The State of Logistics in South Africa

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The South African logistics sector has long been plagued by consistently high costs and the 7th State of Logistics Survey shows no signs of the trend abating. The survey released on Tuesday 8 March by the Council for Scientific and Industrial Research (CSIR), IMPERIAL Logistics and Stellenbosch University found that between 2008 and 2009 total cost of logistics decreased by just 1.2%, from 14.7% to 13.5% of Gross Domestic Product (GDP).

These figures are considerably lower than forecasts estimated and indicate an under performing logistics sector. Considering the declining nature of the price of diesel and inflation, the two leading cost drivers, a drop closer to 12.5% could’ve been expected.

There was also a drop in total tonnage as well as ton/km of 4% and 3.7% respectively and less freight was transported in 2009.

On the environmental side, 23 million tons of greenhouse gasses were emitted due to land freight transport activities, 20.3 million tons of which was due to road freight.

The survey found that approximately one third of transport activity in South Africa is outsourced and also stated that growth opportunities were to be found in growth in outsourcing and not among available outsourced freight.
A call has been made for further collaboration between the private and public sectors to enhance the economic infrastructure and promote economic growth and job creation. In addition, it is noted that a move away from mediocrity and strive for world-class standards to ensure the envisaged 7% economic growth annually, for the next 20 years.

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Marketing to the bottom of the pyrimid

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Target Market
Too often marketers and manufactures overlook a crucial segment of the market, The Bottom of the Pyramid (BoP), which comprises the poorest people in the world. Together they constitute more than half of the world’s population (approximately 4 billion people) and they annually spend five trillion US dollars.

At last week’s TNS Breakfast Series talk, the guest speaker Sebastian Janini, Regional Director of the Consumer Sector for TNS, expanded on this issue.

Janini notes that when considering the BoP, many marketers and manufacturers don not fully know how to approach and reach these audiences. Marketing to these consumers is notably different than to the middle or upper classes. Furthermore, he highlighted that even consumers with a very low income are willing to pay extra for a product that will add quality and deliver better value to their lifestyles.

In addition, he pointed out that BoP consumers are highly sociable and community based. The influence of these social groups can greatly affect the success of a product. It is therefore essential to always consider the social context and then cater to the community as a whole, opposed to the individual.

The Bottom of the Pyramid constitutes a large portion of the consumer market with significant unmet needs. Those who are willing to innovate will be met with a wealth of opportunities. In terms of the domestic potential, with approximately 50% of the population living under the global poverty line of $2 a day, the bottom of the South African pyramid is very large indeed. This must surely be the single biggest growth opportunity for the next 10-20 years and that is without taking the rest of Africa into consideration.

For more on this issue, click here to download Sebastian Janini’s full presentation.

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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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