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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Urban Consumer spending

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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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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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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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