Price wars: saving the king of savings
Competition, poor customer engagement sting retailer MRP
IT’S mid-January and a saleswoman at an MRP store in Johannesburg is marking down items in the men’s section. Printed chino shorts, which were selling for R159.99 a month ago, are now retailing at R120.
“The pricing is too high, it’s not Mr Price [rebranded as MRP in 2015]. When you look at our history when it comes to pricing, we are very reasonable, but customers would rather buy better quality at Cotton On than get a R200-something jeans at MRP,” said the saleswoman, who did not want to be named.
Mr Price Group shareholders felt déjà vu when the stock fell almost 5% on Tuesday, following a trading update showing poor sales performance during the all-important Christmas season. Last year, when the group released its quarterly results in January (as opposed to a trading update), the stock tumbled nearly 18%.
The stock has plunged 46% off its all-time high reached in March 2015.
It seems that issues on the shop floor are not making their way to head office.
“Before they [head office] would ask us to send updates, just to go the extra mile to understand what the customers want,” said the saleswoman.
“What they could do is give associates more information.”
In the trading update released this week, MRP’s retail sales fell 0.5% to R6.1-billion in the three months through to the end of December.
The group, which owns MRP, Mr Price Sport, Miladys and Sheet Street, said like-for-like sales declined 2.2%, with the group’s sports chain as the worst performer.
An analyst who did not want to be named said that although MRP may be shifting its strategy, change would not be instant.
It has ordered stock, but it takes a while to change the stock. An in-store reflection of the shift in strategy is going to take time.
MRP has also fallen victim to the influx of international retailers such as Cotton On and H&M into South Africa.
Their investments in the local market showed up flaws in the local retailer.
Many local players such as TFG found refuge in offshore markets.
Victor Dima, a Dubai-based equity analyst at Arqaam Capital, said international expansion was not a straightforward response to the situation in South Africa, “but it’s definitely possible . . . there should be a cautious approach to international expansion — it should make sense in terms of fit and in terms of the market”.
MRP, which has two stores in Australia, reported a combined loss of R33-million in its operations in Nigeria, Ghana and Australia, which contributed 2.1% of group sales, according to the company at the group’s interim results for the six months to the end of September.
Dima said a large part of MRP’s woes arose from the heavy discounting environment.
It has been affected by consistent discounting by other retailers, who end up with a competitive advantage.
This has resulted in competitors being cheaper, undermining MRP’s position in the market as the traditional leading discount fashion retailer.
Dima said that other apparel retailers had been generating healthy margins due to the high discount activity, but MRP’s discounting did not yield the same benefits.
However, this was not the beginning of the retailer’s woes.
In November last year Mr Price posted its first drop in profit in 15 years after net income declined 15% to R921-million in the six months through October.
Yet 64.3% of analysts polled by Bloomberg currently rate the stock as a hold, which signals a recovery, according to analysts.
“Not everyone’s numbers that came through in December were fantastic; they are probably slightly better than people were expecting and Mr Price Group was basically more of the same,” an analyst said.
Mr Price Group’s trading update said cash sales, which constituted 83.2% of total sales, decreased 0.5%, with an increased credit-sales growth of 0.3% over the corresponding period.
Dima said: “I don’t think retailers will go back to business as usual.”
One of the consequences of the longer discounting period is that the consumers will be getting used to this.
“They are becoming bargain hunters, so the risk of that over time once pricing normalises . . . you’ll see consumers responding negatively to this.”
For the saleswoman marking down chino shorts in Johannesburg, the real problem at MRP is that its buyers are not purchasing the merchandise customers want.
“We have a lot of prints that customers don’t want. This dress,” she said, pointing to a black floral item, “has been here since early December; customers are not really happy.”
Mr Price Group declined to comment. MRP share price was down 0.33% to R152.50.
We have a lot of prints that customers don’t want . . . Customers are not really happy
LAST year, French retail chain Carrefour opened its doors at an upmarket shopping mall in Karen, Nairobi. Yet Africa’s biggest retailer, Shoprite Holdings, has not yet made a foray into the country, raising questions about the failure of South African retailers to make significant inroads in the region.
Although Shoprite has become a dominant player in some major African markets — reporting some impressive numbers in the face of low commodity prices and forex shortages in certain countries — the East African market has proved a minefield for the retailer.
Celeste Fauconnier, an Africa analyst at Rand Merchant Bank, said on Thursday intense competition was central among the reasons South African retailers had not thrived in Kenya.
“You’ve already got your Nakumatt, Uchumi, Tuskys in Kenya and Botswana-based Choppies thinking of going in. It has more to do with the competition than anything else.”
Fauconnier said foreign retailers needed to thoroughly assess the competition and be willing to take a minority share in a local business if they wanted access to the market.
Ashmi Shah, Kenya-based retail portfolio manager at real estate consultancy Knight Frank, said it was vital that foreign retailers understood how the market operated. Local partners could provide invaluable information in this regard.
“Supplier contracts must suit the local market since what works elsewhere may not necessarily yield results, say in Nairobi,” said Shah.
“We must remember that we cannot use one type of product across the different countries. You have to assess whether Kenya is starting to become a mature retail country or retail sector, which means you have to start diversifying your products a bit.”
Nakumatt is the largest family-run supermarket chain by sales in East Africa with a branch network of 64 stores across Kenya, Uganda, Tanzania and Rwanda.
Its footprint was broadened when it bought Shoprite’s stores when it exited Tanzania in 2014. The group only has two stores in Uganda.
By comparison, Shoprite operates 2 214 stores in 15 countries across Africa.
According to 2016 research by Knight Frank on African retail, in sub-Saharan Africa, Kenya is second to South Africa in terms of shopping centre space.
While South Africa accounts for 23 million square metres, Nairobi in Kenya has 391 000m². Windhoek’s shopping centres put Namibia in third place.
This week Nakumatt announced the appointment of former Tesco executive Andrew Dixon as chief marketing officer, signalling a move towards the further deepening of the formalised retail environment.
According to Oxford Business Group, Kenya ranks as the second-highest formalised retail sector and the average value of consumer spending has risen as much as 67% in the past five years, making it Africa’s fastestgrowing retail market.
Shah said: “The Kenyan market is itself quite dynamic and the range of products on offer is wide — not forgetting that the existing retailers have established brand loyalty among consumers over time. Therefore, incoming retailers need to offer a differentiation if they are to appeal to consumers.”
She said that, like other South African retailers, Game, a subsidiary of the Walmart business Massmart, which opened its first store in Nairobi in May 2015 at Garden City shopping centre, “hasn’t expanded to other locations in the country”.
Location was a crucial factor, he said.
Massmart operates one Game store in Nairobi and one in Uganda.
Africa’s largest branded food service franchisor, Famous Brands, which has expanded to nine the number of stores flying the banners of its Steers and Debonairs Pizza brands since it launched in Kenya, has decided against opening outlets in malls.
Darren Hele, Famous Brands CEO, said: “We have stayed away from malls due to high rentals, which are often dollar based.” But “further cautious expansion” in Kenya was planned.
Fauconnier said high rentals were among the factors that made it difficult for South African retailers to gain traction in Kenya.
“Even though the Kenyan government is quite open to investment, it also tries to protect its own industries,” she said.
Incoming retailers need to offer a differentiation to consumers