Challenging times for retailers and wholesalers

Some of the challenges facing retail and consumer products companies include limited volume growth‚ increasing costs and falling prices.

According to PwC's South African retail and consumer products outlook: 2012-2016‚ after a strong recovery following the financial recession of 2009, with retail sales surpassing a trillion rand in 2011‚ the sector is now slowing significantly.

Volume growth for this year is expected to be just 0.7%‚ down from 3.9% in 2011.

"As pressures on consumers' wallets increase‚ retail sales by value are expected to slow this year. The economic outlook is expected to be modest‚" John Wilkinson‚ PwC retail and consumer leader in South Africa said.

The strain is expected to filter through to food sales in general‚ with sales forecast to edge up to R576.7bn in 2012‚ from R542.3bn last year.

Sales are projected to accelerate again from 2013‚ rising to R787.6bn by 2016.

Non-food sales will also slow down this year‚ with R485.8bn expected in 2012‚ up from R459.6bn in 2011.

At an aggregate level‚ retail sales volumes are forecast to expand by 3.45% over the period 2013-2016‚ Wilkinson said.

According to the report, any new growth in the retail sector will be largely driven by the country's steadily expanding black middle class. By 2016‚ some 11 million households are expected to have an annual income above R89 500 - a level that gives them discretionary spending for a wider range of consumer goods.

Interestingly‚ for those at the upper end of the scale‚ there is a significant drive to increase spending‚ particularly for status purchases such as of motor vehicles and premium alcohols.

For the large pool of consumers at the lower end of the market‚ two key government initiatives - large-scale infrastructure investments across the country and wide-ranging social grants - are helping to support demand.

One of the downside pressures facing this sector is South Africa's growth rate‚ which remains fragile with gross domestic product (GDP) is expected to expand by 2.8% this year‚ down from 3.1% last year.

The report points out that this is far below the rate required to make an effect on unemployment rates and is on a par with more mature economies such as those in Europe.

While low growth is, in part, affected by the global economy and the Eurozone crisis‚ local issues such as policy uncertainties over labour broking and temporary workers are constraining growth.

Furthermore‚ electricity prices are also increasing along with ongoing wage hikes‚ higher fuel costs and rising retail occupancy costs.

"These increases are compounded by the persistent skills shortage‚ particularly among middle management‚" warns the PwC report.

Encouragingly‚ from a growth perspective‚ retailers are focusing on expanding into new areas‚ converting informal trade into formal retail activity‚ increasing their growth into other markets in Africa and diversifying into new services.

According to the report, every major retailer and consumer goods supplier has started to expand into the rest of Africa‚ while expanding their retail space in the south African market.

The move is being led by domestic food retail giant Shoprite‚ which already has stores in 17 countries.

Upmarket retailer Woolworths already has operations in several African countries and fashion group Mr Price recently opened its first store in Ghana.

Pepkor‚ the owner of Pep, is in the midst of a R100m expansion into Nigeria‚ with plans to open a further 50 outlets in various countries.

According to Wilkinson most brands are treating the African aspect of their growth cautiously‚ given the significant risks such as the paucity of infrastructure in many areas‚ excessive red tape and high import tariffs.

"Indirect taxes are also a pressure point‚ particularly when imports transit through countries. Given the risks on the African continent‚ most major retailers and consumer goods companies have adopted a strategy of organic expansion. Many are operating in tandem with property developers‚ opening up in parallel with new shopping mall developments and complexes‚" he said.

According to PwC's report‚ the demand for food‚ beverages and tobacco was estimated at R491.5bn in South Africa in 2011. This is forecast to grow by an average of 11.5% in nominal terms‚ over the 2012-16 period‚ reaching a total value of R847bn by 2016.

Diederik Fouche‚ PwC consumer and industrial products and services industry leader in southern Africa said that for consumer goods companies the primary constraint remain the high levels of unemployment.

Fouche said that in the long-term, the success of the retail and consumer goods sectors will depend on a continued focus on the consumer‚ efficient supply chains and a low cost of doing business.

"Companies that differentiate their products and provide a compelling reason for customers to buy from them will survive. Those that don't will face an onslaught from their competitors. In difficult times like these‚ companies need to re-examine their cost structures‚ operational effectiveness and efficiency‚" he said.

PwC's survey was published in cooperation with the Economist Intelligence Unit's industry and management research division.