TIPS Development Dialogue: The retail sector - an

opportunity for industrialisation?

The spread of supermarkets in the SADC region

Impact on competition and on suppliers

Reena das Nair

24 October 2017

Importance of the spread of supermarkets for

consumers and suppliers

• Findings from CCRED research, inc. with regional partners in

Zambia (ZIPAR) and Zimbabwe (ZEPARU)

• Rapid spread of supermarkets in s. Africa in the past 2 decades

• A growing retail sector can:

– Benefit consumers: potentially lower prices, better quality, wider

range, more offerings, one-stop-shop, convenience, etc.

– Benefit suppliers: growing route to market (RTM) for farmers,

agro-processors and light manufacturers:

• Opens up opportunities to access wider regional markets

• Supports entry and growth into regional value chains and

creates upgrading opportunities, and for industrialisation

• BUT anticompetitive and exclusionary conduct of supermarkets with

market power can limit these benefits

2

What has driven supermarket internationalisation in

s. Africa?

• Rising urbanisation, income, population growth, commodity prices

• Greater sales & profits outside SA: new market-seeking theories of

internationalisation (Narula and Dunning, 2000)

• Maintaining competitive advantage; first mover advantage – asset

augmenting motives (Dunning, 1993, 2000)

• Trade and FDI liberalisation in the region:

– Growth in regional trade of products, esp. food exports from SA

• Modernisation of procurement systems & investments in centralised

distribution (DCs)

• Country-specific political, social and economic context has a major

impact on rate and extent of internationalisation in different

countries

• Routes to market differ in the different countries

3

Shoprite group grocery store numbers in SADC, 2010 - 2016

4

0

10

20

30

40

50

60

70

80

90

2010 2011 2012 2013 2014 2015 2016

Exit 2013

Exit 2013

250 stores

outside

SA

*Includes Shoprite, Checkers,

Checkers Hyper, Usave, OK

Foods, OK Grocer, OK Mini

Mark (old 8 till late), OK Value,

Megasave, Sentra, Friendly

Source: Annual reports

Growing sales and profits outside SA – Higher CAGR

5

0

1 000

2 000

3 000

4 000

5 000

6 000

0

10 000

20 000

30 000

40 000

50 000

60 000

70 000

80 000

90 000

2010 2011 2012 2013 2014 2015 2016

Pro

fits

(ZA

R m

ill)

Sale

s (Z

AR

mill

)

Shoprite RSA salesShoprite Non-RSA salesPnP RSA salesPnP Non-RSA sales

Source: Annual reports

Shoprite RSA profit (2010-2016)

13%

Shoprite Non-RSA profit (2010-2016)

17%

Shoprite RSA sales (2010-2016)

10%

Shoprite Non-RSA sales (2010-2016)

21%

PnP RSA sales (2010-2016)

7%

PnP Non-RSA sales (2012-2016)

20%

PnP RSA profit (2010-2016)

3%

PnP Non- RSA profit (2012-2016)

46%

Formal markets are concentrated (chain store numbers)

6

Shoprite, 30%

Pick n Pay, 30%

SPAR, 21%

Food Lovers' Market;

2%

Woolworths; 9%

Game/Walmart (inc. Cambridge); 5%

Choppies; 2%

South Africa

Shoprite, 35%

Pick n Pay, 15%Spar, 20%

Food Lovers' Market; 2%

Woolworths; 2%

Game/Walmart; 2%

Choppies, 15%

PoundStretcher; 4% Melissa; 5% Zambia

Shoprite; 6%

Pick n Pay; 5% Spar, 14%

Food Lovers' Market;

1%

Woolworths; 11%

Game/Walmart; 1%

Choppies, 42%

Shoppers/Sefalana,

12%

Saverite (Trident/Eureka/Walmart); 9%

Botswana

TM/Pick n Pay, 30%

Spar, 24%Food Lovers' Market; 3%

OK Zimbabwe,

23%

Food World; 3%

Choppies; 17%

Zimbabwe

Barriers to entry maintain high levels of concentration

• Large investments in logistics, DCs, inventory

maintenance (structural)

• Incumbent behaviour can also raise barriers

(strategic):

– Incumbent supermarkets are often anchor tenants

in shopping malls/centre

– Insist on exclusivity clauses in leases with

property developers which can span decades

– Anchors are ‘must-have’ for property developers

– Prevents rivals, free-standing bakeries, butcheries

etc. locating in same centre

– Excludes independent retailers, esp. a concern in

rural areas

– Several complaints to the Comp Comm.

– Being considered in the Commission's Grocery

Retail Sector Market Inquiry7

New entry and alternative business models illustrate

benefits of competition

Fruit and Veg City/Food

Lover’s Market

• Identified gap for fresh produce

• Direct procurement from municipal markets –

alternative RTM for farmers

• Efficient and lean operations

• Lower prices for consumers

… but has taken a long time

Choppies Enterprises • Regional chain from Botswana

• Targets low-income consumers in rural areas &

along taxi routes

• Cheaper products (house brands); long opening

hours

• Alternative RTM for suppliers

Independent retailers • Choice and convenience for low-income

consumers, esp. in townships; foreign owned

• Spurred by social grants

• Successful ones supported by buying groups

• Alternative business model for new entrants

• Alternative RTM for suppliers – less onerous

requirements

Importance of

municipal markets

for farmers

• Important route to market for farmers, especially if they can’t sell directly to

supermarkets

• Independent retailers, spaza shops, vendors buy from municipal markets

• 24 fresh produce markets in South Africa (19 owned by municipalities)

• Joburg market the largest nationally (48% share); Tshwane market (20-22%)

• Joburg market – approx. 6,000 farmers supply around 100,000t of fresh

produce/annum

• Produce is sold to agents in markets; prices set daily

• Farmers still face costs: agent fees, transportation and packaging – recent

allegations of collusion 9

Supermarket buyer power can exclude suppliers

and stifle industrialisation

• High concentration limits supplier options; exposes them

to potential abuse of buyer power

• Seen in negotiation of trading terms:

o High listing/support fees: e.g. +R250,000 for till

positions for sweets

o Volume, advertising & promotional

rebates/discounts

o Long payment periods, onerous requirements,

private standards, packaging requirements etc.

o Access to good shelf space

• Growing private label trend : + ve and –ve for suppliers

• Conduct sometimes ‘exported’ to the region by SA

supermarkets10

Can the Competition Act fix this?

• Current wording and interpretation of the Act - difficult to

prosecute abuses of buyer power:

o Lower prices are, after all, a desirable outcome?

– However, can result in exclusion of suppliers in

the long run; impacts industrialisation

o Evidentiary requirement to show substantial lessening

of competition can be prohibitive

o Being looked into in the retail inquiry

– May result in recommendations, including code

of conduct

o Wording may be re-considered in amendment to the

Act? 11

Critical Success Factors to supply supermarkets – perspectives of suppliers

12

1

2

3

4

5Cost

Quality

Brandawareness

Volume

Lead times

Consistency

Packaging

Innovationcapabilities

Location

Transportcosts

Average across SA, Zambia, Botswana, Zimbabwe

• Suppliers need to

develop capabilities to

meet supermarket

requirements

• Can be difficult,

especially for SMEs, who

don’t have scale and

can’t access capital

• Mismatched standards

e.g. ZABS not well

accepted in SA;

International standards

expensive (HACCP,

FSSC etc.)Source: 80 supplier interviews

• All supermarkets have supplier development initiatives: but ad-hoc, short-

term, not commercially oriented, more CSR

• Some through intervention: SDF ordered by the Competition Appeal Court

in Walmart/Massmart

• Upskill and train farmers to supply fresh produce to stores

– relatively unsuccessful; discontinued

• But some positive stories on the agro-processing side, e.g. Lethabo Milling

– included financial support, offtake agreements, access to good shelf

space, waived listing fees, fast-tracking payments etc.

– current Walmart: moved away from food, focus on established business

that can be up-scaled quickly in FMCG, General Merchandise, DIY and

Building

• Partnerships in the region: Zambia– Shoprite/Zambeef; PnP/Amatheon;

MoUs entered into by Shoprite to support SMEs

Build capabilities through Supplier Development

Programmes

13

• Foster a competitive environment for a diversity of retail

models – Develop municipal markets and lower barriers to entry for farmers into

these

• Open up retail spaces and supermarket shelves – Role for competition authorities, urban planners & supermarkets

• Encourage codes of conduct between suppliers and

supermarkets (incl. ‘regional’ codes/retail charter; e.g.

Namibian charter)

• Open up shelf space to regionally produced product/offtake

commitments: ‘Regional content policy’

• Harmonise basic standards across region and supermarket private standards

• Enter commercially sustainable and mutually beneficial, long-term, SDPs – can be part of code of conduct

14

Some recommendations