SA woos the Big Four
Foreign competition and curbs on credit left many floundering
● It has taken South African retailers 10 years to realise that their consumers have changed.
After the 2008 global recession, a period in which South Africa saw a groundswell of job losses in the private sector, local retailers were the beneficiaries of government initiatives to bolster public sector employment as it responded to the crisis.
Following a counter-cyclical fiscal policy, the government was able to spend in the years leading up to the 2010 Soccer World Cup.
The Reserve Bank also had a more accommodative monetary policy, meaning there were low interest rates.
Atiyyah Vawda, an analyst at Avior Capital Markets, said before the National Credit Act regulations were applied in 2015, retailers had an “easy time, largely driven by credit”.
“The competition in the environment was also limited in terms of international retail penetration, both from a product perspective and revenue perspective. The [retail] model was a lot simpler than it is now and the growth was much higher,” said Vawda.
“Our view is that they [retailers] probably won’t replicate that kind of growth again, given the structural difference, because you now have international players in South Africa and the level of discounting has changed significantly as well.”
During this period, retailers relied largely on consumers’ access to credit. Retailers such as Truworths had a 70:30 credit-tocash sales ratio, as consumers’ easy access to these reserves encouraged spending.
When the changes in the national credit regulations were implemented, as consumers became heavily indebted, Truworths was one of the first to cry foul.
In the past five years, Truworths’ share price has fallen almost 4%.
“Credit is seen as an enabler, but as it stands, consumers’ appetite for credit has also changed,” Vawda said.
While other retailers such as Mr Price and TFG were victims of the credit regulations too, those that survived did so on the merit of their discounted offerings and diversification of their brand portfolio.
TFG’s 28-brand store portfolio, which includes Foschini, saw it draw consumers to its fashion, jewellery, accessories, sporting and outdoor apparel, cellular, homeware and furniture brands, making it easier for the group to diversify its income stream.
Charles Allen, a senior retail analyst at London-based Bloomberg Intelligence, said some retailers had clearly managed to thrive in the changed conditions; others had not been able to adapt and some had had to undergo significant restructuring to return to stability.
In 2016, just a year after the regulations were implemented, Mr Price, which had departed from its initial strategy of cash-only sales, reported its first profit decline in 15 years. Net income fell 15% to R921-million in the months to October 2016.
But after changes in its merchandise and discounted offerings in a world that was looking for cheaper alternatives, earnings improved and its share price has moved up as much as 82% over the past five years.
Many had initially blamed Mr Price for its poor merchandising decisions, but another factor was the influx of foreign retailers that threatened the position of many local retailers unprepared for the competition.
The launch of Australian retailer Cotton On in 2011 was the first gut punch for local players, as they battled for market share in an already constrained environment.
The acquisition in 2011 of a majority stake in Massmart, which owns Game and Builder’s Warehouse, by Walmart as part of its international expansion was also a significant moment for the local retail landscape.
“The South African grocery market is comparatively mature by developing-market standards so it may not have seemed sensible to launch a standalone company against relatively large and well-operated businesses,” Allen said.
But since 2013, Massmart’s share price has declined 31.3%.
As local retailers sought to salvage what they could from a consumer market that was increasingly gaining exposure to international brands, they too expanded their crossborder acquisitions.
Supermarket retailer Spar Group made two big acquisitions, in Switzerland and Ireland, as the rand began to show signs of weakening in the face of an economic downturn. The acquisition of BWG Group in Ireland and Spar Switzerland was a clarion call to the rest of the retail community to extend their international exposure.
Some continued to invest heavily in Australia, where Woolworths embarked on the David Jones purchase. This has delivered a R7-billion setback, almost a third of the R23.3-billion Woolworths paid for the business in 2014, suggesting poor foresight by management.
Woolworths’ share price has declined 15.7% in the past five years, making it the worst performer among apparel retailers over that period.
“There’s a shift of power from the retailer to the consumer. We classify it as the fourth wave of retailing,” Vawda said.
What would set local retailers apart was how quickly they responded to the changes in the environment, she said. Those that adapted would come out on top and those that didn’t would struggle and continue to lose market share.
Africa’s largest retailer, Shoprite, has been the most consistent performer in the past 10 years. Even with muted growth on the continent its share price has gained 28.2% in the past five years as it continued to place its bets on lower-income customers and in Africa.
But it has been outperformed by competitor Pick n Pay, whose share price has gained 101.24% since it implemented a turnaround strategy that has yielded value.
“In 10 years’ time, if you take an optimistic view with South Africa, things will be a lot better. The retail environment nonetheless will remain competitive,” Vawda said.
Credit is seen as an enabler, but as it stands, consumers’ appetite for credit has also changed Atiyyah Vawda
Avior Capital Markets analyst