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Tough year ahead for SA retailers

| Economic factors

Food retailers have started the year on a solid footing with good trading results for the festive season.

However, they would have to work hard to raise their game in the new year as consumers would find themselves in more financial trouble than the previous year, according to equity analysts.

For starters, South Africa’s biggest food retailer Shoprite is expected to face a bumpy ride as its low-end target market is struggling under the weight of debt and unemployment.

Chris Gilmour, an Absa investment equity analyst, said he was not too optimistic about Shoprite’s performance this year.

When asked if Shoprite would not benefit from the weakening petrol price, Gilmour said “most of the time consumers chose to buy clothes rather than food with extra cash or they might move into an upper market”.

He said the same could be said about Pick n Pay, whose target market, the middle class, might find 2015 more stressful.

“The interest rate hike will definitely happen this year and it will hit the middle class hard,” Gilmour said.

MASSMART TO RISE

Gilmour added that Massmart, which owns Game stores, Dion Wired, Makro and Builders Warehouse, was likely to rise to prominence.

This was despite the fact that Massmart had been embroiled in legal battles with Shoprite, Pick n Pay and Spar over the exclusivity clauses that prevent direct competitors from trading at the same mall, in shopping centres around the country. This has stalled Massmart’s plans to roll out its GameFood stores.

However, Gilmour said Massmart had been able to push the fresh food sales through its Makro stores.

Dirk van Vlaanderen, an analyst at Kagiso Asset Management, said that Massmart had been growing its retail food offering.

“At this stage the ongoing legal battles around the validity of lease exclusivities may have halted progress on the Foodco conversion of a few specific Game stores, but Makro has, by and large, still been able to execute on its fresh food strategy,” he said.

By the end of last June, Massmart had rolled out Foodco into 55 out of 126 Game stores, with a further 12 conversions to Foodco expected in the second half of this year.

He said: “Management’s rationale behind the move into Foodco is to make Game less cyclical and reallocate space from declining general merchandise segments to a more defensive food offer,” he said.

Jean Pierre Verster, an analyst at 36ONE Asset Management, said that Massmart’s Foodco stores would also take longer to gain traction with the consumers.

A NEW TREND

Gilmour said another expected trend this year was that most of the retailers would adopt a more convenient and smaller format store trend.

“The days of the all-in-one store are coming to an end. The trend both in Europe and the US was the smaller format stores than the Walmart type of all-under-one-roof stores.”

Analysts are convinced that the move by local retailers into Africa will continue despite retailers such as Spar and Woolworths eyeing growth in Europe and Australia.

Gilmour said the most difficult thing about trading in some of the African regions was that land was becoming too expensive.  
 

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