Expanding opportunities for South African fast-moving consumer goods segment

Around the world, fast-moving consumer goods (FMCGs) tend to be more resilient to economic volatility than other manufactured products. This category of low-cost goods, sold quickly, includes a range of consumables like processed and perishable foods, soft drinks, basic toiletries, beer and basic pharmaceuticals. FMCGs are less discretionary than electronics and automobiles, low-margin and high-volume.

Market Performance

The FMCG segment has ridden out several years of economic fluctuations in South Africa better than most sectors. A recession in 2009 has been followed by an uncertain recovery with persistent low growth throughout 2014-15. “While consumers have been under pressure amid high unemployment levels and sluggish growth, we have not seen a significant impact on beverage consumption, as the segment is less vulnerable to economic stress,” Therese Gearhart, president of Coca-Cola Southern Africa, told OBG.

South Africa’s market size, with nearly 55m people, and a young and growing population, are strong upsides for the industry. South Africa is already one of Coca-Cola’s top 10 markets in the world, though it ranks only in the top 25 in terms of population and in the top 90 for GDP per capita. While generally the manufacturing sector has felt a negative impact from wage growth around 2% above the rate of inflation, for FMCG companies this has a flip side in boosting consumption. Some segments can even benefit from a squeeze on earnings, for example canned food, as consumers shift away from fresh produce.

South African brands like Shoprite and Woolworths have reached fast-growing African markets, like Nigeria, taking South African products with them. “Sub-Saharan Africa is seeing a transition from subsistence economics to middle class and primary consumers for the first time, with urbanisation having a particular effect,” Andre de Ruyter, CEO of Nampak, Africa’s largest packaging firm, told OBG. “In the sector, you get growth in excess of GDP growth as people are transitioning to a new income level, particularly in the beverage industry.” However, Ian Donald, chairman and managing director of Nestlé South Africa, told OBG that it is sometimes cheaper to import into Africa from Asia or Europe than from South Africa, due to high logistics costs. Red tape also adds expense and hampers efficiency. Nestlé South Africa only exports 5-7% of its output, a figure that could be higher. There are hopes that this may change with the signature of the Tripartite Free Trade Agreement, but it take time before the benefits are felt.

Within the country, distribution to South Africa’s many small and informal retailers is a particular challenge for FMCG companies, but one that many multinationals have succeeded in addressing; beverage and confectionery companies in particular have developed the distribution networks necessary to reach out to every township and village stall.

Supply Concerns

The sector has not been immune to supply shocks. Gearhart said that power outages are a concern, and water use will need to be carefully managed. Beverage and confectionery producers have also been affected by South Africa’s sugar prices, which trend above the global average due to tariffs. Price rises in this low-margin sector are generally passed to the consumer, which can push down demand – affecting the producers of the raw materials. Some FMCG companies, and closely related sectors such as packing, have responded to market conditions by working to address inefficiencies that they were previously able to externalise – until the past few years, South Africa could leverage lower energy prices and lower-cost labour. Nampak has shifted from using tin-plate cans to aluminium, reducing energy costs by 17% per can, while replacing old, slow, and labour-intensive production lines. With the company transporting 5.5bn-6bn cans a year, lighter packaging makes a significant difference to costs.