Continental foothold: International firms favour the country as a starting point

The most advanced on the continent, South Africa’s retail sector encompasses the spectrum of mercantile activity – from large chains with a multinational footprint to the informal spaza shops that provide household items to their neighbourhoods. The sector has grown rapidly since the end of apartheid in 1994, underwritten by demand for convenience, a growing middle class and changes in consumer preferences. Sophistication has also increased, and retailers have adopted new strategies, like loyalty programmes, to understand customer demand. The sector has also attracted foreign firms, with several international brands establishing a presence in 2012. For retailers the changing market brings challenges, but also opportunities.

Getting A Start

The market is dominated by large retail groups operating supermarkets and hypermarkets in the domestic sector, and in most cases expanding their presence across the rest of the continent. Shoprite, Pick ‘n’ Pay, Spar and Woolworths together make up the “big four” in terms of brands, and between them account for around 60% of the total food retail market, according to South African financial services group ABSA. Assessing the market share of the nation’s largest players has, however, presented difficulties since Pick ‘n’ Pay’s 2009 withdrawal from the AC Nielsen’s survey. “When Pick ‘n’ Pay withdrew it was deemed to have about 35% market share, Shoprite a 32% market share, Spar about 28% and Woolworths around 9% or 10%, but annual results suggest that Pick ‘n’ Pay have lost a significant amount over the last three years,” Christopher Gilmour, analyst for asset management at ABSA, told OBG. The biggest brands form part of larger groups that operate in other niches tailored to different income segments. Shoprite has Checkers, for example, while Woolworths has a clothing line, Country Road outlets.

Two other large retail groups play a significant role in the market: Massmart Holdings, a managed portfolio of 10 retail chains and wholesalers focused on high-volume, low-margin sales through 182 outlets; and Metcash Africa, the largest distributor of fast-moving consumer goods on the continent, with interests in South Africa that include Metro Cash and Carry, Trade Centres, Liquor World and Buy Rite.

Other Outlets

Beyond the industry giants, the sector includes a wide range of outlets such as convenience stores, petrol station forecourt stores, small general dealers and speciality providers focusing on lines such as confectionary and health food. General dealers accounted for the largest amount of retail trade sales in 2012, according to the government agency Statistics South Africa, followed by textiles, clothing, footwear and leather goods; food, beverages and tobacco in specialised stores; and household furniture, appliances and equipment. However, a significant proportion of South Africa’s retail activity takes place beyond the scrutiny of the government: according to AC Nielsen, the informal retail sector, including the neighbourhood spaza outlets, accounts for around 30% of total retail trade.

The Big Four

The Shoprite brand started in 1979 as a small chain of supermarkets, and has since grown into a retail group with 339 stores in South Africa and a further 85 stores in 16 countries across the continent. In South Africa it utilises two store formats: supermarkets, which offer a range that includes groceries and small appliances, and large-format superstores that house an extended product line of non-food and do-it-yourself items. Shoprite has targeted customers in the lower and middle Living Standards Measure (LSM) ranges – a widely used market research tool unique to South Africa which divides the population into 10 LSM groups, with 10 the highest and 1 the lowest.

In contrast, Woolworths markets itself to the higher end, those in LSM groups 8, 9 or 10. The chain’s presence in South Africa dates back to 1931, when the first store opened its doors in Cape Town, followed by Durban, Port Elizabeth and Johannesburg. In the years since, Woolworths has introduced a number of new concepts to the market, such as pre-washed lettuce, machine-washable woollen clothing, and “sell-by” dates in the 1970s. Today the brand is present in 287 locations across South Africa, as well as in 11 African countries, while separate Country Road and Trenery outlets have been established in 23 locations domestically as well as in Australia, New Zealand, Oman and the UAE.

Pick ‘n’ Pay, meanwhile, has traditionally occupied the centre ground in the South African market, selling to those in the middle-to-upper LSM groups. Established in 1967, it has expanded its footprint over the years to include 941 stores in South Africa of all formats, from owned and franchised hypermarkets to liquor stores and pharmacies. It has opened 94 stores elsewhere on the continent, which in 2012 made up 7.7% of till sales.

While Pick ‘n’ Pay’s expansion has been partially built on a franchise model (282 of its 456 supermarkets operate under it), the success of Spar locally is due to franchising. In the 1963 a group of eight wholesalers were given exclusive rights to the Spar brand, through which they serviced around 500 small retailers. After numerous mergers and takeovers, the Spar Group today operates seven distribution centres which supply goods to around 1000 independently owned Spars nationwide. As well as carrying branded Spar products, individual stores are free to source specific goods from local traders under the group’s voluntary trading principle.

Distribution

South Africa’s largest retailers operate centralised distribution systems – and are able to apply their considerable purchasing power to require suppliers to deliver to central depots and warehouses on favourable buying terms. From there, products are distributed to hypermarkets, supermarkets and other retail outlets nationally, primarily via a national road network that is the largest in Africa. Freight rail provides an alternative to road transport, and increasing the amount of container traffic transported on the nation’s extensive rail network has been made a priority in the government’s strategic plan (see Transport chapter).

Imported goods arrive primarily by sea and may enter through any of eight commercial ports, with Durban accounting for the largest amount of inbound produce. Smaller formal retailers rely largely on agents and distributors, which in South Africa have clearly defined roles, whereby agents work on commission after obtaining orders from customers, and distributors buy and sell products directly to their customers. The appointment of a single agent to provide national coverage through a single office or a network of branch offices is a common practice in the domestic market. South Africa’s large number of informal retailRetail sales at current prices ers, estimated at 80,000 in 2011 by AC Nielsen, generally make bulk purchases from wholesalers, like Trade Centre, Makro and, more recently, hypermarkets.

Performance Figures

The South African retail sector, like comparable markets across the globe, suffered a decline in the wake of the global economic crisis of 2008 but has since shown a sustained recovery. Total retail trade sales reached a high in 2008 of R4.98bn ($610m) before falling to R4.79bn ($580m) the following year, according to Statistics South Africa.

However, using constant 2008 prices, by 2010 the market had recovered the lost ground and exceeded its 2008 high-water mark, reaching R5.34bn ($650m). By the close of 2012, total sales at constant 2008 prices were at R5.57bn ($680m) – up 4.31% on 2011. Data from real estate market researcher IPD South Africa also suggests that the sector is becoming more efficient: trading density for “super regional” stores (measured by turnover per sq metre) between June 2011 and June 2012 showed a 7% year-on-year rise from R2495 ($304) per month to R2562 ($312) – a trend that was repeated across the remaining four segments: regional, small regional, community and neighbourhood. Still, the market’s performance has shaped retailer behaviour.

“The rand is extremely volatile and retailers will always prefer to source locally to mitigate currency risk. However, they need a quality product that is cost effective,” Peter Matlare, the CEO of Tiger Brands, told OBG.

As a result, larger domestic chains with sound logistics show the most progress. Shoprite saw its earnings increase from R2.6bn ($320m) in 2011 to R3.1bn ($380m) in 2012; Woolworths went from R1.97bn ($240m) to R2.52bn ($310m) over the same period; while Spar saw an 11% rise to R1.06bn ($130). Of the big four, Pick ‘n’ Pay registered the only decline, with earnings falling from R784.4m ($95.6m) in 2011 to R681.4m ($83.1m) the following year.

International Participants

The favourable trading density exhibited by the retail market makes it an attractive proposition for foreign retailers, a number of which have already made significant inroads. Fashion brands such as Zara, Topshop, Superdry, Steve Madden and G-Star have all opened outlets in the last two years, and compete directly with local stalwarts such as Truworths Holdings and the Foschini Group for the clothing spend of a burgeoning middle class. The arrival of international brands in a segment traditionally dominated by domestic players makes the clothing market one of the most dynamic within the wider sector.

For many industry watchers, however, the arrival of Walmart through a merger with Massmart in 2011 is the largest foreign development. The $16.5bn deal was resisted by unions and other stakeholders amid fears over job security for Massmart employees and the potential rise of imports. South Africa’s relatively rigid labour laws and assurances by Walmart have ensured that these fears remain unrealised, but the possibility that the firm will utilise its global procurement network to cut the prices remains a potential challenge to local players. “I do not think Walmart have begun to flex their muscles yet, they could reduce their prices massively if they want,” said ABSA’s Gilmour.

Market Trends

With rising domestic and foreign competition, South Africa’s retailers have adopted new strategies in a bid to secure market share. Gareth Ackerman, chairman of Pick ‘n’ Pay, told OBG, “Price competition amongst retailers is intense. Customers are increasingly savvy, and loyalty schemes and private labelling are on the rise.” Loyalty programmes are a relatively new phenomenon in the country, but have now been adopted by many of the major players. Clicks, a domestic chain, was first to the market with a loyalty scheme with the launch of its Clubcard in the late 1990s. Woolwoorth’s, having started with the “My School” charity initiative, has developed a fully fledged loyalty scheme in the form of Rewards which has attracted 3.5m members and allowed the firm to track 61% of customer spend as of 2012.

Pick ‘n’ Pay launched its Smartshopper programme in March 2011, and it is now the largest loyalty programme with over 5m members. Spar currently does not offer a loyalty programme, while Shoprite has opted for an alternative electronic coupon system, by which consumers access coupons via mobile phones.

Although many South African retailers’ loyalty programmes remain in the developmental phase at this point, their growing memberships are already making a range of standard marketing techniques possible, such as customer-base segmentation and propensity modelling. This, in turn, will allow for a more efficient pursuit of cross-shop opportunities as well as the development of more productive direct marketing tools to help draw in customers.

Online retailing, which has emerged as a significant trend in comparable markets, has been adopted with less enthusiasm in South Africa. According to some estimates, the small number of grocery retailers that have established online stores, such as Pick ‘n’ Pay and Woolworths, derive less than 1% of total sales from them.

Ian Moir, the CEO of Woolworths, told OBG, “The industry is getting excited about online shopping given the year-on-year growth figures, but one has to remember that volumes started at virtually nothing and online still accounts for only a very minor fraction of total sales in the country.”

Technical challenges offer one explanation for the modest take-up: according to the 2011 census carried out by Statistics South Africa, 64.8% of households have no access to the internet, and 2013 data from broadband testing and diagnostic organisation Ookla showed that broadband speed the country ranks 122nd out of 180 countries measured.

Security concerns may also have a bearing on the online shopping segment. “Some people do not like the idea of total strangers coming into the house to drop off deliveries,” said Gilmour. Retailers of consumer electronics retailers, meanwhile, face the challenge of a postal service that was blacklisted by Amazon and the UK’s Blackstar in 2008. Despite reforms, slow delivery times and theft make expensive courier services the only means of delivery for these items, limiting the market for high-value, low-volume products.

Outlook

The well-established trend of retail expansion in South Africa is expected to be maintained on the back of GDP growth that the IMF has forecast will average 3.6% between 2012 and 2016. However, some factors may act as a brake on the market. Rising energy costs pose a challenge to a range of sectors, and retailers with high energy usage are particularly exposed to climbing tariffs. Consumer debt is also a matter of concern to some in the sector. Unsecured personal loans are readily available and, although regulated by the National Credit Act, consumers circumvent background checks and obtain loans from numerous lenders simultaneously. Household debt stood at 75% of disposable income in 2013 and with higher debt servicing costs than the EU or US, a rise in interest rates may negatively affect consumer spending. Furniture and clothes have traditionally benefitted from purchases made on credit, meaning chains like Truworths and Edgars are exposed to changes in credit availability. Still, the potential relisting of Edgars on the Johannesburg Stock Exchange, from which it delisted after a buyout by Bain Capital in 2007, is a positive sign.

Retail trade sales, 2008-12