FUTURES IMPERFECT

Ron Derby column

The more things change, the more they stay the same, and this applies to corporate South Africa’s response to the slowing domestic economy and the weakness of the rand. The answer is not simply expansion into the rest of the continent, which has been a theme for a few reporting seasons, but a footprint in developed Europe or Australia.

Whenever there’s been a prolonged period of currency weakness or economic struggles, I think we can rely on this one rather ambitious strategy to be dusted off the shelves in the management committee meetings of some of SA Inc’s large corporations. In years past, financial services giants sold the idea to shareholders of a London base, Old Mutual being the leading light along with Anglo American.

And here we are again, but this time around banks and other financial institutions aren’t the ones leading the praise-singing for Western expansion. Retailers, frustrated by the slow progress in any African expansion strategy, are leading the charge.

Perhaps encouraged by the market embrace of Woolworths’ Australian adventure with the purchase of David Jones, there’s now a growing list of retailers that are either planning or are in the process of planting their flags in the high streets of London.

Perhaps Ian Moir’s affinity with Australia will help Woolworths — the biggest beneficiary of the explosion of South Africa’s black middle class — in its trip Down Under. The jury is still out on that.

But one feels that in the not too distant future, shareholders may have to pay dearly for these adventures. If double-digit growth for retailers correlates with the emergence and growth of the middle class, it’s near impossible to see any advantage in a store in Piccadilly over one in Luanda or Addis Ababa.

Admittedly, the entire village of emerging market nations is in a bad space economically at the moment, since China’s slowdown has caused commodity prices to fall. But on a demographic dividend alone, these parts of the world are where anyone in search of high growth rates should focus.

The world’s biggest brewer, Anheuser-Busch InBev, wants to purchase SABMiller, not for its European and US operations but for its emerging market footprint and in particular the African continent.

The quarterly focus of management teams, which is the result of pressure from the investment community, may make it appealing to boost scale by buying a European retailer, but over the long term, I can’t see the value.

Let’s take struggling credit retailer Truworths, which is looking at placing a flag in the UK. Already fighting a losing battle on the local front, the Cape Town management team are looking to turn their attention to a saturated UK market.

How much management time is going to be spent in getting those operations running, and at what expense? A continued decline of its local fortunes and, by extension, a weakening of any chances of an African strategy bearing fruit.

In this current period of low growth that has lasted for the better part of two years (to be kind), there should be better strategies being sold to the investment public. And in the case of Truworths, a better strategy is to improve your offerings, which clearly aren’t as attractive as those of your rivals.

But judging by the stock performance after the announcement of Truworths’ intention to buy into the UK market, it’s a strategy that has investors interested. As one analyst put it, if the retailer doesn’t head west, it risks being crowded out in the local market by its fierce competitors.

It’s a concept that I don’t quite understand. The UK adventure, in my book, leaves the retailer in an even more fragile place.

There’s a battle for market share locally, one that is going to leave some bodies, Edcon seemingly the biggest. Who’s next? We don’t know, but starting a European adventure doesn’t seem the smartest gamble at the moment.

South Africa and an African strategy make logical sense.

In this current period of low growth … there should be better strategies being sold to the investment public