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Emerging Market Spotlight ______Retail in South Africa: Making an Impression July 2011

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Emerging Market Spotlight ______Retail in South Africa: Making an Impression July 2011 Emerging Market Spotlight _____________________________________________________________________________ Retail in South Africa: Making an Impression July 2011 South Africa has forever had the Fast Facts reputation of being the world’s treasure cache of mineral The South African economy is the strongest on the African resources. From the discovery of continent, accounting for 17% of Africa’s gross domestic diamonds on the banks of the output (GDP). Orange River in 1867 to a series South Africa’s currency, the Rand, is the most actively traded of gold rushes and subsequent emerging market currency. The country’s stock exchange, development of gold fields, the JSE Securities Exchange, was ranked 18th in the world in mining as an industry has been terms of market capitalization as of March 2009. crucial to the economic The South African Retail sector is the largest on the African development of this sub-Saharan continent and was ranked 24th on A.T. Kearney’s 2010 nation. However, over the years, Global Retail Development Index (GRDI). gold and diamond production According to a Global Agricultural Information Network has lost some of its luster and (GAIN) report, retail sales volumes were US$72 billion in sheen. South Africa, which held 2009 despite severe recessionary conditions. the No.1 position in gold With blacks constituting 79.4% of the nation’s population production for over a century, (49 million), the emerging black middle class - estimated at was relegated to the second around 3 million - is currently the largest spending group. position by China in 2007. It is now only the fifth largest producer of diamonds in the world after Russia, Botswana, Canada and Angola. Though the mining sector continues to be the largest employer, it is expected to contribute only around 8% to the GDP in 2011, according to a report by Business Monitor International. The services sector is now the largest contributor to South Africa’s GDP. While the nation has seen remarkable advancements in the financial services, tourism and telecommunications markets, retail is now emerging to be a strong contender. Growing affluence among the nation’s black majority, particularly the emerging black middle class, has provided the much required fillip to this sector. Growth in the retail sector over the years has been due to steady economic growth, an increase in disposable income and high consumer confidence. Retail sales grew briskly from around US$28 billion in 1998 to US$92 billion in 2007. However, this sector too succumbed to the global financial crisis in 2008. Nevertheless, with consumer spending rebounding in 2010, a survey by the Economist Intelligence Unit has forecasted retail sales to touch US$117 billion in 2011. Higher Consumer Spending South Africa fell victim to the global economic meltdown in the first quarter of 2009 – the country’s first recession since 1992. A slump in export demand and lower household spending plagued the economy until the end of 2009. Encouragingly, the economy took a turn for the better as it gingerly entered the year 2010. The effect of the government’s counter-cyclical fiscal policies coupled with increased infrastructure spending programs and tourist arrivals fueled consumer spending in the run up to the 2010 FIFA World Cup, cushioning the economy. According to the Minister of Tourism, foreign visitor numbers grew 16.8% year-on-year between January-September 2010. The Consumer Confidence Index (CCI) as measured by FNB/BER had spiraled to 6 at the peak of the recession. However, the index climbed to 15 in the first quarter of 2010 and held steady throughout 2010, mirroring the resilience among South African consumers. According to a study by the United Nations, growing urbanization and an increase in the number of economically active individuals is expected to augur well for South Africa’s retail industry. More than 64% of the population is expected to move into the urban category by 2015. While the proportion of the economically active population, in general, is slated to reach 64.3% by 2015 from 64.1% in 2005, those in the age group of 20-44, who are vital to the Source: First National Bank, Bureau for Economic Research 2 retail sector are forecasted to constitute 38% of the population by 2015, compared to 36.8% in 2005. Growing Consumer Goods Sector Most of the consumer goods markets in South Africa are underdeveloped and are import-driven. While markets for white goods, such as PCs, and apparel are heavily dependent on imports, the cosmetics and toiletries (C&T) segment is the only one that has remained self-sufficient. C&T markets have a good mix of domestic players such as Adcock Ingram, Beige, and Avroy Schlain, and international players like Unilever, Revlon, L'Oréal (France), and Procter & Gamble, among others. The consumer electronics segment accounts for the lion’s share of the consumer goods sector. Audio/video devices, mobile phones and computing devices are most popular, with computing devices leading the market share. Laptops, notebooks and more recently Apple’s iPad are extremely popular with South Africans. Mobile communication is experiencing a phenomenal growth in Africa, according to Ericsson CEO Hans Vesberg. Smartphones are making waves in Africa and according to consulting firm Gartner, their penetration in South Africa is expected to reach 80% by 2014. A testimony to this is that even the Massai veterinarians are using these phones to track the spread of animal diseases and provide preventive vaccinations. GPS enabled smartphones were donated by Google through a Vet Aid charity program. Another emerging trend is the growing demand for “green” or energy-efficient appliances in the small domestic appliances segment such as irons, kettles, and vacuum cleaners. Demand for washing machines and refrigerators continue to dominate the large household appliance segment, thanks to a drop in retail selling prices. Amalgamated Appliances, Nu-World, LG Electronics, Hewlett-Packard, Dell and IBM are some of the leading companies. According to a study by Business Monitor International, consumer electronics sales are forecasted to reach US$9.63 billion by 2015 from an expected US$7.51 billion sales in 2011. A recovering economy, an increase in household spending and a shift in the spending towards more technologically advanced goods are anticipated to boost sales. Rise of the “Black Diamonds” South African blacks have come a long way after several decades of apartheid oppression. Apartheid had severely fractured the nation along the lines of racism as well as wealth distribution. According to Statistics South Africa, the majority of the economy was controlled by a small minority of whites comprising 10% of the population. However, the country turned the corner in 1994, when it achieved democracy. Nevertheless, the majority of the population, particularly the previously disadvantaged groups consisting of black Africans, Indians, coloreds (mixed race), and Chinese, have been still grappling with poverty. With a view to raise the living conditions of these groups and have them actively participate in the economy, the South African government launched the Black Economic Empowerment (BEE) program. 3 The first signs of black Africans making their presence felt in the middle-income bracket were shown in research by the Financial Mail in 2004. The survey data showed that around 300,000 South African blacks had risen to the middle-income status over the period 2001-2004. This emerging black middle class population was dubbed as the “black diamonds.” Further, the survey also found that 500,000 had risen to the lower middle-income level, albeit a very small number relative to an unemployed population of 4-million. A study by the University of Cape Town has cited that the black diamonds, whose combined spending power is presently around $250 million dollars, are expected to grow at an annual rate of 30%. Source: Statistics South Africa What’s more, there was also a rise in educational attainment among South Africans, who had been fighting illiteracy for a long time now. A survey by Statistics South Africa showed that among Africans in middle-class households, 29% attained a BA/Diploma or higher in 1998-2000 and in 2004-2006. This was comparable to 44% of Whites in middle-class households having a BA/Diploma or a higher degree in 1998-2000 and 37% in 2004-2006. However, 85% of the White households were middle-class in 2004-2006. Higher disposable income in the hands of the black up-and-coming professionals known as “buppies”, in addition to favorable economic conditions, resulted in a spending spree. Demand for motor vehicles, furniture, media, clothing, property and cell phones was strong among the buppie class. Of course, topping the list of priorities was to buy a new home, and move out of townships into more affluent neighborhoods. A survey by Financial Mail also showed that the buppies were far more fashion-conscious than their white counterparts. 20% of the richest blacks spent 3.5% of their household income on clothing compared to 1.5% by the whites. Retailers such as Woolworths, Truworths, Massmart and Shoprite cashed in on this trend. The opening of 4 the Maponya Mall in 2007 by Nelson Mandela, in Soweto, the largest township of Johannesburg, celebrated the growing black spending power. This mall housed multiple cinema screens and high-end retail stores previously found only in Johannesburg’s suburbs largely inhabited by rich whites. Another factor mirroring growing consumerism was an increase in vehicle demand. According to a research report, BMWs are found to be the most sought after cars among South Africans and are also at times referred to as “Be My Wife.” Vehicle sales, particularly local car sales, are expected to touch 130,000 units in 2011 according to the National Association of Automobile Manufacturers of South Africa (NAAMSA).
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