The South African Cold Beverage Sector

There has been a recent, but growing, swell of activity in the non-alcoholic, cold beverage sector, driven by a range of factors, least of which is the onset of summer.

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Non-alcoholic beverages constitute 39.6% of the total beverage market (10 670 million litres), and the sector is valued at approximately R39.731 million.

Year-on-year to December 2010 the CPI for food and non-alcoholic beverages (CPIF) only recorded growth of 1.5%, compared to the international average of 25%, creating ideal conditions for new entries in the market. Amongst the new-comers there is a notable growth in the amount of energy drinks in the market, but that is a topic for another discussion.

Although the sector has traditionally been dominated by carbonated soft drinks (they held 83.2% of the market in 2009), it is beginning to lose its foothold. The best performing categories in terms of volume growth for 2009 - 2010 were Sports Drinks (-15.5% > 4.1%), Mageu (-12.6% > 3.2%) and Energy Drinks (5.5% > 13.5%).

There is also an increasing trend towards healthier lifestyles and this spills over into the food and beverage category. “The average consumer is becoming more aware and educated regarding beverage ingredients and the benefits of these, and there appears to be a greater incidence of consumers who read labels.”

These are interesting times for the beverage industry and if current trends continue, and there are no signs that they won’t, manufacturers and retailers alike will be facing some challenging changes.

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A few weeks ago I wrote about the Bottom of the Pyramid and the importance of catering to that sector specifically. Whilst it is true that South Africa’s Bottom of the Pyramid is very large, there is another sector that is growing at an increasing rate and cannot be overlooked, urbanites. An article I recently read dubbed them; Citysumers.

The article defines them as: “The hundreds of millions of experienced and sophisticated urbanites, from San Francisco to Shanghai to São Paulo, who are ever more demanding and more open-minded, but also more proud, more connected, more spontaneous and more try-out-prone, eagerly snapping up a whole host of new urban goods, services, experiences, campaigns and conversations.”

These citysumers present a host of new challenges for retailers. Their loyalty does not lie with a particular brand, but rather they look for brands that “challenge, thrill, titillate, or even shock.” In addition, each city has its own unique citysumers, meaning that a campaign that has swept Cape Town might crash and burn in Johnannesburg or Bloemfontein. City specific marketing is essential. They’re eager for new experiences and not shy to spend a little bit extra to find them.

A recent UNICEF report showed that in 2008 61% of the South African population was urbanized and growing at a rate of 2.1% annually. This is a massive portion of the population, many of whom have considerable disposable income, but not somewhere to spend it.

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A customer is the most important asset a retailer has and they should therefore be at the centre of the retailer’s universe. Every retailer has a clear and expressive “customer centric policy” or a “customer satisfaction strategy” that is presented by executives at every opportunity. Putting it on paper is easy but turning it into a reality is something entirely different.

South African retailers have a sophisticated store infrastructure in place that is modern, well-run and aesthetically pleasing. European shoppers would find it difficult to believe that they were on the Southern Tip of Africa. It is clear that our retailers spend a great deal of time and money on the “hardware” aspect of the customer experience but neglect the “software” or personal aspect.

A retailer’s only direct contact with its customers is through the store’s floor staff. They have a powerful impact on the customer’s in-store experience, whether it’s positive or negative. Every shopper has a customer service story to tell and the vast majority of them are negative. That is something that needs to change. Most consumer goods can be bought at a competitor’s store for very close to the same price. This makes it near impossible to generate shopper loyalty based on price.

A great in-store experience is worth as much as a quality product. I believe retailers need to place more effort on the development, education and training of their floor staff to ensure that they deliver the best service to every customer, at every opportunity. It is crucial that staff realize their integral role in the retail experience and the influence they have on customer experience.

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The ample supply of a relatively cheap labour pool has long been an asset to South African retailers, until now they have been able to employ a large workforce (by international standards) while still being able to maintain healthy margins (again by international standards). An international FMCG retailer expects to operate on a margin of between 0.5 and 1.0% while in South Africa Retailers aim for between 4 and 6%, but that is a topic for another discussion.

The cost of labour in South Africa is increasing considerably and legislation is reducing the number of retailer friendly employment options, such as contract and casual labour. At store level, retailing is labour intensive and the cost saving potential is limited. However contemporary IT solutions provide a viable alternative to the traditional staff heavy approach. Small innovations, like electronic shelf labeling, can significantly decrease costs and improve productivity. Whilst full automation at store level is still a way off, retailers are prepared to invest in the right technologies to reduce the dependence on labour.

It is not going to be the store floor worker who will feel the impact for the race to reduce the overall employee cost. They are largely protected by unions and legislation, however we can expect a sharp drop in contract and casual work opportunities. The brunt of the blow will be felt in the management teams outside of the store.

In SA some retailers have done well to keep “non store” management costs low, but in other instances these costs appear to be substantially higher than the global norm. Centralization of management functions such as purchasing and logistics helps to reduce the management cost, but that’s not enough. As the overall costs of labour increase we will see pressure exerted by executives to cut management structures to the bone.

Whichever way you look at it, the retail industry does not look set to increase the number of people it employs in the near future. When you consider the valuable training, low level entry requirements and upward opportunities that retailing offers, you would expect Government to be bending over backwards to create an environment that would stimulate employment. In my opinion it should form the backbone of the nation’s job creation strategy. Instead we seem to find ourselves in a web of legislation designed to have the reverse effect.

For a concise summary of the amendments to the Labour Laws, click here.

  
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