How valuable is the convenience format to South Africa’s major food retailers?

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There has been a great deal of hype around the Branded forecourt store ever since the first Woolworths / Engen store was launched in 2000, but in the 10 years since then the partnership has only managed to find 43 suitable sites and still do not distribute nationally.

I am not implying that there is not a space for convenience retailing in our market, it has been proven that the format works very well. I am simply warning against the over estimation of the size of the target market and the availability of suitable sites for stores.

Convenience retailing is a very specialist form of retailing and the costs associated with selling from a small store are often underestimated, especially if there is an aggressive store roll out plan. It is also difficult to find suitable sites and even more difficult to find operators who are able to make the significant investment and have the necessary retail skills to manage what is an intricate, hands-on business.

Pick n Pay and Fruit and Veg City have aggressive plans for the convenience format. They are both very good retailers and I have no doubt that they will execute the projects to their full potential. It’s the potential size of the market that remains to be seen. I don’t believe that retailers should be looking for their growth to come from the convenience format but perhaps a better question to ask is, can they afford not to participate in the sector.

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Promotional Pricing vs Everyday Low Pricing

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In Europe and America FMCG retailers have opted to pursue an everyday low pricing (EDLP) strategy in favour of the Promotional price strategy that is predominantly used in South Africa. Promotional pricing is a great way to get feet through stores and it creates a marketing platform for retailers to promote themselves as a “best price” retailer.

Promotional pricing works for marketers and there are real benefits for retailers such as heightened foot traffic through stores and increased sales of promotional items over the duration of a promotion. Having said this, I am skeptical of the long term benefits. Very often, a short increase of sales through a promotion will starve the retailer of sales in the period thereafter, this method also does little to develop shopper loyalty as it encourages consumers to seek the next promotion regardless of the retailer. From a suppliers perspective, promotions may increase market share and drive volumes but history has proven that these increases are most often temporary and do little to stimulate brand loyalty.

EDLP works for finance, logistics and planning people, there are a number of reasons for this, the bulk of them related to increased efficiency. Efficiency is about consistency and EDLP is all about consistency. Eradicating the spikes in demand created by promotions helps to ease many pressures on the supply chain and more importantly makes planning and forecasting more accurate. EDLP reduces out-of-stocks and the risks of overstocking and returns. It also improves planning across the board from cash flow management, distribution and forecasting to manufacturing and demand planning. These are all things that the back office loves and in an industry as large as FMCG getting planning right is worth a lot of money.

In recent months many people have asked the question, How will Walmart’s entry into SA affect the industry? I believe one change will be a progressive move away from promotional based pricing and I have little doubt that a change to EDLP will be positive for the industry as a whole; even if it is initially met with resistance from some retailers.

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What Christmas Holds For Retailers in 2010

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For the past two years, South African retailers have not had the merriest of Christmases as both years saw declining sales volumes. These figures corresponded directly with fourth quarter sales data. Following this, sales from the fourth quarter of last year were compared to sales over same period of this year, and it correlates that an increase of up to 5% in retail sales volume can be expected for the coming month. This, from The Bureau for Economic Research (BER) and Ernst & Young Festive Season Retail trends survey.

Furthermore, consumers won’t have to break the bank to keep up with the Joneses as the majority of retailers surveyed claiming that retail price increases will be lower than last year.

As with all things, there are two sides and in this case it’s the retailers who are at risk. Turnover is still under pressure and profit margins look to remain low. Despite the growth in the retail sector, recovery is still a way off.


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Class action against bread producers

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Since the onset of the case with the Competition Commission for collusive behavior, three of South Africa’s major bread producers; Pioneer Food Group, Tiger Brands and Premier Foods, have found themselves under the spotlight. Earlier this year, Pioneer Foods was the last to receive judgement upon which they were ordered to pay a hefty sum in the region of R1 billion. However, the saga was not yet over.

Last week Friday consumer organizations, Cosatu and activist groups, as well as 5 individual consumers, applied for 2 class actions against the bread producers.

On Tuesday, in the latest development, the accusatory organizations pushed for certification as representatives of all bread eaters in the Western Cape. Some might recall that Tiger Brands’ official case was concluded in 2007, and the three year prescription period comes to a close on Friday, which made the application all the more urgent so that a summons could be served. However, the hearing has since been adjourned until next week Tuesday, effectively taking Tiger Brands out of the fray.

The motions against the producers are driven by claims that penalties already paid to the state did not do enough to compensate for the average consumer who also suffered due to the collusion. In particular concerns were raised for the impoverished who suffered severely as a large portion of whatever income they receive goes to buying bread as it’s a staple food for many of them.

Taking all this into account, what do the plaintiffs truly expect to happen? Is it realistic to expect these producers to pay out yet another large sum which would go to the consumers? And if so, how would this payment be administered and redistributed? After all, how much did the collusion really affect the prices paid by average consumers, with only a few cents being added per loaf here and there.

If successful a class action could be very costly, particularly for Pioneer Foods, who earlier this month revealed that they are looking to acquire KWV and expect to pay a premium for the prestigious winemaker.

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Pick n Pay implement a reshuffle to initiate changes

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The 3 core principles behind Pick n Pay’s restructuring campaign, Consumer Sovereignty, Doing good is good business and Business Efficiency, are simple and straightforward and it follows that they therefore should be easier to affect and maintain. At the heart of the restructuring, as always with Pick n Pay, is the consumer and how their experience and interaction with the brand can be improved.

One the biggest changes is right at the top as the current Exco and Retail Management Board and Group Enterprises Board make way for a Group Executive consisting of accountabilities in Marketing and Sustainability, Buying, Operations, Supply Chain/IS, Franchise, Group Enterprises, Finance, HR, Transformation and Customer.

These are only the latest in a series of changes which began implementation in 2006. CEO Nick Badminton cites the most notable change as the fact that they are now a “more focused operation, having converted the Score stores to Pick n Pay and announced our intention to sell our Franklins operation in Australia.”
In addition, they have made substantial investments towards efficiency and sustainability. In terms of the latter, the retailer announced its intention to commit to zero waste to landfill by 2015 and dramatically reduce carbon emissions.

With regards to the sale of their Franklin’s operation, unfortunately the Australian Competition and Consumer Commission has chosen to oppose the proposed sale, claiming that if successful the deal would negatively affect competition in the retail sector. Furthermore they also cited an expressed interest in acquiring the Franklins chain by “unnamed parties.” Pick n Pay CEO, Mr Gareth Ackerman was surprised and disappointed by the decision and insisted that the sale of Franklin’s to Metcash would be in the best interests of Australian consumers.

Ackerman commended Badminton for his efforts and added that, “his restructuring is an important part of the total strategy of Pick n Pay. It positions us very well for the future.”

With all the changes in the pipeline it looks like Pick n Pay have a bright future however, some the sparkle may be lost if Franklin’s continues to weigh down the domestic giant. The sale would go a long way towards funding the extensive restructuring and without it said plans may have to be put on hold.

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