Unequal SA sends grocers to invest in poorest cities
When Choppies Enterprises opened a supermarket in the mining town of Rustenburg, Daniel Human’s life improved.
Once forced to make inconvenient trips to buy fresh food or haggle with street hawkers close to home, he’s now able to purchase a greater range of produce, meat and ready-made meals — often at better prices.
"It’s walking distance from my house," Mr Human, in his mid-30s, said as he left the Choppies outlet in the Wall Street mall, near some newly built housing developments.
"The quality is good, there are often specials, it makes prices cheaper."
Choppies, which opened its first store in Botswana in 1986, is joining far larger South African chains such as Shoprite, Pick n Pay and Wal-Mart-owned Massmart in targeting a new market: SA’s lower-income citizens. The chains are expanding near taxi ranks and along bus routes to lure customers who have struggled to access formal retail chains.
"There are a lot of people with a little bit to spend, but this accumulates to quite a lot of money," said Alec Abraham, an equities analyst at Sasfin Securities in Johannesburg. "The wealthy are a small percentage of the population and the lower end of the market has historically not been sufficiently catered for."
SA’s unemployment rate of 25.5% is the highest of almost 40 emerging-market nations tracked by Bloomberg. SA also has one of the highest inequality rates in the world, with the poorest half of the population of 54-million accounting for less than 8% of the country’s income, according to the World Bank. Towns such as Rustenburg have been particularly hard hit over the past two years by mining strikes over pay and job losses as companies seek to adjust to a platinum price that’s down 29% this year.
Households that earn less than R6,000 a month account for about 34-million people, or about 65% of the population, according to a report by the University of Cape Town’s Unilever Institute of Strategic Marketing. The buying behaviour of this target market is changing, where people no longer see a need to get into a taxi to buy their food, it said.
"In SA, it’s very competitive," Choppies CEO Ram Ottapathu said by phone.
"With the lower half, that is where the critical mass is and where formalisation of retail is taking place."
Massmart’s Cambridge chain, which targets lower-income earners, is opening stores in underserved areas near commuter centres. Offering fresh food is "very important, as many shoppers do not have fridges to store food and fresh food from hawkers can be expensive," the Johannesburg-based company said in an e-mailed response to questions.
At Pick n Pay’s Boxer outlets, which sell a limited range of food at lower prices, proteins such as meat make up about 30% of sales, CEO Richard Brasher said.
"In SA, more people have got less than those who’ve got more," Mr Brasher said.
Choppies plans to increase its stores by almost 25% to 159 in the year through June. Shoprite expects to have 2,255 at the same time, across all brands. The Cape Town-based retailer had more than 100-million customers at its USave budget outlets in the 2015 financial year, it said, without releasing specific growth figures.
Massmart shares have fallen 29% this year while Shoprite has lost 19%. With consumer spending expected to come under more pressure in the first half of next year, retailers are seeking to expand their customer base, Mr Abraham said.
Succeeding in the low-income market isn’t always easy for retailers: profit margins aren’t as wide as in higher-income markets, billionaire Shoprite and Pepkor chairman Christo Wiese said by phone. While it’s harder to get handsome profit margins when selling to such customers, the payoff is in its size, Mr Ottapathu said.
"It’s a game between the margin and the volume," he said. "You need to be very alert to make sure you get this balance right."
With its clean outlets and modern layout, Choppies also attracts some well-off customers in Rustenburg. Kyle Hundermark, a resident in his early 20s from a more affluent part of town, says he normally shops for groceries at Pick n Pay but when he is at the Wall Street mall he will pop in to Choppies, especially for its meat.
As the fight for shoppers in SA intensifies, retailers are also pushing into sub-Saharan Africa, which has a retail market of more than $420bn. Food accounted for about 65% of Africa’s total retail sales of $823.2bn in 2013, according to a November report by Deloitte Touche Tohmatsu.
Choppies, which listed in SA in May and is also adding shops in Zimbabwe, Zambia and Kenya, was the fastest-growing retailer in the region, according to the same report.
Pepkor, SA’s biggest retailer, is considering adding some food to its stores, Mr Wiese said.
"In that lower end, it’s certainly not a walk in the park," he said. Yet in Africa, "that’s still where the bulk of the market is."