ALL things considered, South Africa’s retailers performed robustly last year, despite the country’s weak growth environment. Over the past six years, the retail sector had a good run, outperforming economic growth. However, analysts don’t expect this trend to continue this year.
According to Ernst and Young’s analysis of the 12 largest retailers in the country, which account for nearly R600 billion in annual sales, last year grocery retailers had a 62% share of total retail spend, specialty retailers had 23% and clothing retailers achieved 15%.
Despite the above, the outlook for South Africa’s retail sector remains gloomy, as the retailers try to recover from weak and declining GDP growth, consumer psychology and the economic fundamentals underpinning consumer demand.
“You could see the early signs in the last 24 months and that is evident in the retail sub sectors. For example, the furniture sector has been under pressure for more than a couple of years and also some of the clothing companies,” says Stefan Salzer, partner and managing director at Boston Consulting Group South Africa.
The tough retail market hit the country’s largest retail group (by floor space) Edcon and high-end retailer Stuttafords.
Edcon, bought out by Bain Capital in a highly leveraged deal a decade ago, struggled and this forced the retailer into a debt-for-equity swop last year.
“If you look at Edcon, they were hamstrung in having a dated store portfolio and they still had to pay back this massive loan that their private equity owners were burdening them with,” says Salzer.
The closure of Stuttafords speaks volumes about the ability of customers to spend at the top end.
The 159-year-old department store was once the go-to department store in the country but Stuttafords’ problems were intensified in 2008 when the retailer repositioned the brand by showcasing international brands including Ted Baker, Gap, Banana Republic and Tommy Hilfiger at its large format stores in Cape Town, Durban and Johannesburg.
“I was surprised that they went under because they were quite clear in their positioning and their target market was the higher LSM segment. They were bringing in international brands, so I think they suffered from the deterioration of the rand,” says Salzer.
The Stuttafords business model of importing international brands failed and market share was lost to local clothing rivals and international fashion retailers such as Cotton On, Topshop and H&M.
The retailer battled with massive input costs due to the volatile rand, and as the costs could not be passed onto the consumer, that eventually ate into their profits.
According to Salzer, many of the retail companies benefited in the past because South Africa was cut off from the rest of the world and in terms of fashion there was no alternative.
“The local retailers would copy what was happening in the northern hemisphere and introduce the items in the local market six months later,” says Salzer.
Mr Price’s value-for-money clothing model launched a few decades ago has become very easy to replicate. International retailers introduced similar price and store formats with the same value proposition and it now appears as though the retailer is struggling to compete.
“Mr Price took some bold fashion decisions. It worked for a while but they had two seasons where it didn’t work and you saw really meagre results from them a couple of months ago because they made really bad fashion calls,” says Salzer.
The casualties at the top end of the sector point to a continuing downward trend on consumers’ disposable income, which will be exacerbated by increasing interest rates and currency depreciation, according to EY.
“The retail landscape has changed and I don’t think we are going to see a lot of growth in the overall sector. We will see winners and losers and right now it’s going to be about evolution,” he adds.