Retailers strive to adapt as customers struggle

© iQoncept - Fotolia.com

Sector bellwether Shoprite reported its slowest annual profit growth in 15 years last month. The retailer's investment needle has now tilted towards the rest of Africa - it will spend up to R1.5bn on opening new stores and distribution centres in West Africa, where rapid middleclass growth is expected.

It is spending R697m to grow its presence in SA, where its core, lowerincome customers are not likely to increase spending.

This segment of the market is most affected by inflation headwinds as the people it includes spend a greater proportion of their income on food, says South African Institute of Race Relations chief economist Ian Cruickshanks.

"If 50% of your income goes towards food and another 20% is for transport or taxi fares, there is precious little left to spend." Cruickshanks says although the petrol price declined recently, "the price of bread, meat, milk - and every darn thing that went up - hasn't come down".

Full-year sales growth at Shoprite's local supermarket operation slowed to 8.7% from 9.8% a year earlier. The company, which serves 73 customers per second, was not unscathed by the five-month platinum strike this year and recorded more than R1bn of lost sales.

"We are right in that area of those people who were striking, and the salaries were lost, so we must have picked up the highest brunt with a 50% market share in that area to lose that sort of money," Shoprite CEO Whitey Basson said last month.

Walmart-owned Massmart has also come under pressure - more so at its Game chain, which sells mostly household goods such as fridges.

Massmart CEO Guy Hayward says selling customers general merchandise and durables is very difficult. "They don't have enough money so they're spending it on food."

Hayward says the middle of the month has become a "desperate" time for customers who then buy smaller pack sizes and opt for private-label brands.

With personal balance sheets being scrutinised more closely, the fight for market share has intensified, with retailers competing aggressively for new sites to lure customers. The race for the perfect location is a short-term strategy that often leaves retailers with a bigger store base, but with their like-for-like sales taking a knock and their expenses soaring.

Avior Capital Markets equity analyst Kyle Rollinson says because Spar Group is largely franchise-run, it is better able to adapt to market conditions than bigger retailers.

"It's a lot more defensive in this environment," Rollinson says.

Promotions have become a staple in the market. Pick n Pay launched Brand Match, which compares prices of the 1,000 top-selling national products among all big grocery chains and pays customers in coupons if the products cost less elsewhere.

Checkers has an "Inflation Fund" which, it claims, saved its shoppers R1bn in its full year.

Woolworths, once considered a niche food retailer, has also launched a price-cut strategy. Customers who have not shopped at Woolworths before are attracted by promotions the group runs at mid-month and month-end, says its CEO, Ian Moir.

The group invested 0.5% of its gross margin into keeping its prices down to offer value to existing customers and to combat its image as an expensive food shop. "One of the things we've got better at is listening to our customers - they wanted more choice, more brands, bigger stores and better value, and it was clear in what direction we needed to drive the business," Moir says.

Stock-keeping units at Woolworths increased from 6,400 five years ago to 11,000 as it added more brands to its offerings.

Sasfin Securities senior equity analyst Alec Abraham says the group is in a better position than its competitors as the high-income bracket is not as affected by the economic climate as the lower brackets.

"They are the best-placed retailer at the moment. With their supermarket strategy, they are taking market share away from the likes of Pick n Pay, whose big problem is still the fact that their on-shelf availability is substandard. This is because their distribution centres are not entirely operating properly," he says.

Cruickshanks agrees that higher earners are less likely to change their shopping habits over the coming year.

"If you look at vehicle sales for August, 123 Porsches were sold. In the boom times before 2007, they were selling around 250, but three months ago it was down to 60 - so spending seems to be coming back again in the highest living standard measures," he says.

In the middle to lower end of the income bracket, purse strings are likely to remain tight in the near future. "It's a really, really tough environment," says Momentum portfolio manager Wayne McCurrie.

"Things will just get worse for the South African consumer next year. There will effectively be no job creation - the government is not hiring any more people because they can't afford it.

"We are probably going to see job losses in some industries simply because growth is just so slow.

"There is a very big slowdown in unsecured credit granting after African Bank. Living costs are going up. It's a very bad environment for consumers."

Source: Business Day