Amazon may threaten SA retailers
Amazon plans to move into South Africa in 2023 and the world’s biggest online marketplace might give local companies a run for their money
More than a decade ago the United States’ biggest retailer, Walmart, entered the South African market and local retailers braced themselves to be decimated — but that threat did not materialise.
In 2011, Walmart bought South African retailer Massmart, which owns Makro and Game. Since then Massmart lost its value to the point where, in 2019, the parent company had to bring in reinforcements in the form of chief executive Mitch Slape. Massmart had a head start in the online retail game, especially with the backing of Walmart, but now is second to Takealot, which was launched in 2011.
Since Walmart bought a controlling stake, Massmart’s share price has plunged 79%.
On 2 August, Massmart announced that it expected a 51% decline in headline earnings for the 26-week period ending 26 June. This is a potential loss of R974.9-million, compared with the R645.4-million loss in the previous period.
Now that Amazon is coming to South Africa, locals are wondering if it could be the real American juggernaut, mowing down local competitors standing its way?
Amazon plans to land in South Africa in February, according to Business Insider. The online marketplace will also be expanding to Belgium, Chile, Colombia and Nigeria.
The multinational company has had a presence in South Africa dating back to 2004, with the customer service unit operating since 2010. But customers had to order on the American platform, incurring worldwide shipping and customsrelated costs and a long waiting period for delivery.
Amazon’s cloud computing platform — Amazon Web Services — announced the launch of its first data centre operations in April 2020 in Cape Town.
But the online marketplace hasn’t offered its e-commerce service in the country until now.
When Amazon launches in South Africa it will set up local infrastructure and warehouses in South Africa, cutting the delivery time. It also means consumers will not be buying an “international” product.
Emerging markets
What the effect will be on the South African retail market is unclear for now, but Amazon’s appearance in other emerging market economies provides a pointer.
The company operates in 20 countries, with a presence in five emerging market economies — Brazil, China, Egypt, India and Mexico. Emerging market economies are usually those that are transitioning into a developed economy and are high growth economies, albeit with common traits such as low income and currency volatility.
A paper by Ying Cai of the University of York, titled Why Amazon Has Struggled to Gain a Foothold In China, found specific barriers in that market such as institutional duality, cross-cultural communication barriers and the implementation of a global strategy in comparison with local competitors.
For these reasons and more, Amazon shut down its China online store in 2019. Its remaining businesses there include cross-border e-commerce, advertising and cloud services.
Nishlen Govender, a portfolio manager at Citadel, said, “Amazon has tried to get into China and India but faced significant competition. In China it was Alibaba and in India it was Flipkart. Amazon went in with a typical strategy of putting in as much capital as possible and fight on price by reducing profits to basically nothing and hopefully all the other competitors will fall.”
He said Amazon had been “caught off guard” by the resistance it faced in China and India, where it was reported that industry bodies such as the Confederation of All India Traders, which represents about 80-million traders, had filed complaints to the government and regulators. They said Amazon and Flipkart, an Indian e-commerce company majority-owned by Walmart, were flouting regulations, practicing predatory pricing and not competing on a level playing field.
How will Takealot fare?
Govender said things might be different in South Africa, because Takealot is not as competitive as Alibaba, an e-commerce company in China, and Flipkart.
Takealot is owned by multinational internet group Naspers and has under its banner Takealot.com, Superbalist and Mr D Food.
“[Takealot] sort of came into a market where there was no competition. From a pricing perspective they are relatively expensive if you compare them to some of the brick and mortar stores. So, if Amazon comes in, there will definitely be a price war between them and Takealot, which is good for the consumer,” Govender said.
“I do think Amazon has a reasonable shot of doing well in South Africa.”
Amazon has an advantage over Takealot because of its unified service, Govender said.
“When Amazon comes in they’ll bring their prime membership such as Amazon Prime Video, and general Amazon products such as Kindle and Audible. So, if they bundle a product together that provides all their services in one with a yearly membership and one day shipping as they do overseas … I can see a lot of South Africans opting for that instead of Takealot.”
Amazon Prime is an Amazon subscription service with benefits such as free two-day shipping, unlimited movie and television streaming, unlimited reading — members can choose from more than a thousand books, comics and magazines — unlimited music streaming, free games and free unlimited photo storage with Amazon Photos.
Takealot might not be the only retailer that stands to suffer with Amazon’s entrance into the local retail market. “Big box retailers” could also be threatened.
“Your bigger box retailers such as Incredible Connection, Hifi Corporation and, historically, Dion Wired, these sorts of businesses, the durable goods businesses, might face a big threat. Additionally, if Amazon goes into more consumable products such as toilet paper, consumer staples, non-perishable stuff, that could also affect brick and mortar,” Govender said.
He added that the only brick and mortar retailers that would probably be spared from were clothing retailers because Amazon isn’t a big player in that market.
Casparus Treurnicht, a portfolio manager at Gryphon Asset Management, said white appliances (such as fridges, washing machines and tumble driers) is an area that can still be defended by the likes of Makro and Game as long as the price is best.
“People tend to take slightly longer in purchasing these goods and only make the final decision when they are certain the product is right, and they cannot get a lower price. I am not sure at what level Amazon will be entering the white goods space, but they will only take market share if existing competition makes mistakes and hand them market share,” he said.
“Takealot is struggling in this area and pricing is not always better than what can be found at Makro, for example. Takealot better pull up their socks.”
In terms of how on brick and mortar businesses could be affected, Treurnicht said the “Amazon effect” does not apply in the South African context.
“A big part of the population does not rely on delivery and fixed addresses are non-existent, which limits bigger sized items for delivery. And I think that’s why Takealot has had limited success,” Treurnicht added.
The real American threat
Still, it’s not 100% guaranteed that Amazon will not suffer the same fate as Walmart.
Govender said, “Whether Amazon will be the real American threat depends on how significantly they invest in the country. If they come in a half-hearted way without a significant amount of consumer product available then they will fall by the wayside. But, if they come in earnest they will hurt some of the bigger retailers.”
He pointed out that Walmart had come into South Africa through an existing retailer and operated through it, suggesting things might have turned out differently had the Sam Walton-founded retailer come in and traded as Walmart.
“Walmart, Costco and the likes have fantastic business models … Walmart never really brought their full strategy into South Africa and I don’t think they could have, because as much as they have great business models they do rely on infrastructure and logistics whereas Amazon really doesn’t,” Govender explained.
Treurnicht added that Walmart had changed very little in Makro and Game and how the retailers operated when it took over, which might partly explain why it had not succeeded in South Africa.
“Amazon is a game changer as they will be replicating in South Africa what’s proven to be very disruptive in other countries. They have ways of doing many things better and we will soon find out how good they are at what they do,” said Treurnicht.
‘Your bigger box retailers – the durable goods businesses – might face a big threat’