Food retailing in South Africa

The history and development of the food retail industry in South Africa can be explained by describing the rise of the supermarket industry. Supermarkets started in South Africa in 1951 when OK Bazaars opened a food department store as its flagship store in Eloff Street, Johannesburg. Since then, many entrants have followed into the industry.

According to Weatherspoon and Reardon (2003) there are neither official data nor private estimates (such as those of AC Nielson) on how quickly the supermarket sector in South Africa has grown over the past decade. Generally it is perceived that some supermarket chains started quite early, but have grown rapidly only recently (in particular, since 1994).

Pick ‘n Pay started in 1967 and Shoprite-Checkers in 1979. Shoprite’s major growth came with acquisition of some of South Africa’s existing domestic chains, like the 17-store chain of Grand Supermarkets in 1990 and the 170-store chain of Checkers Supermarkets in 1991. SPAR originated in the Netherlands in 1932, but only came to South Africa by 1963.

Woolworths Food opened as part of a department store and has seen tremendous growth since its inception. All the major role players in the supermarket industry only experienced rapid growth over the last 10 years.

The supermarket was historically the first format used, with location and sales focused on upper-income consumers. While the number of supermarkets increased quickly during the 1990s, by the late 1990s the chains added hypermarkets (to extend their target to middle- and lower middle-class urban consumers, with broad food and non-food selections and low prices). In the late 1990s and early 2000s chains added convenience stores on transport routes and in dense urban areas. During the second half of the 1990s small supermarkets opened in poorer areas by means of franchising (Weatherspoon and Reardon, 2003).

However, until the early 2000s, supermarkets were still focused on consolidating business in the cities. Competitive pressure and relatively saturated markets were experienced at the top end. This pushed some supermarket chains to expand into townships from 2001.

Supermarkets were not permitted to exist in townships and former homeland areas during apartheid (Business Today, as cited by Weatherspoon and Reardon, 2003). The companies entered these regions by domestic capital acquisitions of smaller chains or independent stores located in those areas.

7.3.1 Formal food retailing sector

The formal sector represents a wide spectrum of neighbourhood convenience stores (include forecourts, described as gas stations with convenience type stores, as well as cafes, in the format of internationally known neighbourhood convenience drugstores), speciality stores, boutiques, chain supermarket stores, department stores and large wholesale and retail outlets. The various types of food retail outlets differ in size and in turnover. For food retail outlets to be considered for inclusion in AC Nielson data for the formal food retail sector, it:

• must stock at least four food and four confectionary product classes;

• must have a fixed location;

• must be plainly recognised as a trader; and

• must be accessible from any public thoroughfare.

Food retail outlets excluded from the total are school tuck shops, canteens, kiosks, hawkers and mobile stores, which are very difficult to count, due to various reasons. Makro, which is a wholesale food retailer, as a subsidiary of MassMart retailers, is also excluded due to the fact that Makro only sells canned and non-perishable foods and no fresh or perishable processed foods.

7.3.2 Informal food retailing sector

The informal food retail sector is playing a much larger role in the food retail industry than has been recognised before. Its size, volumes and revenues cannot be determined easily, as

the outlets are not registered as retailers, nor do they pay rent or taxes. RocSearch (2004) estimated that the informal retail market had a turnover of roughly R34 billion in 2004.

Wilson (2003) estimates that there could be over 6,000 spaza shops in South Africa.

Informal food retail stores are independent and include general dealers, small cafes, street vendors, hawkers, tuck shops, primitive street corner stalls and spaza shops. Most procurement by these dealers is from large cash & carry stores and wholesalers, while some products are bought from supermarkets and, to a smaller extent, from local producers. Spaza shops are the most common type of informal outlet and are usually found in townships and poor neighbourhoods.

A spaza shop is usually attached to the owner’s house, but can be in a garage, an outside room, a shipping container or it could be a street vendor. Spaza shops, like many other informal retailers, find their success by offering the clients place convenience. Khuzwayo (2000) states that spaza shops have an advantage due to the fact that they are close to their customers and that their overheads are lower than conventional stores. Also in the favour of the spaza shop owner is the fact that he/she is often a neighbour of the clients.

Another familiar type of food retail outlet found in townships and other urbanised, low income areas are small counter-service stores, where a shop assistant stands behind the counter and passes the client whatever he/she asks for.

7.3.3 Dispersal of retail outlets in South Africa in 2004

Different retail outlets occur more abundant in different regions of the country (Figure 7.2).

Throughout the country, the most common store types by number are the smaller types, such as rural shops, urban counter shops and urban self-services shops. Urban counter shops are usually situated in townships and other poor neighbourhoods, which explain the high frequency of occurrence. These smaller shops totally outnumber the large supermarkets and more formal retail outlets, described as total majors, branded superettes and forecourts.

There are a large number of rural shops in all provinces, except Gauteng and Western Cape, which, together with KwaZulu-Natal, has large numbers of urban counter shops. According to the numbers of outlets, it appears that there are very few ‘majors’, such as supermarkets and hypermarkets, compared to other retail markets. Figure 7.2 indicates the dispersal of various outlets throughout South Africa, as was the case in 2004. It is expected to have stayed relatively the same over the past 4 years, but due to the unavailability of updated information this graph will give sufficient background as to the status of the number of different retail stores per region.

7.3.4 Size of the market

The South African food retail industry had a compound annual growth rate in the period 2003 to 2007 of 2.1%. Between 2006 and 2007 the industry grew slightly slower, with a growth rate of 1.5%, to reach a value of R153 billion (Datamonitor, 2008a,b).

Since the beginning of the this decade, rivalry among food retailers in South Africa became more and more fierce, especially with the rapid penetration of Supermarkets and Hypermarkets. According to data obtained from Datamonitor (2008a,b), supermarkets account for the largest share of the South African food retail industry, generating 55.6% of the industry’s value, whereas food specialists account for 22%, hypermarkets for 8.3% and discounters for a mere 2%. Figure 7.3 indicates the industry segmentation as percentage share by value in 2007.

7.3.5 The South African supermarket industry

Pick ‘n Pay supermarket group originated in 1967 when the first stores opened in Cape Town. Currently Pick ‘n Pay is regarded as one of Africa’s largest and most consistent retailers of food, general merchandise and clothing. Tremendous growth in turnover was experienced between 2001 and 2003, followed by a lower, though more stable rate of growth thereafter. Since 2004 a steady growth rate of slightly higher than 10% were maintained, with the exception of 9% in 2005. After a slight slowdown in annual growth in 2008, the growth rate hiked again in 2009 by 17.39%.The total annual turnover increased steadily to R49.8 billion by the end of the 2008/2009 financial year in February 2009. The Pick ‘n Pay

Figure 7.2. Numbers of different food retail store types per region in South Africa in 2004 (AC Nielson, 2004).

0 5,000 10,000 15,000 20,000 25,000 30,000

Eastern Cape

Northern Cape Gauteng

Mpumalanga / North West

Western Cape

Total Majors Branded Superets Forecourt Rural Urban Counter Urban Self Free State / Kwazulu-Natal Limpopo /

branded operation include a wide variety of activities and outlets; including hypermarkets, supermarkets, family franchising, mini market franchising and home shopping. Datamonitor (2008a,b) listed that Pick ‘n Pay Stores has 159 supermarkets, 190 franchise stores and 16 hypermarkets. The non-Pick ‘n Pay branded operations form part of the Group Enterprise Division, and includes Boxer Supermarkets, Score Supermarkets, TM Supermarkets, Property and Go Banking. Other non food retail stores include 24 clothing stores and 36 liquor stores (Pick ‘n Pay, 2009).

The Shoprite group of companies was established in 1979, when eight supermarkets were purchased in the Cape Province. In 1991, Grand Bazaars was acquired, and the turnover increased significantly. Between 1992 and 1993, the Shoprite group and Checkers Supermarkets merged, to generate a combined turnover of R5.3 billion – 365.5% more than Shoprite obtained by its own in the previous year. In 1996 Sentra was acquired, and in 1998 OK Bazaars. Shoprite currently trades with 1,220 corporate outlets in 17 countries, and had total turnover of R47 billion for the financial year ending June 2008, which is 16.2% higher than the previous year. Among the different outlets included in the Shoprite holdings scope is the Shoprite Checkers Group, which include Shoprite supermarkets (373), Checkers supermarkets (119), Checkers Hyper (24), Usave stores (106), OK Furniture outlets (180), House & Home stores (35), Hungry Lion fast food outlets (113), distribution centres (20) and the OK Franchise Division, which includes OK Foods supermarkets (24), OK Grocer outlets (61), OK Mini market convenience stores (30), OK Power Express stores (14), Sentra stores (74), OK Value stores (19), Megasave wholesale stores (48) and OK Power Express stores (15).

Figure 7.3. Industry segmentation of the South African food retail industry as percentage share by value, 2007 (Datamonitor, 2008a,b).

Supermarkets 55.6%

Food specialists 22.0%

Hypermarkets 8.3%

Discounters 2.0%

Other 12.1%

SPAR originates from the Netherlands, where its first store was opened in 1932 under the concept of ‘voluntary trading’. With the emergence of grocery chains in South Africa in the1960s, a group of eight wholesalers acquired the rights to trade under the name SPAR. By 1963 they were servicing 500 small retailers. The group expanded over time by a number of mergers and takeovers by the SPAR group Ltd., which today operates six distribution centres (in South Rand, North Rand, KwaZulu-Natal, Eastern Cape, Western Cape and the Lowveld region) and supplies goods and services to 1,422 SPAR branded stores across the country. In 1978, Tiger Brands acquired a 30% equity interest in SPAR. The company again became a wholly-owned subsidiary of Tiger Brands in 1988. In October 2004, SPAR unbundled from its holding company, Tiger Brands Limited, and listed as a company on the Johannesburg Stock Exchange (JSE). The group has showed a steady increase in total turnover since 2000.

Between 2004 and 2005 the growth rate decreased slightly, but recovered well to 25% in 2006, 28% in 2007 and 23% in 2008, obtaining a turnover of R26 billion for the 2008 financial year ending 30 September 2008. The SPAR organisational structure consists of SPAR Retailers, who are independent store owners, and SPAR Distribution Centres, which provide leadership and services to the SPAR Retail members. The group has three store formats, SPAR (457 outlets) for neighbourhood shopping, SUPERSPAR (218 outlets) for one-stop, competitively priced bulk shopping and KWIKSPAR (150) for every day convenience. The SPAR Group expanded with two initiatives; ‘Build It’ (building materials and hardware chain) and ‘Tops at SPAR’ (stand-alone liquor stores).

Woolworths Holdings Limited is an investment holding company with two major trading subsidiaries, Woolworths (Proprietary) Limited, in South Africa, Africa and the Middle East, and Country Road Limited, in Australia, New Zealand and Singapore. Woolworths Food Division’s financial results show very positive and stable figures. The total revenue in the food division has increased every year, reaching R10.3 billion by the financial year ending 30 June 2008, which constitutes for 51.6% of the Woolworths group – with a turnover of R20 billion in 2008. The food division only contributed 35% of the company’s turnover in 2000. The Woolworths group offers a wide selection of ranges of apparel, cosmetics, toiletries, footwear, jewellery and food under its own brand name. Woolworths targets the wealthiest South African consumers, with a Living Standards Measurement (LSM) target of 6 and above. The target market of the food division is specifically LSM 9-10, though recent opportunities have been identified for expanding the target market to LSM 8 categories. The stores have a small number of branded products, and a number of private labelled products with its own Woolworths brand.

The annual turnover of each of the four major supermarket chains between 2002 and 2008 are indicated in Figure 7.4.