers leading the way with a 39.6% share; followed by clothing and footwear (20.6%); food, beverage and tobacco (9.1%); hardware (8.1%); pharmaceuticals (7.4%); and furniture, appliances and equipment (4.8%).
The country’s largest players tend to cover a range of categories, with the outlet mix also split by format type and the living standard measure (LSM) segments being targeted. The country’s “big four” grocery chains – South African Shoprite, Pick n Pay and Woolworths, and the Dutch-headquartered Spar – all have hypermarket, supermarket and forecourt offerings within their portfolios. Shoprite, in addition to its flagship brand aimed at the mass middle market, trades under the Checkers and Usave brands, targeting the upper-and lower-income segments, respectively. It operates branded furniture, homeware and pharmacy subsidiaries. From February 2013 to February 2014, Shoprite added 104 corporate stores in the country, representing more trading space than any of its rivals.
Pick n Pay has also recently launched a range of standalone clothing stores to complement its grocery portfolio, while Dutch-owned Spar also manages a chain of liquor stores (TOPS) as well as a building franchises (Build it). Woolworths is perhaps the most focused of the four, with its single branded stores selling a mix of food, clothing and homeware. The retailer has a strong private label offering and focuses on the higher LSM segments.
The big four each follow different ownership models. Spar is purely franchised, Woolworths purely corporate, and Pick n Pay and Shoprite, a combination of both. Non-food retailers also have a significant diversity of brands and outlets. Brands under Massmart Holdings, in which global giant Walmart acquired a 51% equity stake in 2011 for $2.4bn, include wholesalers Makro and CBW, Game (a hybrid of food and general) and Builders Warehouse. General retailer Mr Price operates specialised sports and home stores in addition to its flagship chain of apparel shops. Edcon is a department store chain and owns a number of fashion brands, as well as the book and stationery retailer CNA. The Foschini Group and Truworths are nationwide apparel groups, while the two largest pharmacy retailers are Clicks and privately held Dischem.
“We expect the ends of the spectrum to best sustain revenues, with higher-end retailers which include Woolworths – and lower-end retailers – namely Mr Price and Shoprite – to remain the most resilient over the coming periods,” Zaheer Joosub, a retail analyst with Renaissance Capital, told OBG. “However, those with credit and discretionary products are likely to be impacted by slowing spending.” Indeed, the burden of escalating prices as well as rising debt levels is being felt predominantly by lower- and middleincome consumers, prompting a flight for value. Conversely, higher-income spenders display more resilience. Joosub does caution that the outlook for Woolworths could change if interest rates, hovering around historic lows, experience a round of hikes.
Food price inflation is very much subject to exogenous pressures in South Africa. “About 80% of all food is directly or indirectly impacted by the maize or soya price. If there is good rainfall and a good local maize crop, this could help temper inflation a bit,” Gareth Ackerman, the chairman of Pick n Pay, told OBG. In light of the high levels of imports and with the rand having fallen by double digits over the past few years, clothing and other durables have been experiencing double-digit inflation, slowing consumption in non-grocery segments.
Cash Is King
Cash sales are outpacing credit sales as retailers tighten their scorecards for issuing credit to new customers. And consumers, with debt-to-disposable income levels (76%) near all-time highs, are unable to extend themselves any further.
Amidst a weakening credit environment, retailers that are heavily reliant on credit sales are taking a hit. Around 70% of Truworth’s sales are on credit, and 60% of Foschini’s, according to the respective companies’ annual reports. Edcon, after Absa Bank bought its credit book for R10bn ($947m) in 2012 and introduced tougher credit approval stipulations, is rumoured to be looking for an additional credit provider in a bid to extend its prospective customer base. Unsecured lending in South Africa grew rapidly between 2010 and 2012 to what many perceive was approaching an unsustainable level that posed serious systemic risk. The National Credit Regulator has introduced stricter legislation to temper growth, while the financial sector, through the South Africa Banking Association, has agreed to adopt a code of conduct towards more responsible lending.
Moreover, Renaissance Capital’s Joosub believes that the push towards credit tightening, while having a marked impact on the market in the immediate term, should normalise over time. “We are experiencing a maturity cycle. First-time card buyers will learn their lessons and the credit bureaux will need to consider issuing one-off amnesties.”
Big & Small
South Africa’s retail market is heavily concentrated among the large, national outlets in both grocery and non-grocery segments. According to research from McKinsey & Company, in 2012 the six leading apparel retailers held 47% of the market. All signs point to further consolidation as the larger retail groups continue to acquire smaller independents in a move to not only increase market share, but also extend their footprint into townships and rural areas. This trend is prompting debate over whether or not the diminished role of traditional “mom and pop” shops (referred to colloquially as spaza shops) is eroding the fabric of more traditional communities.
A couple of retail groups, including the furniture and appliance retailer Lewis and the durable goods retailer Pepkor, have carved out a niche in lower-income and peri-urban areas (i.e. those transitioning from rural to urban). This has involved the adoption of a model where the storeowner and employees are hired or selected from the community. “60-70% of their customers are repeat customers, and they are able to sell on credit with good collection rates as they know their customers personally,” explained Renaissance’s Joosub. Leveraging the customer affinity generated, these groups have successfully expanded into offering co-branded mobile phone packages and micro-insurance and funeral coverage.
A Matter Of Convenience
In a bid to reduce overhead costs and increase customer access, co-location is a strategy being widely pursued, with the major grocery retailers increasingly having dedicated kiosks that handle money transfers, travel, general ticketing and other services on-site.
This pursuit of convenience, in combination with densification, is also driving a move to forecourt expansion, which has been taking the form of grocery chains striking exclusive partnerships with leading petrol retailers. Woolworths, for example, has 50 smaller format stores situated within Engen-branded filling stations, with plans to open 45 more by June 2016. Pick n Pay has a similar agreement with BP and plans to open 120 more forecourt stores at its stations over the next five years. Spar has concluded a partnership with Shell, while produce chain Fruit and Veg City is partnering with Caltex.
Forecourt footfall is not only premised on the locational convenience of drivers being able to buy groceries while filling up their car, but also trading time convenience, as many petrol stations remain open 24 hours a day compared to standalone and mall stores that are usually not permitted to be open past 6-8pm depending on municipal zoning laws.
According to a Broll Property Group report, online purchases in 2013 accounted for just 2% of all retail sales in South Africa, as opposed to the UK and US, where e-commerce represents around 10% of the market. “Even for Mr Price, which has arguably done the best in terms of launching an online offering, total online sales amount to less than the sales generated from its 10th biggest store,” said Joosub. “Online is a long-term play and those going into it are mostly doing so to be prepared for when it eventually takes off.” Comparatively low internet penetration rates, along with low credit card usage, are often considered the main reasons why online retail lags similarly mature retail markets elsewhere, although higher LSM segments do see comparable levels of spending. Even so, South Africa does experience distribution challenges, especially in meeting demand from consumers in lower-density areas which tend to have relatively fragmented infrastructure.
Meanwhile, high delivery costs have tended to serve as a barrier to e-commerce reaching critical mass. Nevertheless, online remains a channel being pursued by retailers, not necessarily for transacting sales and handing fulfilment, but as an information platform that allows shoppers to browse merchandise that they can then purchase in person in stores.
One retail trend long popular in Europe and North America that has been catching on in South Africa is loyalty schemes. Clicks’ Clubcard has 4m active members responsible for 76% of all purchases. Pick n Pay has an estimated 7m members, earning points that can be redeemed for cash each time they spend, while Woolworths’ “Difference Card” offers its members promotional discounts on selected products. There is some concern that a proliferation of loyalty cards is weakening the impact of each, especially as banks have also unveiled their own multi-partner programmes.
For instance, First National Bank “e-bucks” cardholders are able to earn points when they shop at Makro, the electronics retailer Incredible Connection and Engen filling stations. Both Woolworths and Pick n Pay, when speaking with OBG, acknowledged that while their schemes are intended to garner loyalty, their most significant benefit is the ability to capture customer information and perform complex analytics to better understand and cater to their customer’s shopping patterns and preferences.
According to Broll, there are currently around 20.7m sq metres of formal retail space, as well as another 12m sq metres under construction or in the planning stage, most of which is concentrated in the more urbanised provinces of Gauteng (45%), the Western Cape (15%) and KwaZulu-Natal (14%).
Despite the tempered outlook for retail growth, property developers continue to introduce new mall stock to the market. While some areas might appear to be over-retailed when measuring mall space per capita, indicators around vacancy rates and occupancy costs are faring well. The South African Council of Shopping Centres reveals that 25 new shopping centres exceeding 30,000 sq metres are expected to open between 2013 and 2016, raising the tally to 180. This is more than double the number registered five years ago. Rapid construction of high-density housing in and around the outskirts of urban centres, and new passenger rail stations, are creating opportunities for new retail developments, while new mixed-use developments, such as Waterfall City situated between Johannesburg and Pretoria, are creating fresh retail nodes in and of themselves (see Real Estate chapter).
Developers’ confidence that new malls will have uptake is also being fuelled by the arrival of international chains. A number of global fashion brands have entered the market over the past few years, including Burberry in 2008; Zara, Gap and Topshop in 2012; and Forever 21 in 2014. For most, their foray into South Africa is more of a continental stepping stone than a pure domestic play, with the strategy to initially only open a couple of flagship stores rather than going nationwide. Needless to say, the influx has had an impact on local retailers, particularly in terms of just-in-time distribution. “In the past, local buyers got on planes to attend overseas fashion shows and then sent orders to China to have them copied. Now, you suddenly have companies like Inditex [the owner of Zara] that are able to turn around fashions exceptionally fast,” according to Joosub. “Even if they don’t take a huge chunk of the market, they are able operate with minimal overheads while spending very little on advertising and can aggressively negotiate for favourable rents as landlords understand that they drive traffic.”
Walmart’s purchase of a majority stake in Massmart is another example of the increasing profile of South Africa’s retail sector – and more particularly, its retailers – on the international stage. The purchase was then followed by Pick n Pay and Shoprite committing substantial cap-ex to improve their operational efficiency, although whether other larger international retailers will follow suit remains uncertain, given the drawn out as well as costly three-year legal battle that preceded the final acquisition.
As international retail groups increasingly arrive in South Africa as a platform to enter other markets on the continent, local retailers have been looking to beat them to the punch. The likes of Shoprite, Pick n Pay and others have already ventured north in an effort to secure first-mover advantage (see chart). For Shoprite, sales in the rest of Africa are delivering triple the growth rate of those in South Africa, while for Edcon, non-South African sales rose 24.8% over the final quarter of 2013, and made up around 10% of all group sales. Africa as a whole holds significant economic potential in the coming years. The continent is home to six of the world’s 10 fastest growing economies of the past decade, and is urbanising at a rate of 3.61%, faster than any other region in the world. By 2018, its top 18 cities are forecast to have a combined spending power of $1.3trn. However, modern retail has a long way to go. In Nigeria, for example, which in 2014 surpassed South Africa as the continent’s largest economy, formal retail penetration stands at just 5% as compared to 40% in South Africa.
The same factors making the region appealing – that formal retail is in its infancy and highly fragmented – are also what make it a risky proposition. Along with the highly fragmented nature of formal retail, the sector faces challenges from poor supply chain infrastructure to inconsistent regulation and difficulties in finding and attaining permits for a suitable site. Although the environment in South Africa is more receptive towards business, South African firms are still considered more adept than their Western counterparts at functioning in developing markets. Its retail groups are also more accustomed to operating under tight margins and capable of successfully retailing to consumers with less spending power. “While formal retailers have made inroads into non-traditional channels in recent years, their progress has slowed down and independent channels are starting to take market share back as they become more sophisticated,” Peter Matlare, CEO of Tiger Brands, told OBG.
Slowly & Surely
Africa is not yet a given, as evidenced by Woolworth’s exit from Nigeria and Shoprite’s closing of stores in Tanzania. When examining the footprint of South African retailers across sub-Saharan Africa, foreign outlets remain concentrated, as proximity helps to alleviate logistical constraints.
It can take up to 117 days for Shoprite to stock its Nigerian stores with goods originating from its Cape Town warehouses. According to research from Renaissance Capital, because of a lack of local warehousing and distribution centres, around 25% to 35% of Shoprite’s Nigerian store space is being allocated to storage, compared to a norm of around 5% to 10% domestically. As the transportation of goods originating in South Africa can also involve paying double taxation in addition to facing delays, the preference is to source locally where possible.
While the likes of Nestlé, Unilever and South African fast-moving consumer goods Tiger Brands are beginning to establish manufacturing facilities in places like Ghana and Nigeria, expansion into Africa remains a long-term play, especially for those whose inventories consist mostly of perishables. Indeed, the most aggressive foreign foray to take place recently was in Australia, where in mid July 2014 Woolworth’s completed an R23.3bn ($2.36bn) takeover of Australian department store chain David Jones.
South Africa continues to offer much scope for growth in the retail sector. In A.T. Kearney’s 2014 African Retail Development Index ranking, a study conducted to determine the most attractive sub-Saharan retail markets, South Africa came in at 7th out of 48 countries. Although as a more advanced market it was rated less favourably on indices related to saturation and market penetration, it was the top performer for country risk and market size. The growth of South Africa’s black middle class as well as urbanisation are long-term demographic trends that position retail as a sector poised for sustainable growth. In the interim period, however, a consumer base that is under pressure might temper that growth, meaning retailers that can offer consumers the most value-added offerings may fare better than others.