FDI IN RETAIL SECTOR OF SOUTH AFRICA

OVERVIEW

The South African economy is the strongest on the African continent, accounting for 17% of Africas gross domestic output (GDP). South Africas currency, the Rand, is the most actively traded emerging market currency. The countrys stock exchange, the JSE Securities Exchange, was ranked 18th in the world in terms of market capitalization as of March 2009. The South African Retail sector is the largest on the African continent and was ranked 24th on A.T. Kearneys 2010 Global Retail Development Index (GRDI). According to a Global Agricultural Information Network (GAIN) report, retail sales volumes were US$72 billion in 2009 despite severe recessionary conditions. With blacks constituting 79.4% of the nations population (49 million), the emerging black middle class - estimated at around 3 million - is currently the largest spending group.

Retail Industry A Closer Look

The South African retail industry is the largest in the sub-Saharan region and is positioned as the 20th largest retail market in the world. It is more or less an oligopolistic market with five South African companies, namely Shoprite, Pick n Pay, Spar, Massmart and Metcash, constituting 80% of the retail sales.

Food Retail
The South African Food Retailing market is dominated by Pick n Pay, Shoprite, Woolworths and Spar, which trade under several store names and also operate discount outlets. y Shoprite Holdings Limited, the largest food retailer in South Africa, was founded in 1979 with the acquisition of eight Cape Town-based supermarkets for R1 million. Over the years, the company has followed an inorganic growth model and other expansion strategies such as franchising. The retailer now operates over 1,800 stores in South Africa and Southern Africa. With a market share of around 34%, this retail giant caters to the middle-and lower-end consumer markets. Pick n Pay Stores Limited is the second largest retail chain. Founded in 1967, this family controlled retail business operates in South Africa, Southern Africa and Australia via its Franklins stores. Its retail formats include larger supermarkets, hypermarkets and family franchise stores, with hypermarkets being the largest. This retailer caters to the middle ncome class of consumers and hopes to improve its presence in the black diamonds consumer markets, according to a South African media report. In 2007, Pick n Pay underwent an extensive brand transformation in a bid to retain its position in the local retail market. The new signage after rebranding dropped the apostrophe before the n (Former signage: Pick n Pay). y y SPAR Group Limited (ZA), South Africas third largest retailer, was formed in 1963 when a group of eight wholesalers were given rights to the SPAR name to service 500 small retailers in an emerging grocery chain market. SPAR Group adopted an acquisition-driven growth model and presently operates around 800 SPAR stores in South Africa. It is chiefly a franchise operation focusing on smaller stores. The SPAR group has three store formats namely: SPAR which represents neighborhood shopping, SUPERSPAR known for competitive prices and bulk purchases and KWIKSPAR more of a convenience store format. SPAR also owns the largest of the liquor store chains in South Africa called TOPS. As a part of its commitment to the BEE program, Spar is planning to sell 10% of the company to its black employees. The value of the transaction would be R1 billion.

y Woolworths Holding Limited, founded in 1931 is a South-African retail chain that operates through its subsidiaries Woolworths (Proprietary) Ltd and Country Road Ltd in Australia. It owns over 400 retail outlets and caters to the high-income segment. The group contains both corporate-owned stores as well as franchise stores. In line with its philosophy to incorporate new initiatives across its businesses, Woolworths is looking to strongly focus on an organic food venture, which was launched in 1999. The organic food market in South Africa is the second fastest growing sector following the segment for baby food. According to a report published by a trade body which focuses on the South African retail industry, Woolworths goal is to increase its organic food sales to R1 billion by 2011. Pick n Pay and Shoprite have also forayed into the organic food segment. According to market reports, while Shoprite expects its organic sales to account for 10% of its fresh produce sales by 2015, Pick n Pay has already been reaping benefits from its wide range of organic products.

Non-Grocery/General Retail
Metro, formerly known as Metcash Africa, is the leading wholesale distributor of fast moving Consumer goods (FMCG) in Africa. It has over 150 outlets open to business customers, located mostly in and around black townships. They offer a wide range of merchandise including general goods and also operate liquor stores such as Liquor World and liquor Warehouse offering imported liquor. Massmart Holdings Ltd. is the third largest distributor of consumer goods in Africa and also one of the leading retailers of general merchandise and other goods. The retailer has around 250 stores and caters to a broad consumer base ranging from the lower-income to high-income groups. Its focus is on high volume, low margin and lost cost distribution of quality consumer goods. Makro, Game, and Jumbo are among its many brands. Notably, the U.S. retail giant Wal-Marts bid to acquire a controlling stake of 51% ($2.3 billion deal) in Massmart was recently approved by South Africas Competition Tribunal amid tough opposition from trade unions. Truworths International is South Africas premier fashion retail chain targeting the fashion/quality conscious youth of the country, who are keen on matching up to international standards of styling. Founded in 1917, this fashion retailer has over 500 stores and now commands a larger market share than Pick n Pay. A few of its brands include Truworths Man, Identity, Ginger Mary, YDE and Uzzi. In addition to its existing style-conscious consumer market, this fashion retailer also stands to benefit from the emerging black diamonds segment who are becoming more style-conscious. The Foschini Group Ltd., formerly known as Foschini Ltd. is one of the specialty retailers offering clothing, jewellery, accessories, and home furnishings. Founded in 1924, the company is considered to the first of the independent chain store groups in the country. With over 1,500 outlets, Foschini caters to consumers ranging from middle to upper-middle income groups. Markham, donna-claire, @home, DueSouth are some of Foschinis brands.

FOREIGN ENTRANTS
South African retail has thus far been dominated by large home-grown holding companies, due to apartheid and the subsequent allied international sanctions. Given the present competitive landscape, an invitation to join the BRIC (Brazil, Russia, India, China) group, and the opportunities presented by the nations emerging economy status, the retail industry has been put on the international radar screen. The sub-Saharan market is considered to be lucrative, given the aggressive expansion by domestic retail giants such as Shoprite, Spar and Pick n Pay in the food retail segment and Truworths and Foschini in the clothing segment. The rise of the black diamonds, which appears crucial to the economys recovery, has also added cheer to this sectors performance. Wal-Mart has been the first international retailer that has managed to gain ground in the South African market, through its bid to acquire a 51% stake in the Massmart, the third largest retailer of consumer goods. In addition, Chicago-based collective buying website Groupon acquired Twangoo, a South African e-commerce provider, to gain from Twangoos reach across various South African cities. As of now, foreign investments are flowing into retail equities as foreign portfolio managers have taken a shining to this sector. According to a report by Home Goods Retailer, a leading South African retail publication, equity investments are likely to continue to be the area of primary interest in the coming years.

Trends in the South African Retail Industry

Convenience Store Format to Dominate Retail Trade

Changing consumer lifestyles have led to the relatively new trend in the South African retail market-- the emergence of convenience stores as a shopping destination. These stores are typically owned by wholesalers and retailers. With convenience stores open for longer hours, South Africans have been found this format to be a safer and more time-saving shopping experience. With this, South Africas leading retailers have jumped on to the bandwagon, introducing new store formats to cash in on this growing trend. According to a market research survey by Euromonitor International, Woolworths Holdings led the convenience stores market in 2009. Woolworths Food outlets are located at Engen Petroleums forecourt stores (or gas stations), which are becoming popular thanks to the convenience shopping drive. Others in the fray include Pick n Pay, which introduced Pick n Pay express outlets through British Petroleum forecourt stores in 2009, and Sentra Value outlets owned by Shoprite and Sasol forecourts focusing on restaurant chains.

Informal Retail The Significant Other

Informal retail is also referred to as the second economy within the South African retail sector. This market is still a crucial supply channel of goods predominantly in black townships, which were largely ignored during the apartheid era. Informal retail concepts vary from taverns to tuck shops (small food-selling retailers). In particular, spazas, or small retail stores most often run from home, are making inroads in the local retail arena, offering both food and non-food products. A study by University of South Africa (UNISA) found that some spazas also have direct contact with product manufacturers; for instance some spazas receive Coca Cola goods on a cash basis. Still, the spazas face certain challenges, including funding access, theft, high transport costs, and competition from the developing formal retail outlets in these areas. Hawkers, street stalls, fast foods, kiosks and take-aways are among the informal market retailers. According to a study by the Bureau of Market Research (UNISA), the informal retail sector is comprised of around 750,000 informal spazas and street vendors, which account for revenues of R32 billion.

E-Commerce Gaining Momentum

E-commerce and online retailing, which remained unpopular until 2007, have grown encouragingly over the past four years. An increase in the number of sellers and traditional retailers developing online retail sites, coupled with growing internet access in South Africa, has fueled growth. According to a survey byWorld Wide Worx, the number of South Africans with access to the internet grew to 5.3 million from 4.6 million, between 2009 and early 2010. Though VCDs, CDs, DVDs are the most sought after purchases online, airline ticket purchases dominate the virtual shopping space. Pick n Pay Home Shopping, Woolworths, Kalahari.net, Exclusive Books, NetFlorist, OnSaleToday are a few of the largest online retailers. Some of the retailers benefiting from this growing trend include Bidorbuy, whose online sales grew 40% during the 2010 holiday season compared to 2009 sales levels. Kalahari.net launched an online marketplace where consumers could purchase new as well as used items, similar to eBay. Nokia also announced the availability of the N8 model of smartphones through Online Stuff, a company partnering with Nokia to provide order and payment services. The early 2010 introduction of PayPal, a premier online payment system, is also expected to spur growth. Though online retailing has shown growth potential, a large percentage of the population continues to buy from the traditional brick and mortar outlets. Factors such as high broadband access costs, relatively low internet penetration, and low confidence in the postal system, are expected to impede growth in the medium term.

Conclusion
In summary, the South African economy is a consumer-driven economy, much like the United States where consumer spending accounts for two-thirds of the GDP. The retail sector has managed to overcome the worst of the recession thanks to the resilience of South African consumers and the improving spending power of the emerging middle class, albeit at a slow pace. The fact that interest rates have held steady at 5.5% and consumer inflation has eased to 3.5% towards the end of 2010 bode well for the economy. However, the nation has been plagued by its high unemployment rate (24% in 4Q2010), which could throw a wrench into the works. Now what remain to be seen will be any positive effects of the initiatives presented by President Zumas government, such as the allocation of US$5.4 billion towards tax breaks and job creation programs, to battle unemployment and poverty in South Africa.