South Africa's retail sector growing and drawing in new international brands

One of Africa’s largest and most affluent markets, South Africa has a well-developed retail sector, including a number of major domestic players. While recent macroeconomic difficulties have affected parts of the market, it has continued to grow and draw in a number of new international brands looking for a launching-pad to the rest of the continent.

Facts & Figures

The retail market grew 2.4% in 2014, according to Statistics South Africa, an official body. This is respectable growth, almost a point above GDP, though it was the third consecutive year of growth deceleration, following expansion of 6.1% in 2011, 4.5% in 2012 and 2.5% in 2013. This was largely due to pressures on the economy, including the falling rand, the effect of inflation on real incomes, and the impact of macroeconomic uncertainty on consumer confidence. However, there is also an element of the market stabilising following a rapid recovery from the 2009 recession, when retail sales fell by 3.2%. In 2010 a full-blooded recovery began, with sales rising 5.6%.

The picture is one of fairly solid growth: monthly sales rose from around R48bn ($4bn) in mid-2009 to around R60bn ($5.2bn) at the end of 2014. The fastest-growing segment in the market was textiles and clothes, which rose 3.5%, followed by hardware (2.6%), general stores (2.4%), household goods (2.3%), pharmaceuticals (2.1%), and food and drinks (0.9%), with other types of retailer seeing sales growing 1.3%.

Modern Market

In terms of market share, general stores dominate, with 41% of all sales in 2014, reflecting the still strong segment of small general retailers across the country, which has been given a new lease of life by immigrant shopkeepers, according to Ian Donald, chairman and managing director of Nestlé South Africa. Textiles and clothing stores accounted for 21% of spending, food and drinks shops 9%, hardware stores and pharmacists 7% each, household goods retailers 5%, and other shops 10%. Compared to most sub-Saharan African countries, the retail market is relatively modern, with around 80% of sales in formal outlets, according to John Wilkinson, head of retail and consumer at professional services company PwC. He saw scope for growth in convenience based stores in residential areas as well as targeting the lower-income market and some rural areas, where informal retail still has a significant presence. Pick n Pay, Boxer and Shoprite’s Usave stores have been particularly active in this segment.

Performance Indicators

Despite the solid performance of the sector since the recession, by mid-2015, retailers and analysts were reporting an increasing drag from the burdens weighing on South Africa’s broader economy. “One can’t ignore macroeconomic factors,” Wilkinson said. “It has been for quite a while a difficult environment in which to operate. Consumers are under pressure, there have been higher than normal increases in electricity prices and fuel costs are very high. This puts an enormous amount of pressure on consumers, so we see a general drop in disposable income across the board.”

Retailers often use the living standards measure (LSM) developed by the South African Audience Research Foundation, which categorises South Africans in 10 groups from 1 (lowest) to 10 (highest). The LSM 7-10 categories have more disposable income across the economic cycle and are less affected by cyclical downturns. Thus retailers that target the upper end of the market have weathered the economic slowdown better than others, including Woolworths, Checkers, and branches of Pick n Pay in higher-income locales, Gwarega Mangozhe, CEO of the Consumer Goods Council (CGC) of South Africa, an industry organisation, told OBG. By contrast, those retailers focusing on LSM 1-5 have done less well.

The general retail segment held up reasonably well in the first half of 2015, sustained by lower fuel prices feeding into disposable income, while credit was becoming a facilitator of spending rather than a major driver, financial institution Barclays said in a note on July 2. It forecast that the segment would face headwinds in the second half of 2015 due to lower appetite for credit with disposable income under pressure. The falling credit outlook may affect nonfood retailers, which see a larger proportion of credit-based sales. Barclays noted a decline in the number of customers requesting credit from retailers, adding that those still extending credit to customers to maintain sales faced medium-term risks.

The fundamentals of the market are promising for the medium to long term. South Africa’s growing and youthful market of 55m people, its resource wealth and moves to re-industrialise, and its position as a springboard to the rest of sub-Saharan Africa all stand it in good stead. Retailers are also used to dealing with cyclical downturns – and in this case South Africa seems unlikely actually to dip into recession in 2015. “Retailers are pretty resilient, and tend to come up with innovative ways to trade through until the economy turns around, which I expect in the next 12-18 months,” Mangozhe said.

New Trends

Stiff competition in a maturing market with low margins has seen retailers look to build market share and maintain revenue growth by offering services as well as goods to their customers, including insurance and loans. Loyalty card schemes are also increasingly popular, helping retailers maintain custom and track purchasing habits.

A move to centralised distribution has been an important trend in recent years, with new warehouses and logistics centres built in major cities such as Johannesburg, Cape Town and Durban. Online shopping is in its infancy in South Africa, used almost exclusively by the higher-income segments, and accounting for less than 1% of overall sales, according to Wilkinson. However, the niche is seen as one of the most promising retail segments.

The strongest players in the market at the moment are online-only retailers like Amazon and Takealot (which merged with rival Kalahari in February 2015), but bricks-and-mortar operators are also looking to move online, including via mobile applications; ShopRite launched its first app in 2010. However, patchy infrastructure and logistics, slow internet connections, and poor mapping are impediments to the growth of online retail beyond upper-middle income groups. Christopher Gilmour, an investment marketer and analyst at Barclays, also questioned whether online shopping could grow in a society where going to the mall is a social event, as much as a retail one.

Brands

According to CBRE, an international real estate company, 19 new brands entered South Africa in 2014. CBRE ranks South Africa as the 15th “most-targeted” market in the world for retailers. This ranking, despite growth currently below the world average, and middling GDP per capita, is a sign of retailers’ confidence in the market’s potential. “In any mall, there will be five to 10 brands that weren’t there two years ago – Zara, New Look, Mango, a lot of brands from Europe and the UK, and that will continue,” Wilkinson said. Many international brands see South Africa as both a market with a lot of potential in its own right and as a springboard to the rest of Africa, including as a testing-ground for future expansion on the continent. In turn, the entry of new players has caused local retailers to reassess their strategies, introducing new products, improving their overall offering to shoppers, and streamlining back-office operations to maintain competitiveness.

Expansion Abroad

South African retailers have been increasingly turning their attention to diversification into other countries, particularly with the domestic retail market maturing and currently undergoing a slowdown. Countries elsewhere in Africa have been the main focus, but Europe is also on the radar.

Shoprite, for example, has 160 outlets in 13 countries outside South Africa, according to CGC; Gilmour estimates that 16-17% of its revenues come from elsewhere in sub-Saharan Africa. In June 2015 the international press reported that the Foschini Group planned to expand its portfolio of outlets elsewhere in Africa from 148 to 375 by 2020. Pick n Pay and Edcon are also growing elsewhere in the continent.

“Nigeria has a growing middle class, a very attractive market in size terms, and a new president after fairly calm, peaceful election,” Wilkinson said. “Angola is very attractive, seeing a lot of activity, as are Kenya and Tanzania. But these markets are all very different, with different challenges, opportunities and cultures.” Barriers to expansion include supply chain logistics, lack of suitable locations for modern retail, and the slump in commodity prices that has affected African economies. Thus, South African retailers have started to look elsewhere. In May 2015 Brait agreed to pay around $1.2bn for British fashion chain New Look, following the move of Foschini Group and Spar Group into Europe.

Outlook

Retailers have largely ridden out recent economic difficulties. With the outlook improving in the second half of 2015, they can look towards a positive medium-term future. The entry of international brands is a sign of sound fundamentals and the market looks set to remain highly competitive and active.