Changes in South African Retail

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The South African retail environment is set to change over the next 5 years and that change is going to be driven largely by Massmart and their competitor’s reaction to their post Walmart strategy. Already every retailer has been asked the question, “How is the Walmart in SA going to impact on your business”. That is a very difficult question to answer when you are not sure how Massmart will change.

Walmex (Walmart Mexico) has been a successful model in an emerging market for Walmart and the management team at Massmart will be encouraged to follow a similar strategy by their American partner. Walmex has expanded successfully into Central America from a dominant position in the Mexican market and one can reasonably assume that the South African team will endeavour to follow the same path.

The key difference in South Africa is that Massmart don’t dominate the local food market and will need to grow a significant food business in a market dominated by a few major players. This will present a challenge that will not be easy to overcome. Already Massmart have pursued each of the independents successfully and the purchase of Rhino will all but close the book on growth by acquisition. Perhaps the competition commission would have a different view on Massmart purchasing Fruit and Veg City than it did to the proposed Pick n Pay buy out. That may be farfetched but it would certainly throw a cat amongst the pigeons.

I don’t believe that suppliers are going to be adversely affected by Walmart’s purchase of Massmart and I certainly don’t believe that factories will be closing left, right and centre. Prospects for suppliers may even improve through Massmarts projected growth in food retail. In all markets a retailers priority is to source locally wherever possible and it is unlikely that that will change. Manufacturers require efficient routes to market to be successful, a growing Massmart with multiple store formats would provide that as well as access to markets that have previously been difficult to supply directly.

To get an idea of how Massmart may look in a couple of years have a look at the Walmex site. It looks remarkably similar to what Shoprite have done in Africa, without an American friend and hats off to them for that!


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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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Trimming down the work force

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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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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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Outlook for African Retail in 2011

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An insight for the year to come
From what’s come through my desk and over the internet over the last few days, it seems reasonable to speculate that the local retail industry has enjoyed a decidedly positive Christmas trading period for the first time in two years. Although details for the December /January period have not yet been released, several retailers have reported improved results despite seeing significant price deflation for the period.

Shoprite Holdings reported 9.5% rise in first-half turnover, with comparable store sales up 2.8% in the six months to end December and an internal deflation of 1.2% for the period. Massmart also reported a 13.3% increase in sales in the latter half of the year and an estimated 2.9% deflation was recorded year to date. The Clicks Group enjoyed an increase in sales of 16.8% with selling price inflation of only 0.9%.

In the final weeks of 2010 TNS Research Surveys released its latest Economic Confidence Index (ECI) results for metropolitan adults, conducted in the first week of November. The overall ECI was up four points from the previous quarter to 137, maintaining the highest levels it has seen for 2 years. Click here for more

This increase in consumer confidence, together with the lowest interest rates seen in the last 30 years, could make 2011 the year of the consumer comeback. Prof Deon Tustin, executive research director of the Bureau of Market Research (BMR) at Unisa, provides further impetus with the release of his report, Forecast Of Economic Indicators And Formal Retail Sales By Product Group For 2011. Amongst other things the report forecasts a 3.4% real growth rate for formal retail sales in 2011 which, if it holds, is cause for optimism amongst retailers. Click here for more

Despite very high levels of debt amongst consumers, 2011 has the potential to be a year of strong sales growth for the FMCG industry. The sales growth is positive but retailers will have to cope with very low levels of price inflation, this environment should provide a platform for the most efficient retailers to outperform competitors and gain market share. It will be interesting to see who the 2011 winners are.

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Talking Retail Technology

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In the modern age technology is an integral part of almost every business. In the retail industry where efficiency is critical retailers have been early adopters of technology, many innovations used in other industries have been developed specifically to address problem areas in the retail supply chain. This is a trend that will no doubt continue and while developments in many of the processes of retail - logistics and point of sale – are slowing there is much activity in the “soft” elements such as marketing and customer interaction.

Recently, the Intel Corporation launched its Connected Store concept in New York. Dubbed by some as ‘the future of retail’, it looks to show off the best of current technology and how it could affect retailers and consumers alike.

Using various Intel processors makes it possible for retailers to integrate several services, monitor statistics with ease and offers the luxury of remote manageability. In addition to this, Intel has also unveiled the Intel AIM Suite, a video analytics technology for anonymous audience measurements, this enables retailers to monitor age, gender and length of attention of each customer in the store. If used properly information will revolutionise customer interaction as we know it. Imagine the possibilities for marketing and advertising teams.

Although widespread adoption and implementation may still be a way off, the point is that it’s coming. Retailers need to embrace the change and invest prudently in technology in order to ensure the long term sustainability of their business. The future of retail really is an exciting place for those with an open mind.

Click here for source article



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