South Africa’s two-tiered retail sector

There is a big difference in catering to South Africa’s middle and higher income groups and the large groups of lower income earners that often live in township areas. As the former customer base is efficiently catered to, retailers increasingly look at the latter in their search for growth.
Elsevier Food International Vol.8, No.1, February 2005
Pascal Kuipers

Large differences in purchasing power between consumer groups, high rates of unemployment and crime, and an unpredictable economy. Such socio-economic indicators hardly account for a structurally healthy business climate. Still, South Africa can boast a state-of-the-art retail industry. Many South Africans, however, still depend upon informal retail structures.

Every year, the consultancy A.T. Kearney publishes its Global Retail Development Index (GRDI), which ranks emerging countries based upon economic and political risk, the level of retail saturation, and the difference between GDP growth and retail growth. In 2003, South Africa ranked 21st in this list of 30, and one year later South Africa was not even included. “The reasons are clear,” reads the 2004 GRDI report. “Retail food sales declined from 1999 to 2003 (-0.4 per cent), leading retailers possess 65 per cent of market share and retail sales per square metre only grew by 1.1 per cent in the past five years.”
Sapoa Online – a South African retail, office and property portal – reported on 7 October 2004 that “Financial results from retailers and banks over the past few months show South Africans are spending and borrowing more money as they participate in the upswing in the economy.” Massmart and Woolworths are among the retailers that are said to have benefited most by a strong rise in sales and profit over the last year.

Marginal growth
Decline or upswing? How can South Africa’s retail sector best be characterised? “We are not sure of the sources of the A.T. Kearney data,” responds Mark Lamberti, CEO and deputy chairman of Massmart. “All local information indicates that South African food retailing is growing by approximately two per cent per year in real terms, although the proliferation of new stores has led to a marginal growth of sales per square metre productivity.”
James Basson, CEO of South African retailer Shoprite, explains the business environment in South Africa. “The factors in the economy, which during the past year worked in favour of retailers of durable and semi-durable goods, had just the opposite effect on food retailing in the Shoprite Group’s primary markets,” he stated in Shoprite’s 2004 annual report. “Lower inflation, cheaper imports due to the strengthening of the rand and the drop in interest rates stimulated discretionary spending among middle and higher-income earners but did not […] materially alter the position of low-income earners.”
Those consumer groups who did benefit, spent their discretionary income on durable and semi-durable items and not on food, explained Basson. Low inflation and falling prices affected food sales in particular, which, according to Basson, explains Shoprite’s sluggish sales development in its business year ending 30 June 2004. Due to greater efficiencies in cost control and in the supply chain, Shoprite still managed to improve its operating profit.
Durable non-food items have been popular and this explains Woolworths and Massmart being mentioned among the profiteers from the economic upswing. Data from M+M PlanetRetail show that food accounts for only 30 per cent of Woolworths’ sales and this has not changed over the years. Still Woolworths seeks to increase its food business by developing ‘Food Stop’ stores. These are upmarket convenience formats catering to an affluent customer base. M+M PlanetRetail says that Woolworths was inspired by Marks & Spencer’s ‘Simply Food’ stores. Woolworths is also expanding its ‘iSentials’ discount store concept, which aims to provide low-priced, essential grocery items to low-income groups.
Massmart is also predominantly a non-food retailer but it has been increasing its food share in recent years. Currently, food accounts for 43 per cent of Massmart’s business and M+M PlanetRetail data reveal that Massmart has become South Africa’s fourth food seller (see table on page xx). “Our growth strategy is based on price leadership founded on high volume, low margin wholesale and retail distribution of branded general merchandise and food mainly for cash,” says Lamberti.

Growing black middle class
There are still huge differences in income in South Africa, with 20 per cent of households accounting for 60 per cent of expenditure. In 2003, low rates of interest and inflation caused an increase in spendable income and a rise of a new – black – middle class.
“Currently growth targets in South Africa are favourable due to exceptionally positive macro-economic indicators,” says Lamberti. “The interest is low, inflation is low and the currency is strong. We have the highest consumer and business confidence ever recorded and there is the emergence and rapid growth of an upwardly mobile middle-class consumer.”
“I am fully aware there is a growing black middle class with considerable disposable income,” said Christo Wiese, chairman of Pepkor (the investment holding company that is the parent company of Shoprite) during the African Congress of Shopping Centres in October 2004. Wiese said that South Africa did not have sufficient growth in the number of higher income consumers to sustain many more of the upmarket regional shopping centres. Despite the emerging black middle class increasingly shopping in these centres, Pepkor’s chairman thinks there is an oversupply of retail space in South Africa, especially in the saturated upmarket retail sector. Wiese sees potential in the middle market, urban neighbourhood stores where, said Wiese, “[…] the store is taken to the customers.”
Townships offer enormous potential for these new stores that are smaller than conventional supermarkets, offer extended ranges of value-added products and serve a smaller consumer base. According to Wiese, developers of retail real estate would support these trends by developing small neighbourhood centres and shopping malls in township areas.

Catering to the townships
Townships have traditionally been associated with poverty and crime, but now these are perceived as interesting locations for retail development by leading retailers who are keen on growth like Shoprite, Pick ‘n Pay and Spar South Africa. The informal market, which traditionally caters to township dwellers, has an estimated value between 20 and 30 billion rand (US$3.1 billion-US$4.6 billion) a year, which potentially is an important addition to the modern grocery distribution sector, valued by M+M PlanetRetail at US$19 billion.
The informal market comprises hawkers (street vendors), taverns, shebeens (informal social halls in the townships), tuck shops (selling sweets and other confectionery) and so-called ‘spaza shops’. Spazas are small stores often conducted from homes in townships, selling a combination of luxury and basic goods (soft drinks, cigarettes, candles, maize meal, alcoholic beverages, bread, sugar) and have extended opening hours. In a 2003 report on South Africa’s retail food sector, USDA’s Global Agriculture Information Network (GAIN) estimates that there are over 100,000 spazas in South Africa. “(…) This sector of the national economy could be providing between 230,000 to 290,000 jobs, and supporting more than a million people,” reads the GAIN report.
Spar South Africa – whose business model is based on managing voluntary groups of independent retailers under the Spar banner – wants to offer independent retailers an opportunity to cater to townships. Peter Hughes, chief executive of Spar South Africa, was quoted by Sapoa Online as saying that many township dwellers shop near their place of work, but that Spar aims at setting up ‘destination centres’ featuring supermarkets, fashion and fast food retailers alongside banking facilities. “We’re trying to get some of the bigger chains – the clothing stores, the banks, the fast food outlets – to come with us,” said Hughes, who knows the importance of location as public transport facilities in the townships are poorly developed. “The successful stores are invariably positioned around taxi ranks. It’s a crucial ingredient.”

Look elsewhere for growth
Wiese acknowledges the potential of new formats aimed at township dwellers but he thinks that such middlemarket neighbourhood centres and shopping malls have limited potential in the long term. According to Pepkor’s chairman, retailers must increasingly look elsewhere for growth, if they did not want to have their margins eroded. In his view cross-border activities in other African countries would be the most logical step for South African retailers.
This is what most leading retailers in South Africa have been doing over the years. Most of them – with the exception of Massmart and Spar South Africa – are also involved in convenience and forecourt stores. This is a growing section of South Africa’s retail sector in which Woolworths seeks growth with its Food Stop c-stores and the franchised forecourt stores it operates at Engen service stations via its joint venture with Engen Petroleum Ltd.
Pick ‘n Pay (41 Pick ‘n Pay Mini Markets with 2003 sales of US$132 million), Shoprite (28 OK MiniMark stores with sales of US$41 million) and Metcash (58 Foodies stores with sales of US$31 million and 220 7-Eleven* stores with sales of US$120 million) are other retailers’ franchised activities in the c-store business.
Petrol companies are also actively engaged in franchising the retail opportunities of their service stations’ locations. According to M+M PlanetRetail, food accounts for 75 per cent of sales in these stores and the food assortments vary from a convenience assortment to a broader grocery selection including fresh and frozen foods and even ready-to-eat (or prepared microwaveable) meals. Total La Boutique is leading both in store number (680 forecourt stores) as in sales (US$284 million in 2003). BP is second largest with its 160 BP Express stores (2003 sales of US$102 million) followed by Shell (200 Shell Select stores with a sales level of US$96 million) and Chevron (150 Star Mart stores accounting for US$67 million of sales).

* This c-store concept of Metcash is not related to Japanese retailer Ito Yokado’s international 7-Eleven c-store franchise.

Population: 42.7 million
GDP: US$ 456.7 billion
GDP by sector:
Agriculture 3.8%
Industry 31%
Services 65.2%
GDP real growth rate: 1.9%
GDP per capita: US$10,700
Unemployment rate: 31%

Source: CIA World Factbook 2004 (2003, est.)