Looking at A T Kearney’s African Retail Development Index, one country is particularly notable due to its poor performance: Gabon, Botswana and Angola all performed favourably in first, second and third position, and yet South Africa – the most developed economy on the continent and the holder of its most mature retail sector by far – ranked outside the top five.
According to the report, the risks in South Africa are few, the political situation is stable and the infrastructure is relatively sound. However, “local players are seeking new ways to grow as the country’s economy struggles and new international players ramp up the competition”.
Considering the figures for the past three years, South African retail looks as if it could be losing steam. Going back to 2010, retail trade was up 5.6 on the year previous and another 6.1 percent in the following, yet the subsequent three logged only 4.5, 2.5 and 2.4 percent growth respectively. The reasons for the slowdown are little changed since: “The retail opportunity is greater than ever before”, the report said of the health of African retail generally – however, opportunities in South Africa are not as they were.
Without the assurance of favourable demographics and discernible shopping trends, South Africa’s allure has diminished
A gloomy outlook
The easy availability of retail space plus an influx of international talent means that the country’s retail trade has enjoyed a good few years in the sun, buoyed both by economic growth and rising household incomes. However, the retail situation must still echo that of the wider economy, and so rising utility bills, together with labour riots and a depreciating currency, have since weighed on retail’s bottom line.
“Another issue is that South African consumers are at times unpredictable”, Christy Tawii, Senior Research Analyst at Euromonitor International, told Business Destinations. “Although aspirational, they don’t always act in line with economic models given the current economic situation – even if the economic situation is tough, some consumers will not cut back on spending, but would rather borrow, hence the high debt levels in the country.”
South Africa’s retailers are still, by some margin, the largest of any on the continent, and it’s only the changed landscape that means market leaders are struggling to build upon their local and international presence. There are a few exceptions, however: in 2014, Woolworths scooped Australia’s David Jones in a deal worth ZAR 23.3bn ($1.7bn), while Steinhoff International, the country’s leading furniture retailer, put in a ZAR 62.8bn ($5.7bn) cash-and-share bid for Pepkor and its more than 3,700 international stores.
“The increasing presence of international brands and retailers is increasingly reshaping the competitive landscape and increasing competition in South Africa”, said Tawii. “In terms of how international retailers would respond to the changing economic situation, the current economic environment is actually favourable for international retailers, especially when it comes to importing products into the [country] due to the falling exchange value of the South African rand. They are likely to partner with locally established retailers to strengthen their distribution channels, which is what we are currently seeing in the form of retail concessions between Topshop, River Island and Edcon (Edgars).”
Maintaining traditions
These are companies that are aiming to make good on the country’s 350 million middle-class consumers and its budding – if slow to grow – infrastructural competencies. Yet these names are increasingly finding that these same consumers are unwilling to part with their cash, and tens of millions are unwilling to sever ties with the thousands of informal outlets at large in the continent’s retail sector.
In sub-Saharan Africa, there are an estimated 550,000 traditional grocery store outlets, and these tabletop alternatives – which represent 80 percent of the overall – are more plentiful even than formal stores. True, the informal sector is less pronounced in South Africa than it is in neighbouring nations, and while modern retail accounts for 70 percent of sales, a tendency to shop outside of formal channels means that the data on which retail strategies tend to rely can be hard to come by. This, coupled with the continued decline of consumer spending, means that the risks for international brands often prove too great, and without the assurance of favourable demographics and discernible shopping trends, South Africa’s allure has diminished.
On the one hand, it’s easy to see why sub-Saharan Africa – with its nearly one billion inhabitants, an emerging middle class and rising mobile penetration – has attracted so much international attention. However, South Africa’s maturity relative to other nations means that companies must reinterpret the retail landscape, and as the most saturated market on the continent, retailers must eke out hard-to-find opportunities if they’re to survive ahead of the competition.
Challenges of maturity
No longer the African powerhouse of former days, both consumer and business confidence in South Africa have suffered, while an influx of major names in recent years means that competitiveness is an issue and loyalty hard to come by. For example, it’s not uncommon to find two competing supermarkets on the same site. Opportunities for international brands, therefore, are limited, and the market is better suited to existing players looking to build upon their competencies as opposed to new entrants looking to test the waters.
By all accounts, global players eyeing the country have likely entered the market already, and so are unlikely to risk entering the South African market now that the opportunities are less. Saying that, it’s likely that mergers and acquisitions activity will pick up in the coming months as retailers adapt to the size and scale of the market, with a special focus on distribution.
“We shouldn’t forget that, despite the aforementioned issues, local retailers will still continue to have the advantage on global retailers, as they have a greater knowledge of the local market, customers and seasons, [plus] an established customer base and prime store locations”, according to Tawii. And herein lies perhaps the greatest challenge of all for retailers in South Africa and sub-Saharan Africa generally: international clout counts for very little without a proper understanding of the local market.
“Beyond the well-known infrastructure constraints, one of the more overwhelming challenges is the complexity of the retail environment”, Allen Burch, Head of Africa at Nielsen, wrote in a recent report entitled Africa: How to Navigate the Retail Distribution Labyrinth. “Modern trade is growing, but it is still small and underdeveloped outside South Africa. This leaves companies to figure out how to reach consumers in the hundreds of thousands of smaller, traditional and informal outlets that account for the majority of CPG sales.”
Embracing opportunities
Complications aside, the South African marketplace is far from being without its fair share of opportunities: while Gabon, Botswana and Angola are more advantageous in terms of unrealised potential, South Africa is home to opportunities that other, less developed nations are not.
One key area where South Africa is some distance ahead of the competition is in online retail, which is in itself symptomatic of the country’s maturity as a retail destination. Looking at last year, internet shopping was the most dynamic channel of any in the sector, owing to improved broadband penetration, a growing internet population and the development of online payments platforms. Woolworths claims that its number of online shoppers has doubled year-on-year, and the platform has proven adept at bolstering the brand’s bricks-and-mortar sales.
For an economy in South Africa’s position, it stands to reason that online retail is the logical next step. However, while increased connectivity and rising disposable incomes play neatly into the hands of e-commerce, World Wide Worx estimates that online shopping will account for a meagre one percent of retail sales come 2016. Here is perhaps the clearest indication that South Africa has failed to realise its potential in terms of retail development, and, without an economic turnaround, international names are unlikely to select South Africa ahead of the competition.
