With more shopping malls opening, expanding or upgrading, local retailers are racing headlong with international brands to occupy prime space.
In the face of unprecedented competition, they cannot rely on extending square metres to keep customers, argued Jaco Prinsloo, principal at management consultancy AT Kearney.
“It’s not always expansion for profitable growth, it’s expansion just to secure that position,” he said. Increasing floor space risked the dilution of revenue per square metre – an important metric for measuring the performance of a retailer.
According to data from AT Kearney, formal retail space in South Africa is 11-million m2. It has grown on average 18% over the past five years, while retails sales figures remained “relatively flat” over the same period, said Prinsloo.
“Across the board, there is lots of competition and revenue per square metre has gone down,” he said.
International fashion brands such as Zara, Cotton On and H&M have already entered or are due to enter the retail clothing space. They bring a new offering and a European “feel” to the local retail market and they “can still compete price-wise with the local players”, Prinsloo said.
In addition they come from “relatively rich organisations”, which benefit from the devaluing of the rand against global currencies.
Firms from other parts of Africa are also making inroads, such as Botswana-based food retailer Choppies, which recently listed on the JSE. The company has a distribution centre in Rustenburg and 35 outlets across South Africa. This is in addition to its 72 outlets in Botswana, and the 18 it operates in Zimbabwe.
South African retailers have benefited from a relatively stable economy and growth in recent years. “All of a sudden the world has woken up in the last couple of years and we also want a share of that pie,” said Prinsloo.
Major mall developments, such as the Mall of Africa in Midrand, attract local and international brands. The project is one of the largest mall developments in Africa. It will house global names such as Forever 21, River Island, Mango and Tommy Hilfiger alongside flagship stores for the Foschini Group, Mr Price and Truworths, the company said.
But this relentless pursuit of more shopping room takes place against a backdrop of a weakening consumer environment.
In the year’s second quarter, consumer confidence slumped to -15, surpassing lows last seen at the start of the 2008 financial crisis.
Retail sales figures for May, released by Statistics South Africa, slowed to 2.4% from 3.4% in April.
The numbers reflect a “more normal” picture of consumer spending: the April figure was driven by the number of public holidays, according to Investec economist Annabel Bishop. South African consumers continue to face “increasing financial distress”, she said in a research note.
After the credit amnesty last year, the latest data from the National Credit Regulator showed impairments – consumers three or more months in arrears on the payment of an account, or who have a judgment or listing against them – and delinquencies – accounts 30 days in arrears – are rising again, she said.
Bishop added that the EY Bureau for Economic Research retail survey for 2015’s second quarter show retailer confidence has decreased. Some 48% of respondents were dissatisfied with prevailing conditions compared with 40% in the first quarter of the year.
“Retailers expect a slower pace of growth in sales volumes and are less confident about the future, anticipating business conditions will deteriorate [in the third quarter],” she said.
Other economists are not optimistic about the outlook improving.
Nedbank economists Johannes Khosa and Dennis Dykes said: “Domestic spending is not expected to improve significantly in the short term as household financial conditions are likely to remain weak on the back of higher taxes, higher administered prices, tight access to credit and the poor job market.”
This will contain consumers’ appetite and ability to spend “particularly on nonessential goods”.
It is often difficult for retailers to vacate unprofitable stores, Prinsloo noted, because they run the risk of leaving the space available to competitors.
It can also be a costly process because of long-term rental agreements and high severance costs. Negative publicity as a result of job shedding is another factor.
A “relentless focus on consumers” is important to ensure local brands differentiate, themselves from their growing international competition, he argued.