/ 11 April 2016

SA’s ferocious fast food appetite

Forget German cars and luxury watches, fast-food consumption could be the most reliable indicator of prosperity of the middle class in South Africa.

The local fast-food industry brings in more than R300-billion every year, according to Insight Survey, a South African-based market research company. Statistics South Africa recorded income from the “takeaway and fast-food outlet” sector as R170-billion in 2015.

The percentage of adults who buy fast-food at least once a month increased from 66% in 2009 to more than 80% in 2015.

A Euromonitor report estimates that the number of consumers in this sector will increase to 42-million people in the next two years.

In its highest month last year, April income in the fast-food and takeaway industry surged by 13.3%, according to StatsSA, more than double the rate of inflation. Analysts believe that investments in the sector will continue to grow even more quickly than the waistbands of those who keep it in business.

An obvious sign of this is the number of new entrants. Burger King opened its first South African doors in 2013. Domino’s Pizza followed in 2014. Pizza Hut came shortly after, re-entering the market after a six-year hiatus. Coffee giant Starbucks now has a local presence, Krispy Kreme doughnut stores are popping up around the country, local chain RocoMamas opened 16 stores in the past year, and Dunkin Donuts recently announced an aggressive entrance and expansion plan.

Price wars have begun as a result and pizza lovers, in particular, are enjoying a wide range of specials.

A Euromonitor report predicts that fast-food in South Africa will witness an annual growth rate of 9% for the 2014 to 2019 period. In 2014, there were 134 new takeaway stores. That figure is set to increase by 4% every year, according to Insight Survey.

“Fast-food is experiencing exponential growth with local consumers,” said Insight Survey. “[The number of] individuals who have purchased fast-food over a four-week period has risen by close to 10-million within the last five years.”

Business Monitor International (BMI), a Fitch research company, published an investor note last year describing the South African fast-food industry as “piping hot”.

This favourable outlook contrasts starkly with other African countries, where many international fast-food brands have limited or decreased their involvement.

So what has allowed South African growth to take place, in the face of waning incomes, rising food prices and a weak and volatile currency? Pundits say it has to do with several factors, including:

  • A broadening black middle class;
  • A strong meat-eating and dining-out culture;
  • An increase in the number of women in the labour force; and
  • Fast-food outlets increasing their footprints in townships and rural areas.

Earn more, eat more
It is no coincidence that the sector has boomed at the same time as the growing black middle class. Now numbering about 4.5-million people, the black middle class has more than doubled over the past decade, according to a 2013 study by University of Cape Town’s Unilever Institute titled Four Million and Rising.

“The emerging black middle class has a big role to play in how well these fast-food brands develop,” said Mohsin Begg, a consumer markets analyst at KPMG.

The numbers show that, as people earn more, their plates get fuller.

Research company Business Monitor International (BMI) estimates that the growing middle class will see South Africans out-eat inflation.

“Despite high unemployment threatening the consumer sector, we forecast per capita food consumption to grow at a compound annual rate of 7% over 2015-2019,” the company said in a note last year. “We maintain our bullish view for the South African fast-food industry over our forecast period to 2019.”

Investec chief economist Annabel Bishop said recently that real incomes per person are contracting. The gross national income in 2012 was R54 486, in 2013 it was R54 266, and in 2014 it was R54 124. This is “not because of inflation,” said Bishop, “but because economic activity is grinding slower”. Business confidence is low and unemployment remains in the region of 25%.

Why, then, is fast-food consumption still climbing?

According to Insight Survey, one of the reasons is an increase in the number of women in the labour force. This means more double-income homes and more disposable cash overall. But it also means that the traditional cook has less time to prepare food. “Around the world, people are becoming asset rich but time poor. In other words, convenience eating is growing apace as people have less time to cook meals,” said Chris Gilmour, an Absa Asset Management investment analyst.

According to BMI, South Africa is also typified by “high meat consumption” and a “strong eat-out culture”, both of which are driving factors for fast-food companies. Buying ready-made meals, especially from popular brand names, has become aspirational. This means that even those living close to the breadline might spend what little disposable income they have on fast-food.

“What’s interesting about fast-food in South Africa is that people may not afford to go often but they still go,” said Michael Wood, a director of Aperio, a fast-moving consumer goods consulting company. “For example, a South African consumer will go to a KFC once a month when they get paid as a treat, versus an American consumer who goes weekly.”

The June 2012 All Media and Product Survey (Amps) showed that 16.4% of the adult South African population said that they “never buy fast-food”. This was almost half the number from five years before, when 28.1% of the population made the same claim.

Best value
Instead of doing away with fast-food altogether, cash-strapped South Africans are searching for the fast-food brands that offer the best value.

“Value for money is something that has been taken up very well in South Africa, particularly for those consumers who have less disposable income,” said Begg.

“Consumers are under pressure. However, the rise of disposable incomes and the rise of the emerging middle class is something that global players [owners of fast-food brands] would want to take advantage of,” said Begg. “This will eventually support sales growth in the long term.”

But when one looks at the overall economic pie, some players are only getting a nibble, and a few well-established brands are taking massive gulps.

The clear market leader is Yum! Brands’ KFC. The Euromonitor report pitched its 2014 value share at 22%. It was followed by Famous Brands, Nando’s and McDonald’s, with shares ranging from 6% to 13%.

KFC is the industry leader, with 771 stores at the time of going to press. (John McCann, M&G)

In May 2015, Businesstech reported on the country’s leading fast-food brands by outlet number. Unsurprisingly, KFC dwarfed its competitors, with 771 stores at the time of going to press. “I think everyone is small in comparison to KFC,” said Wood.

The next three largest were Famous Brands chains: Steers with 509 stores, Wimpy with 497 stores, and Debonairs with 382.

The biggest independent chain on the list was the braai-inspired Chesa Nyama with 251 stores, coming in seventh place.

According to Wood, “global players have an upper hand, years of experience and are efficient operators. That said, global tastes differ from local tastes so, even though an international operator might be a more sophisticated operator, if Chesa Nyama appeals more to local tastes, it will win in the end.”

In Gilmour’s opinion, the multinational-backed brands are not automatically in a stronger position. “The so-called well-heeled foreigners are rarely here in their own right, apart from McDonald’s and KFC,” he said. “McDonald’s has downgraded its involvement here to that of development status and has no intentions to expand into the rest of Africa.

“KFC is already in the rest of Africa and has huge ambitions. Its franchisees are spectacularly wealthy individuals.

“The newer entrants like Burger King, Domino’s and Pizza Hut rely on local partners to put up the money for expansion and there are signs that Burger King is taking strain,” he said, referring to its R55-million loss in the past financial year, which was 38% bigger than its loss the previous year.

But recent stats have shown that the industry is not impervious to today’s unappetising economy. Since August 2015, the sector has performed noticeably lower than before and, in January, income contracted by 2.5% for the first time in years.

“The market will absorb new entrants, however, the key question is the amount of growth these entrants will achieve in a certain period of time,” said Begg. “The increase in competition, rising input costs and operational costs, which have most noticeably been hit by electricity price hikes and power outages, threaten growth in the sector.”

Gilmour’s feelings were twofold. “Fast-food has a great future in South Africa, with its young, growing population. But the next couple of years will be very tough for all consumer-oriented stocks.”