despotism disguised
Online shopping has never been as widely used in South Africa as in Europe or the US. Inability for the customer to get exactly they want without substitution is one reason for this, says Alec Abraham, senior equity analyst at Sasfin Bank in Johannesburg.
The majority of the population will never be able to afford the technology for online shopping, or to pay for a delivery, he says.
“South African food is not an online market.” So for a retailer to beef up its online presence would be a “misallocation of capital,” he argues. “It’s not viable to scale up.”
READ MORE: South African food supply to normalise after unprecedented demand
There are aspects of online food shopping that have potential for growth, such as third-party delivery, he says. But a telling sign is that none of the food retailers are willing to disclose the profits earned from online food.
- “It’s an additional service rather than a profit driver, which won’t grow significantly.”
- Pick n Pay, Abraham says, has the best online offering, targeting middle and upper income segments.
- But the company is now trying to attract lower income shoppers.
READ MORE: Coronavirus: South Africa’s Ramaphosa mounts economic relief efforts
The route to profitable growth in food retail, Abraham says, is the use of smaller convenience stores. Rather than one weekly large shop, people who can afford to want to buy fresh, healthier produce more often.
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Woolworths has been aggressive in rolling out smaller formats and is “the leader by a mile in terms of quality and convenience,” having displaced Spar, says Abraham.
Centralised distribution
The pandemic has shown that food retailers have not invested in the necessary infrastructure to be able to handle large online volumes, says Lulama Qongqo, investment analyst at Mergence Investment Managers in Cape Town.
- Shoprite was only at the beginning of online store investment when the pandemic started and so can only fulfill deliveries from less than 10 stores, she says.
- Abraham lives in Sandton in Johannesburg. Within five kilometres there are at least a dozen Woolworths stores. Their spread, he says, is made possible by Woolworths centralised distribution system.
- Woolworths food comparable store sales rose 5.4% in the second half of 2019, with a healthy gross profit margin of 24.6%. That was despite December trade being hurt by load-shedding and poor weather.
READ MORE: South Africa’s Woolworths appoints turnaround specialist as CEO steps down
The fact that Pick n Pay had a decentralised system has counted against them, says Abraham. Only recently have Pick n Pay clearly understood that centralised distribution is needed to support smaller stores.
The company had too much invested in the old system to easily abandon it and so is “very much the latecomer.”
READ MORE: Coronavirus: South Africa expects economy to tank as it grapples with pandemic
Fast food restaurants are likely to be among the losers from healthier diets and local stores, he says. They have already been under pressure as they grapple with a client base that has seen income per head in decline.
“I expect that we are likely to see some more restaurant closures,” as a result of the lockdown.
Bottom line: South Africa’s retailers need to work out how to supply local stores with fresh produce rather than chasing an online market which isn’t big enough.
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