It’s adapt or die for SA retailers
Discounting wreaks havoc on bottom lines
ALTHOUGH no one in the industry appears willing to say so, the retail sector is in trouble. A cursory glance reveals an industry having to discount, close stores or overhaul strategy to keep afloat.
Woolworths has been running its 50%-off sales for about three months; and just recently Pick n Pay announced that it will spend R500-million to cut the prices of 1 500 products in its stores.
A heavy discounting environment may be good news for consumers, but it is wreaking havoc on the bottom lines of retailers.
Maryla Masojada, MD of Trade Intelligence, said: “It is a major issue that no one is talking about; nobody is acknowledging it.
“The current state of retail is like the frog in the pot. But it’s got so tough that it’s forcing behaviour change. Although it’s been really tough over the past two years, it hasn’t been tough enough to make people jump out the pot.
“Now, suddenly the heat has been turned up and people are jumping, which means it’s a great time for innovative responses from retailers.”
Over the past two years, retailers have had to face the challenges presented by the local and global economic climate, rising prices, low consumer confidence and declining disposable incomes.
All of which, along with the stringent regulations of the National Credit Amendment Act, have curbed consumer spending.
Christy Tawii, a senior recused search analyst at Euromonitor International, said the performance of some retailers, especially fashion and footwear retailers and home furnishing stores, had been hit by the increasing price sensitivity of consumers.
Retailers such as the JD Group had had to restructure, resulting in the closure of stores and discontinuation of brands.
“The restructuring is also fo- on driving more cash sales compared to credit sales. In addition, many retailers are also increasingly offering alternatives to cash and credit sales, with lay-bys surging over the past few years,” said Tawii.
Charles Allen, senior retail analyst at London-based Bloomberg Intelligence, said heavy discounting, “especially if it becomes irrational, is never welcome”.
He added: “It may well be the case that margins come under pressure. There is a constant cycle in retail where new lowercost business models enter the market.
“The legacy retailers have to adapt or be replaced with the newer formats.”
There have already been casualties as shoppers opt for cheaper local brands instead of expensive imported brands.
Last month The House of Busby announced the closure of Mango and Nine West stores for which it held the local licence.
Edcon plans to end its association with UK brand River Island and legacy retailer Stuttafords, after years as a leading upmarket shopping destination, has filed for business THE HEAT IS ON: Shoppers hurry to cash in on ’Black Friday’ discount deals at the Mall of Africa in Midrand last year. S&P’s downgrade will come as a major blow to retailers already under pressure to contain costs rescue. But store closures are just a part of the retail story.
Grocery retailers are migrating away from malls where they have held anchor positions in search of cheaper locations more convenient to consumers.
Anton Hugo, retail and consumer leader for PwC Africa, said significant changes in the retail industry meant that most consumer goods companies were being forced to re-examine strategies that had in the past proved successful.
“Consumers are looking for value and convenience — the right quality product at a very competitive price obtained in the most convenient way.”
Hugo said retailers were caught in a difficult environment in which consumers were struggling financially, making it impossible to pass on the full cost of the increases in their input costs to consumers.
“There will continue to be pressure from consumers on retailers to moderate any price increases and this will require retailers remaining more and more focussed on ensuring their cost base is rightsized.”
Which is why Pick n Pay announced this week that it will overhaul its Smart Shopper rewards programme because it had increased costs.
Masojada said: “It’s almost like Pick n Pay doesn’t have an option because its margins are being so tightly squeezed.”
Even the world’s biggest retailer, Walmart, did not offer a rewards programme
“They just nail your bottom line and for Pick n Pay it took a percentage off their margin.”
But some retailers had successfully diversified their target or product market.
“The Shoprite Group are very smart in taking Shoprite, Checkers and Usave and targeting them across the living standard measure one through to 10. So Shoprite services the main market and Checkers contains the growth of Woolworths,” Masojada said.
Tawii said: “We are likely to see more retailers continuing to widen their product portfolios in an effort to maximise wide margin opportunities by offering value-added services such as in-store pharmacies, the payment of utility bills, money transfers, unsecured microloans and funeral policies and other consumer finance products and services.”
S&P Global Ratings’ and Fitch downgrade is a major blow to retailers. “Consumer confidence is expected to continue declining, so expect less spending.
“Consumer debt-to-income ratios is expected to be high as interest rates are expected to increase,” said Tawii.
Consumers are looking for value and convenience Consumer confidence is expected to decline further