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Spotlight on South Africa: Understanding the South African Consumer
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Spotlight on South Africa: Understanding the South African Consumer

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Economically, South Africa has seen much happier days. In 2013, the nation’s GDP growth rate slumped to 1.8%, while inflation hit 6.3%. Unemployment hovers around 25%, and one in two young South …

Economically, South Africa has seen much happier days. In 2013, the nation’s GDP growth rate slumped to 1.8%, while inflation hit 6.3%. Unemployment hovers around 25%, and one in two young South Africans is now unemployed. In the World Economic Forum’s Global Competitiveness Report, 2013-14, South Africa’s macroeconomic environment ranked only 95th out of 148 countries, down from 69th the previous year. In short, more than five years after the global financial crisis struck, Africa’s largest economy is still struggling to return to its pre-crisis growth trajectory. This economic slowdown has cast a heavy cloud over the country’s retail market. In December 2013, Oxford Business Group observed that the overall trend in consumer spending “has been falling for some time and is expected to remain depressed.” It quoted an explanation from Stanlib chief economist Kevin Lings: “This largely reflects a moderation in income growth, a sharp slowdown in the growth of unsecured credit, a lack of job creation, falling consumer confidence, and a rise in the cost of living.

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  • 1. L.E.K. Consulting CONSUMER SPOTLIGHT LEK.COM Spotlight on South Africa Understanding the South African Consumer L.E.K. Consulting / Consumer Spotlight Economically, South Africa has seen much happier days. In 2013, the nation’s GDP growth rate slumped to 1.8%, while inflation hit 6.3%. Unemployment hovers around 25%, and one in two young South Africans is now unemployed. In the World Economic Forum’s Global Competitiveness Report, 2013-14, South Africa’s macroeconomic environment ranked only 95th out of 148 countries, down from 69th the previous year. In short, more than five years after the global financial crisis struck, Africa’s largest economy is still struggling to return to its pre-crisis growth trajectory. This economic slowdown has cast a heavy cloud over the country’s retail market. In December 2013, Oxford Business Group observed that the overall trend in consumer spending “has been falling for some time and is expected to remain depressed.” It quoted an explanation from Stanlib chief economist Kevin Lings: “This largely reflects a moderation in income growth, a sharp slowdown in the growth of unsecured credit, a lack of job creation, falling consumer confidence, and a rise in the cost of living.” Yet for all these travails, South Africa is still a formidable economic force. Overall, it ranks a solid 53rd out of 148 nations in the Global Competitiveness Report, having overtaken both Brazil (56th) and India (60th). It also ranks above other emerging economic powerhouses such as Mexico (55th) and Russia (64th); and it’s way ahead of most African nations, including energy-rich Nigeria (117th). An Upper-Middle Income Country South Africa’s impressive economic progress in recent decades has created a sizable — and expanding — class of affluent consumers. According to a report by New World Wealth, South Africa was home to 48,000 U.S.-dollar millionaires by the end of 2012. That’s far more than any other country in Africa. Johannesburg alone boasted 23,400 millionaires, easily surpassing any other African city. Yet this nation of 52 million people is also characterized by extreme inequality: Euromonitor International reported that more than half of all South African households were living on less than $7,500 a year in 2011. Nonetheless, the World Bank classifies South Africa as an upper-middle income country. For foreign and domestic retailers alike, much of the attraction of this market lies in the growing legion of middle-income consumers eager to upgrade everything from their clothes to their cars. Since the end of apartheid, many black South Africans have gained access to better-paid jobs and improved credit facilities, dramatically enhancing their purchasing power. As this consumer class has grown, shopping malls have proliferated in many townships (where most of the population lives), and more will follow over the coming years. In the long term, retailers of fashion, furniture, and countless premium products should benefit richly from the rise in disposable incomes within the black community. Still, many South Africans remain under acute pressure to spend prudently. This has led to robust growth for budget private labels, as well as cheaply produced goods from Asia. According to Euromonitor International, private label products accounted for more than 13% of the total value of packaged food sales in 2012. With shoppers feeling the strain, many retailers have also been forced to tighten their belts: among other burdens, they’ve been hurt by the rising price of rent and electricity at a time when it’s difficult to pass on these higher costs to consumers.
  • 2. LEK.COM CONSUMER SPOTLIGHT L.E.K. Consulting / Consumer Spotlight E-commerce on the Rise As in many markets, e-commerce represents a growing opportunity. Young South Africans are relatively tech-savvy, and the falling price of internet access continues to drive up the number of users. However, many consumers are still loath to disclose their banking details online given the dangers of credit card fraud. Even so, the sector will grow significantly as the number of internet users and credit-card holders expands across the country. Euromonitor predicts that most retailers will “establish both an online store and physical stores. An online store is expected to become an essential part of each and every business in order to survive the competition, as well as reduce operating costs in the long term.” A Challenging Environment For international retailers, South Africa is an exceptionally tough market. Local companies and unions provide infamously fierce opposition to foreign firms. In 2011, the country’s Competition Tribunal approved a $2.4 billion deal in which Wal-Mart would acquire a majority stake in a local retailer, Massmart Holdings. Three government ministers and a labor union appealed the tribunal’s ruling, while the nation’s biggest union threatened “the mother of all boycotts against Massmart.” The merger eventually went through, albeit with conditions that included an agreement to rehire 503 workers fired before the deal was announced. Wal-Mart’s high-profile arrival in South Africa has stirred greater interest among other potential foreign investors. It’s easy to see the appeal, given the size of the market and the steadily improving fortunes of the consumer class. But there’s no denying that this is a challenging environment. The Global Competitiveness Report ranks South Africa 147th out of 148 countries for its “extremely rigid” hiring and firing practices, and 142nd for pay and productivity. As for labor-employer relations, it ranks dead last. In other words, approach with caution — and don’t expect a warm reception. Meet Our Expert Please contact us at retail@lek.com for additional information. L.E.K. Consulting is a registered trademark of L.E.K. Consulting LLC.All other products and brands mentioned in this document are properties of their respective owners. © 2014 L.E.K. Consulting LLC Jon Weber Boston

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