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Growth Slows in South Africa’s Retail Sector as Consumer Confidence Declines
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Growth Slows in South Africa’s Retail Sector as Consumer Confidence Declines

With growing concerns about the economy, job prospects and rising costs, South African consumers lost confidence in the second quarter of 2011 to an index level of 86, according to Nielsen’s quarterly online Global Consumer Confidence Survey. This decline comes on the heels of a slight rise in confidence during the first quarter of the year after two consecutive quarters of decline. With that background, it is no surprise that the retail sector posted slowing growth as South Africans dealt with rising costs and sought to save their spare Rands.

While South Africans were the most pessimistic in Nielsen’s Middle East, Africa and Pakistan region, the decline in confidence was hardly unique. Global online confidence declined for the first time in six quarters as economic recovery hit a stumbling block and recessionary jitters again reverberated around the world. Consumer confidence in the U.S. fell to its lowest level on record in the second quarter

Roughly two-thirds (66%) of South African survey respondents said that they believed that their country was in a recession. They are also no longer as upbeat about their job prospects; with half believing that employment opportunities were not good – a 3 percent rise from the same period a year ago. Almost half (46%) felt negatively about the state of their personal finances, a 2 point rise from Q1, and 83 percent said that they had adjusted their spending habits to save on household expenses, an 18 percent increase from the previous quarter. Almost a quarter (24%) said they have no spare cash.

The major concerns for South Africans in Q2 2011 are no different from the previous two quarters: increasing food and fuel prices, rising cost of utility bills, job security, debt, the economy and crime. “Rising food prices are taking its toll on consumers worldwide as more and more households are spending a higher proportion of their disposable income to put food on the table, and South Africa is not exempt from this trend,” said Diane Johnstone, Managing Director, Nielsen Southern Africa. “South Africans may have weathered the worst of the storm, but the frugal behavior prevalent in 2010 will continue into 2011 as headwinds to growth persist. As disposable income continues to shrink, consumers are constantly re-adjusting their spending patterns to save on household expenses by cutting-back on non-essential, luxury items and activities.

Retail Landscape

The retail sector was affected by these changing consumer patterns, posting slowing growth in 2010 with majors outgrowing non-majors. Overall sales of fast-moving consumer goods (FMCG) grew 3.3 percent in 2010 compared to last year. By contrast, growth in 2009 was up 14.6 percent from 2008. Price increases accounted for about half of the growth in 2010 compared to almost 82 percent in 2009.

Inflation has been on the rise since the start of the 2010, but while many countries are experiencing skyrocketing prices for basic goods, South Africa has seen some deflation among several staples categories such as rice, corn meal, flour, margarine and tuna. All of this is good news for consumers, who are highly price-driven. Meanwhile, prices for fresh milk, ready-to-eat meals, instant coffee, carbonated soft drinks and sugar all rose. Nonetheless, retailers are increasingly optimistic that volume growth will be promising in 2011.

So where are consumers spending their money if not on food? A review of consumer spending trends over the period 2000 to 2010 shows that of discretionary disposable income, the average consumer spent three percent more on out-of-home entertainment (from 35% in 2000 to 38% in 2010). Meanwhile, communications, which encompasses cellphones, Internet and cable/satellite TV, almost doubled during the decade, from 11 percent of spending in 2000 to 21 percent in 2010.

Modern trade has continued to expand, and now accounts for more than 62 percent of all FMCG trade in South Africa. Nielsen has noted a consistent annual shift of one to two percent of trade moving from traditional channels to modern trade. Branded retailers, such as Shoprite and Pick n Pay, continued to grow at the expense of smaller, independent retailers, which are also being squeezed by wholesalers. Shoppers at branded outlets not only visit them more, but also spend more per trip. Nonetheless,independent retailers continue to have the highest level of market penetration.

While most categories saw overall value and volume declines in the first quarter compared to a year ago, one category stood out for growth on both measures: dry groceries. Comparing trends from Q1 2010 to Q1 2011 tells a slightly different story, however, with several categories (toiletries, dry groceries, perishables and household goods) recording solid growth in both value and volume. Key gainers over the past year include ready-to-eat meals, canned pilchards, instant coffee and toilet tissue. Much of the growth was driven from middle income consumers.

South African retail brands, or private label, currently make up about 11 percent of the market (excluding fresh food), the highest among developing markets, but still below developed markets. Overall share has remained stable, but value-oriented South Africans have taken to retail brands in a number of categories including chicken (38% of category) and dishwashing liquid (36% of category). Most notably, consumers from the higher income levels have turned to retail brands with some enthusiasm, and 60 percent of the retail brand market value comes from these shoppers. Nevertheless, there remains room for significant growth with middle income consumers, provided retailers know what drives the performance of private label brands.

Aside from brick-and-mortar shops, online commerce has taken off in South Africa. Fully 71 percent of the six million Internet users in the country are online shoppers.

Challenges for Retailers

Promotions are a boon to budget-conscious consumers, but present a number of challenges for retailers to overcome. For instance, reaching the consumer is difficult, particularly in a country as diverse as South Africa, where profiles can vary by a few kilometers. National retailers need to manage overall shopper engagement while remaining locally relevant and focused. Meanwhile, competition in the food category is intense, as grocers – branded and independent – are fighting for a larger share of sales. Ready-to-eat meals and in-store solutions are gaining popularity, while liquor, pharmacy, food courts and hardware all continue to grow at a faster pace than the center store.