Organic Growth for SA's Retail Industry

Posted On Tuesday, 23 October 2012 17:30 Published by eProp@News
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South Africa's retail and consumer industry is facing a difficult and challenging business environment in the aftermath of the global economic recession, according to a report issued today by professional services firm PwC.

Retail and consumer products companies must contend with limited volume growth, increasing costs and falling prices. These are some of the findings of PwC’s inaugural edition of South African retail and consumer products outlook:2012-1016, written in cooperation with the Economist Intelligence Unit’s industry and management research division.

The report considers South Africa’s outlook for both retailers and consumer goods firms, providing growth estimates for the 2012-16 forecast period. It reviews the major opportunities, key pressures faced and some of the growth strategies being deployed. It also touches on the effect of further entrants into the market, following the high-profile 2011 acquisition of Massmart by Walmart, the world’s largest retailer. The economic and industry forecasts included in the report are those of the Economic Intelligence Unit.

After a strong recovery since the financial recession of 2009 with retail sales surpassing a trillion rand for the first time in history in 2011, the industry is slowing significantly. Volume growth for 2012 is expected to be just 0.7%, down from 3.9% in 2011. “As pressures on consumers’ wallets increase, retail sales by value are expected to slow this year. The economic outlook going forward is expected to be modest,” says John Wilkinson, PwC Retail and Consumer Leader in South Africa.
The strain is expected to filter through to food sales in general, with sales forecast to edge up to R576.7 billion in 2012, from R542.3 billion in 2011. Sales are projected to accelerate again from 2013, rising to R787.6 billion by 2016. Non-food sales will also slow this year, with R485,8 billion expected in 2012, up from R459.6 billion in 2011. At an aggregate level, retail sales volumes are forecast to expand by 3.45% over the period 2013-2016.

Growth drivers

Both food and non-food sales will rack up steady growth. Sales by volume are expected to climb by an average of 2.9% after recovering from a low in 2012. By value, sales will expand at an average of 7.85% in nominal terms. Any new growth in the retail sector will be largely driven by the country’s steadily expanding black middle class. By 2016, some 11 million households are expected to have an annual income above R89 500 – a level that gives them discretionary spending for a wider range of consumer goods, as in other emerging markets. 

For those on the upper end of the scale, there is a significant drive to increase spending, particularly for status purchases such as of high-end motor vehicles and premium alcohols. For the large, lower-end pool of consumers, two key government initiatives – large-scale infrastructure investments across the country and wide-ranging social grants are in turn helping to support demand.

Downside pressures

Although South Africa’s retail market has bounced back from the recession, growth prospects in the market remain fragile, with a number of considerable downside risks. Despite South Africa being a member of the BRICS member countries, growth rates remain uncertain, with Gross Domestic Product (GDP) expected to expand by 2.8% in real terms in 2012, down from 3.1% last year. This is far below the rate required to make a significant effect on unemployment rates, and more on a par with more mature economies, states the report. In part this is shaped by the global economy and the Eurozone crisis. 

However, local issues are also constraining growth. These include policy uncertainties over labour brokering and temporary workers. The Government is under immense pressure from trade unions to clamp down on labour brokering, which could have dire consequences on the cost base of many retailers. There are also concerns over legislation, such as more onerous product labelling requirements and other stringent provisions introduced under the newly promulgated Consumer Protection Act. Electricity prices are also increasing materially, along with ongoing wage increases; fuel costs remain persistently high; and retail occupancy costs are being pushed upwards. A further pressure is the persistent skills shortage, particularly among middle management; there is a shortage of strong graduates emerging from local tertiary education, while most retailers have had to develop significant in-house training capacity in order to continue developing skills. 

Growth strategies

From a growth perspective, retailers are focusing on expansion into new areas, converting informal trade into formal retail, growth into the rest of Africa, diversifying into new service lines and boosting operational efficiencies.

Every major retailer and consumer goods company has started to expand into the rest of Africa, along with ongoing efforts at home to expand retail space. The move is being led by domestic food retail giant Shoprite, which already has stores in 17 countries. Woolworths already has operations in several African countries, and Mr Price recently opened its first store in Ghana. Pepkor is in the midst of a R100 million expansion into Nigeria, with plans to open 50 outlets. Woolworths already has operations in Botswana, Kenya, Ghana, Mozambique, Nigeria, Tanzania, Zambia and Uganda, with a mix of corporate and franchise stores.

Wilkinson points out that most brands are treating the Africa aspect of their growth cautiously, given the significant risks that remain, such as the paucity of infrastructure in many areas, red tape and high tariffs. Indirect taxes are also a pressure point, particularly when importing transit through countries. 

Given the significant risks that remain on the African continent, most major retailers and consumer goods companies have adopted a strategy of organic expansion. Many are operating in tandem with property developers, opening up in parallel with new shopping mall developments and complexes. 

Despite the 2011 Massmart acquisition by Walmart, few retailers expect a rush of mergers and acquisition (M and A) activity. Given the challenges of Walmart’s acquisition, which attracted close scrutiny from the Competition Commission, along with local competition, few experts are forecasting a boom in M and A activity from foreign entrants, states the report. 

Consumer goods

The demand for food, beverages (and tobacco) was an estimated R491.5 billion in South Africa in 2011. This is forecast to grow by an average of 11.5% in nominal terms, over the 2012-16 period, reaching a total value of R847 billion in 2016. The demand for other consumer goods is likely to grow more rapidly over the 2012-16 forecast period: clothing, which was already R29.57 billion markets in 2011 is forecast to expand by 14.7%. The same growth rate is expected for household furniture, a R27.35 billion market in 2011. Basic wares, such as soaps and cleaners, are forecast to expand at about 17% from 2012-16. Household audio and video equipment is also forecast to increase by 18%. 

“For consumer goods companies, as with retailers, the primary constraint to further development is the country’s pressing unemployment problem,” says Diederik Fouche: PwC Consumer and Industrial Products and Services Industry Leader in Southern Africa
“Not only are labour costs a barrier to growth, but a shortage of skills is also an issue.” 

Fouche says that the long-term success of the retail and consumer goods industry will depend on a continued focus on the consumer, efficient supply chains and a low cost of doing business. “Companies that differentiate their products and provide a compelling reason for customers to buy from them will survive. Those that don’t will face an onslaught from their competitors.

“In difficult times like these, companies need to re-examine their cost structures, operational effectiveness and efficiency.”

Source: GBN

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