ZA GRANITSY

How Can South African

Retailers Grow Global

Sales? TEAM:

Busiswa Ntobongwana

Ragini Govender

Mohammed Abdulla

Hloni Mosikili

Eddie Khumalo

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Contents Executive Summary ................................................................................................................ 3

Introduction:.......................................................................................................................... 3

Objectives ............................................................................................................................. 3

Answer: ................................................................................................................................. 4

Rationale:.............................................................................................................................. 4

Literature Review: ................................................................................................................... 4

Research Process ................................................................................................................... 9

Presentation Slides ............................................................................................................... 11

Conclusion: ............................................................................................................................. 25

References: ............................................................................................................................ 26

Appendix: International Immersions ................................................................................... 27

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Executive Summary

Introduction:

South African retailers have in the recent years faced the wrath of International

competitors. Aggressive expansion coupled with our dwindling exchange rates have

threatened to change the South African retail landscape. As their home markets slow down,

many retailers are looking to expand their businesses abroad. In South Africa we have seen

this not just through entrants to the local market but also through investments by local

retailers abroad.

South Africa has attracted a number of foreign fashion retailers, such as Australia’s Cotton

On, Spain’s Zara, US’s Forever 21, the UK’s Topshop and Sweden’s H & M. Even in the

challenging economic climate faced by South African consumers, most of these International

competitors have reported impressive profits.

Objectives

The objective of our Action Learning Project is to explore opportunities for South African

retailers to increase global sales. The exploratory nature of the research involves the

investigation of some of the key issues currently facing the South African retail industry.

The data gathering process followed a Systems Thinking approach, which focuses on

analysis that that focuses on the way that a system's constituent parts interrelate, it’s

behaviour over time (BOT) within the context of larger systems. This process was done

through questionnaires, interviews with South African Retail Executives responsible for

international expansions to get a better understanding of their considerations for

international expansion, online surveys, data gathering from international immersions

(China, Russia, Ghana) and an extensive literature review.

In an attempt to best understand our research problem we began the process of identifying

the key drivers via our several research cycles. This process provided valuable information

to identify the most appropriate leverage points to address the objectives of the study. Two

key final drivers were eventually identified that promised to address our concern about global

retail expansion:

Future of economic growth

Ease of doing business

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Answer:

Our extensive research process which focused on retail expansion opportunities for South

African retailers in the European, Asian and African markets revealed that South African

companies viewed Africa as a more viable expansion climate. This then led us to the

following proposal:

South African retailers adopt a two-pronged approach in tackling new markets in Africa.

1. Pseudo retail models to penetrate the informal market, not identified with primary

brand however controlled by the primary brand

2. Small box model – own brand, limited range

The above suggested models should not mirror the traditional retail formats as they

presently exist in the South African retail space. The two new proposed retail models will

enable retailers to customise, localise and ensure a cultural fit of these formats in the new

markets. It is hoped that these new retail models will assist in ensuring growth of brand

equity over a short period of time.

Rationale:

South African retailers need to put more resources into expanding into Africa. The retailers

need to penetrate the new markets through the huge informal sector. This will be done by

creating retail formats that are customised to the identified target markets. The informal

sector in the African continents currently constitute the greater portion of the retail spend.

There is a substantial gap of retail income as a percentage of most countries GDP’s.

The key challenges:

Lack of proper modern retail space

High rentals

Perceptions towards shopping malls

Literature Review: Our key research question was: “How can South African Retailers Increase Global

Sales?” In our attempt to respond and mitigate against the concerning slow economic rate

and influx of international competitors into South Africa who have been claiming a significant

share of the market year on year. We embarked on research to find opportunities for South

African retailers to respond to the aggressive influx of International competition into the

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South African retail landscape. We have observed that the South African retail space has

become a fiercely competitive one as the saturated global retail market forces international

players to explore opportunities in emerging markets. The research that we conducted i.e. in

depth interviews with senior executives responsible for International expansions,

International retail immersions in China, Russia and Ghana, local retail immersions in South

Africa and Literature reviews associated with our concern.

Our Literature review was intended to find as much information and statistics about the

viability of South African retail expansion internationally? We were keen to find as much as

possible on the Market Attractiveness of International expansion for South African retailers.

In particular on the future economic growth and the ease of doing business in International

and African retail markets. Our research was restricted to information in the form of articles,

reports, proposals either qualitative or quantitative in nature related to our key concern. The

scope of our literature review was journals, reports, government documents, print and visual

media.

Douglas, K (2016) in an article titled “Are South African retailers feeling pressure from global

brands?” confirmed our growing concern about the aggressive influx of foreign retailers into

the South African retail space. She states that over the last 5 years South Africa has

attracted a number of foreign fashion retailers, such as Australia’s Cotton On, Spain’s Zara,

US’s Forever 21 and the UK’s Topshop. She adds that the most recent entrant is Sweden’s

H & M, which unveiled its first outlet in South Africa under a year ago and has already

expanded to five stores, with another four that was scheduled to open by the end of 2016.

Douglas observed that that these international competitors have reported very strong growth

despite the financial pressures faced by South African consumers. Cotton On hailed South

Africa as its fastest growing market two years ago. Local fashion retailer The House of

Busby which has the master license to introduce international brands into South Africa and is

responsible for the likes of Guess, Mango, Nine West, Aldo, Topshop has been embroiled in

a court battle with international retailer Cotton On who has been poaching staff from The

House of Busby, the judgement handed done prevents Cotton On from recruiting Busby staff

until 2 years after they have left the organization.

South African retailers on the other hand according to Tradingeconomics.com, October 2016

post data reveals that South African retail sales YoY is growing at 3.8% which is lower that

the South African inflation rate which is currently pegged at 6.8% illustrating the decline in

the retail sales of South African retailers.

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Douglas further added that the emergence of international fashion giants into the South

African market has placed a strain on local retailers, which were already struggling to win

over cash – strapped South African consumers. Douglas made reference to Mr Price, which

has a similar product offering to H & M, they reported lacklustre sales in its recent trading

update.

Mustapha an equity analyst at Mergence Investment Managers as cited in Douglas (2016)

observes that local fashion retailers have enjoyed years of very little outside competition,

and hence will have to adjust to a more competitive landscape.

Mohamed a chief investment officer at JM Busha, a Johannesburg-based investment

company as cited in Douglas (2016) notes that local retailers also has to compete with

foreign retailer’s advantage of mass production and economies of scale, adding that H & M’s

pricing was below Mr Price’s when it first entered the market. International competitors have

longer runs and are able to negotiate better manufacturing rates and hence have the

competitive edge over local South African retailers. Zara operates on quick turnarounds in

terms of their factories and manufacturers that are current and trendy, whereas South

African retailers worked on longer lead times and have been pressurized into shortening

them. Mustapha concludes that local retailers will have to adjust their product/pricing

strategy if they want to compete with foreign players. He summarises that “It comes down to

a combination of price and fashion. If your product offering is good, it will move out of the

store quickly and you will not have to mark its price down. Everyone marks down at some

point, but the idea is to have the right product offering and the right price. So it’s a

combination of the two.”

Douglas, Mustapha and Mohamed confirmed the effect and the subsequent pressure felt by

South African retailers as they had to concede a considerable market share which had been

captured by international competitors. Whilst South African retailers reeled from this

international retail invasion, our government was embracing the influx of foreign investments.

In an article titled “Minister cuts red tape to ease doing business” “in the Finweek (2012),

Minister of Finance Pravin Gordhan said that "the time has come to confront uncertainty"

describing the government’s plan to create investment-led growth. This meant creating the

right environment for business to expand and employ more people. "There's a review of the

regulatory regime and its effect on businesses in a number of sectors, as well as

interventions in some institutions to speed up the issuing of licences and to improve

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transparency in government processes. Hence increasing the ease of business for foreign

owned businesses seeking to expand into South Africa.

According to the PWC Global Outlooks study, global retail and consumer goods companies

are eyeing South Africa’s burgeoning middle class. The biggest news was Wal-Mart’s

R16.5bn 2011 acquisition of 51% of Massmart, which operates local retail brands such as

Game, Makro, Builders Warehouse and Cambridge Food. Despite stiff opposition from

Unions and sections of Government, notably the Department of Economic Development,

both of whom feared widespread layoffs, South Africa’s Competition Commission approved

the deal. The American retailer was to initially focus on the South African market, but plans

to use Massmart’s presence in 12 African countries as a stepping-stone into the continent. It

is almost certainly not alone in such aspirations. Further confirming the keen interest foreign

businesses are taking in the South African retail climate. Our research which included

interviews with executives from major South African retailers suggested that South African

companies are keen to invest in Africa rather than in the saturated European and Asian

retail markets. Micheal De Koker, New Business Executive International/ African Market:

The House of Busby (2016) stated that The European market is quite an established

market. We definitely have no plans to expand in Europe. They already have our brands in

Europe. The rand/euro exchange rate is a deterring factor. Europe is also territorially and

geographically remote from us in South Africa and this places huge challenges. It is difficult

to conduct business in Asia due to the different time zones. Our target markets for

international expansion is definitely Africa, Kenya and Zambia due to their stable

economies, good foreign policies, consistent trade legislation and reliable local partners. We

did consider Mozambique but due to their very unstable political / economic climate and lots

of corruption makes difficult business relations. This also applies to Angola which has a very

unstable political / economic climate, lots of corruption and very difficult to get money out of

these countries.

Dominic Barton, Global Managing Director, McKinsey In 2010 the McKinsey Global Institute

(MGI) described the potential and progress of African economies as “lions on the move”.

Today, despite the collapse of global commodity prices and political shocks that have slowed

growth in North Africa, Africa’s economic lions are still moving forward. He states that

Africa’s economic growth is creating new business opportunities that are often overlooked by

global companies. Barton goes on to state that: “Today the rate of return on foreign

investment in Africa is higher than in any other developing region.” He advised that he

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thought that early entry into African economies would provide opportunities to create

markets, establish brands, shape industry structures, influence customer preferences, and

establish long – term relationships, asserting that businesses can help build the Africa of the

future. Barton’s views were substantiated by Acha Leke, a senior partner in McKinsey’s

Johannesburg office as cited by Jayasuriya (2011). He identified three trends for Africa’s

future, which in the long term, are likely to sustain Africa’s growth. First he identified a young

population with a growing labour; Africa is expected to have the world’s largest working-age

population of 1.1 billion. Second, Africa is still urbanizing and much of the economic benefit

lies ahead. This urban expansion is contributing to rapid growth in consumption by

households and businesses. Third, African economies are also well positioned to benefit

from rapidly accelerating technological change, that can unlock growth and leapfrog the

limitations and costs of physical infrastructure in important areas of economic life.

Not all retail expansions in Africa narrate a good ending, in an article titled "Why Nigeria was

a hard nut to crack for Woolworths" in The AFK Insider. Woolworths South Africa (WSA)

report that apart from “high rental costs, duties and complex supply chain processes”

another factor which contributed to this retail expansion failure was that the brand

“Woolworths” was associated with the UK Woolworths brand which went into administration

and eventually closed down 2008.

Tradingeconomics.com, January 2017, is there a scope for retail to actually recover in the

South African landscape. GDP Growth rate projects that in quarter 1 will grow by 1% and

forecast to grow by 2.2% in 2020.

A large body of literature as cited by Jayasuriya (2011) argues that foreign direct investment

(FDI) promotes economic growth (Adams 2009, Alfaro 2000, Borensztein, De Gregorio and

Lee 1998 and Basu and Guariglia 2007). Alfaro (2003:1) contends it can “be a source of

valuable technology ... which can help jump start an economy” while Wacziarg (2001)

suggests FDI perpetuates trade benefits which then promote economic growth. Some even

argue FDI is important for alleviating poverty. Tambula (2004) states increased tax revenues

from FDI results in poverty reduction, Gohou and Soumare (2011) find FDI has more

impacts on welfare in poorer countries than wealthier countries while Mahmoud (2010)

claims FDI has been a key source of employment for women in developing countries.

Masron and Abdullah (2010:115) notes “Foreign direct investment (FDI) is strongly believed

to have a major role to play in the economic development of emerging markets”.

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Niti Bhan (2016) an economist and market entry strategist in writing about the emerging

markets of the African continent emphasizes that flexibility is key, as well as the ability to

negotiate on “time” – frequency, periodicity, duration and “money” – amount. Between time

and money in the equation of the underlying principle of flexibility is the “trusted network” or

human beings. Facetime and financial flexibility have proportionate relationship to the

success of a business model in such an environment.

In conclusion the literature that we reviewed provided a broad general understanding of our

concern, an analysis of the International retail expansion in South Africa and finally several

fresh insights from various writers on the viability of retail expansion for South African

retailers.

Research Process The research method followed was Interviews, observations, online surveys, and

international immersions and research. The key informants were chosen from the wide

spectrum of the retail sector.

Research Cycle 1:

Interviews:

We interviewed Retail Executives from South African retailers that have a presence outside

the borders of South Africa. We chose to collect our data using the qualitative method as a

means of gathering in-depth data that would not be easily obtained through questionnaires

or surveys. This approach allowed us to gather not only hard, factual data, but to collect

emotional data as well. This method allowed us to probe further in an attempt to clarify on

certain responses.

Online Survey:

We developed a list of battery of short, quick response questions to enlist thoughts of South

African retailers. The link to the online survey was emailed to the targeted audience. The aim

was to reach a wider sample. This method would allow convenience for the respondents, to

answer the questions at their own convenient time. It also allows the respondents to provide

only one response to single choice questions which cuts down on error when analysis is

being done. The absence of an interviewer will enable respondents to share personal

information as they are not disclosing it directly to another person.

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Questionnaire:

An interview guide with twenty five open ended questions was developed and administered

to respondents face to face or via email. Where applicable responses were recorded and

transcribed for coding and analysis.

Research Cycle 2:

International Immersions (China & Russia):

In the two countries we visited, we formulated questions from our initial concern for each of

the business meetings we had. In the two countries we interacted with economists, business

leaders (Li & Fung, MasterCard, Alibaba and Suning) Marketing Research Company (TNS).

We had trade immersions to both formal (The GUM, Ecco Mall) and informal retail formats

(Silk Market, Pearl Market and Busi Market).

We also visited global brands that have opened up in these countries (DHL, Rolex & Ikea)

We utilised the observation technique in the gathering of data. It gave us an opportunity to

ask questions.

Research Cycle 3:

African Immersion (Ghana)

In Ghana, we formulated questions from our initial concern for each of the business

meetings we had. We interacted with business Leaders (Mecowa-Ruben,) and a business

incubation entity called Meltwater Entrepreneurial School of Technology (MEST). MEST

caters for aspiring global entrepreneurs with a strong interest in technology and

entrepreneurship from across South Africa, Ghana, Nigeria, Kenya and The Ivory Coast. We

had trade immersions to both formal (Accra Mall) and informal markets (Makola Market).

We also visited global brands that have opened up in these countries (Coca-Cola Game,

Shoprite & Truworths)

We utilised the observation technique in the gathering of data, this methodology of data

gathering gave us an opportunity to ask questions and seek clarifications.

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Presentation Slides

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Conclusion: After an extensive process of several research methods spanning 3 continents, interviews,

surveys, group discussions, observations and retail experiences with approximately 100

retail specialists and in-depth literature reviews. We concluded that it is more viable for

South African retailers to explore creative retail solutions to enable expansion into Africa

instead of the European and Asian markets.

Our solutions related to introducing two new retail business models into Africa and

specifically the untapped burgeoning informal sector.

1. Pseudo – Brands

A pseudo brand refers to a brand not necessarily identifiable with the primary brand but

however controlled by it. This model will focus on the brand and potential transition from

informal to formal by the population in an attempt to create customer acquisition and

retention. The opening of a pseudo-brand into an informal market would serve to create

an experience similar to that of the main brand.

2. Own Brands

This model will focus on building a brand which eventually links to established South

African brand based in malls. This brand will be a format that majors in specific

categories of the primary brand as an entity.

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References: Dominic Barton, Global Managing Director, McKinsey In 2010 the McKinsey Global Institute (MGI) described the potential and progress of African economies as “lions on the move”.

Douglas, K. (2017). Are South African fashion retailers feeling pressure from global brands? [online] How We Made It In Africa. Available at: http://www.howwemadeitinafrica.com/south-africac-fashion-retailers-feeling-pressure-global-brands/ [Accessed 23 Jan. 2017]. Gordhan, P., 2012. Budget speech. Pretoria: Communications Unit, National Treasury. Jayasuriya, D., 2011. Improvements in the World Bank's ease of doing business rankings:

do they translate into greater foreign direct investment inflows?

Masron, A. and Abdullah, H., 2010. Institutional quality as a determinant for FDI inflows:

evidence from ASEAN. World Journal of Management, 2(3), pp.115-128.

Micheal De Koker, New Business Executive International/ African Market: The House of Busby (2016) Niti Bhan (2016) http://nitibhan.com/2015/03/15/navigating-the-nigerian-informal-retail-

sector/ [Accessed 20 Feb. 2017].

PWC Global Outlooks study, Global Retail development index 2014 [Accessed 20 Feb.

2017].

Tradingeconomics.com, January 2017 [Accessed 20 Feb. 2017].

Uqalo Research, Uqalo Advisory (Pty) Ltd Formal Retail in sub-Saharan Africa, February

2016 [Accessed 20 Feb. 2017].

Why Nigeria was a hard nut to crack for Woolworths" in The AFK Insider [Accessed 20 Feb.

2017].

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Appendix: International Immersions

Slide1: Rich Picture

Slide 2: Local/International Immersion sources

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Slide 3: China Summary

Slide 4: Li & Fung Summary

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Slide 5: Rolex Summary

Slide 6: Dave Gosset Summary

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Slide 7: Mastercard Summary

Slide 8: Alibaba Summary

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Slide 9: SA Moscow Embassy Summary

Slide 10: Yan Yanovskiy Summary

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Slide 11: Deloitte Russia Summary

Slide 12: TNS Moscow Summary

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Slide 13: Jamestown (Accra) Question

Slide 14: Coffinmakers Summary

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Slide 15: Simon Africa Overview Summary

Slide 16: ACET Summary

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Slide 17: Stanbic Summary

Slide 18: MEST Summary

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Slide 19: Coca Cola Summary

Slide 20: MECOWA Summary

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Slide 21: Game Summary

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