Voluntary rescue highlights risks of African retail sector

Increasing competition, currency volatility and skills remain top of mind among leading African retailers. On the eve of our 2016 African retail feature, news broke of a South African retailer in a spot of bother. Stuttafords – a general retailer founded in 1858 and employing about 1,000 people – applied for voluntary business rescue on 31 October. The group says it has been unable to counter the effects of tough economic conditions and the ongoing consumer migration to lower priced products. A business rescue plan will be presented to stakeholders and should result in an effective operational and financial restructuring of the retailer – a far better outcome than the alternative of liquidation. Stuttafords’ woes come on the cusp of a ‘golden age’ for African retail and prove that the wrong strategy – focusing on high price, high margin products during an economic growth slump – can have disastrous consequences. Although other South Africa-based retailers have seen slowdowns in turnover growth in recent years, they have effectively leveraged from the country’s burgeoning middle class to achieve profits and revenues well in excess of a decade ago. hideRetail nirvana? The evidence suggests that Africa is a retail investor’s paradise in waiting. It is a diverse continent with more than a billion people occupying 54 countries, with the population set to reach 1.5 billion people by 2016. KPMG’s African Consumer and Retail Report 2016 points to a handful of demographic factors that make Africa the go-to destination for retailers with money to invest; the first being its population. Other plus-points include positive population growth (most noticeably in the Sub Saharan Africa (SSA) region); rapid and rising rates of urbanisation; and beneficial changes in the shape of the age distribution curve. “Africans are increasingly moving to cities, making it easier for companies to target certain consumer groups,” notes KPMG. Botswana-based supermarket Choppies Enterprises is an example of what retail entrepreneurs and investors can achieve over relatively short periods of time. Since opening its first store in Lobatse, Botswana in 1986, the group has grown to 183 stores (end-June 2016) located in multiple SSA countries. Botswana (79 stores) remains the main contributor to group turnover, with Zimbabwe (30 stores) and South Africa (61 stores) also contributing strongly. The brand also features in Namibia, Zambia and Kenya – and will have opened its first stores in Tanzania and Mozambique by year-end 2016, making it a true SSA player. Choppies’ recent growth has been enhanced by access to capital through its listings on the Botswana exchange in 2012 and the Johannesburg Stock Exchange (JSE) in May 2015. A comparison of 2015 to 2016 provides a ‘snapshot’ of this capital in action, with a 24% surge in revenue; a 43% jump in the number of stores; a 36% growth in retail space; and a 24% rise in employees to 14,661. Challenges It is not all plain sailing however and there are many challenges facing retail brands that are intent on growing their African presence. Top among these is the inability of large retailers to enter Africa with a one-size-fits-all approach. “There are vast differences across countries – north Africa is far more developed than SSA, while the retail market opportunities in countries differ due to variances in consumer tastes, culture, income and demographics,” notes KPMG. So great is the concern that JSE-Listed Massmart Holdings – an international retailer with ZAR42.3bn in annual sales – recognises the complexity of its African operations among its top ten risks. The group focuses on the “careful pre-selection of countries and locations for new stores, with a thorough evaluation of customs, tax, exchange control and business legislation” to mitigate this risk. Massmart operates 405 stores including 38 outside South Africa, representing 9.3% of group sales. Firms investing into Africa have to overcome a range of country-specific risks, while keeping in mind the current subdued global economic outlook. Among these unique challenges is the vast difference in economic scale across countries in loosely established trading blocs. For example, a retailer may be operating in Botswana, South Africa and Zambia with GDPs of $14bn, $313bn and $22bn respectively. The operating environment in the largest country market ends up being a significant driver of the group result. This influence is illustrated in Choppies’ annual report for the year-end June 2016, where it notes that the severe decline in margins experienced in its Botswanan operations was in part due to the devaluation of the South African rand. “Many African countries have been adversely affected by the double dip of commodities prices and US dollar strength – we have also seen weak and volatile currencies across different African markets, with the dollar becoming a de facto currency in some African markets,” notes Massmart chairman, Kuseni Dlamini. Inward investment However, international retailers will pour into Africa provided it addresses the overarching country-specific constraints to new inward investment. For the most part, growth is not a limiting factor. According to the International Monetary Fund, the SSA region grew at an average annual rate of 6.3% between 2001 and 2013, with resultant increases in GDP per capita. “The expansion coincided with an improvement in business environments and a reduction in political risk, although the commodity boom [since a thing of the past] also played a significant role in the increase in real GDP,” notes KPMG. The professional services firm says the biggest threat to the African retail and consumer segments is the failure by African states to address rampant unemployment. A large working-age population without jobs becomes problematic. KPMG observes: “Apart from economic policies and reforms, other factors that are crucial to ensure that a country can benefit from demographic shifts are the effective mobilisation of national savings and a relatively skilled labour force.” The availability of skills and the ability of firms to retain them are consistent themes in the risk sections of retailers’ annual financial reports. Massmart ranks talent retention and succession as its second most important risk: “The executive committee actively monitors the progress, development and possible succession plans for the ‘Top 200’ employees, as well as monitoring a further 200 employees.” JSE-listed Famous Brands – Africa’s largest branded food service franchiser with 27 brands across 2,614 stores – also identifies the availability and affordability of key personnel as a major risk. It has an impressive African footprint, with fast food outlets in Botswana, Swaziland, Sudan, Nigeria, Ivory Coast, DRC, Zambia, Zimbabwe, Angola, Namibia, Kenya, Tanzania, Malawi, Mozambique, Mauritius and Egypt. Foreign competitors Another risk mentioned by both Massmart and Famous Brands stems from increasing international competition, with the former referring to “the intensifying focus of global competitors on expansion into Africa” and the latter to “competitor attacks on major merchandise categories”. Famous Brands countered this risk by making ‘Prosper in Africa’ one of its strategic imperatives. It has plans to introduce major brands into new African markets such as Angola, Ethiopia and Ghana. The group is also strengthening its African footprint through strategic acquisitions and building on its partnership with Total Petroleum in targeted African countries. “Managing a business is not risk-free and failure is always a hazard, so while we have competed fiercely, we have never been rash. Our track record shows we have got substantially more right than wrong,” concludes Kevin Hedderwick, then group CEO (Mr Hedderwick retired from the group at the end of February 2016). Political risk An article on the African risk landscape is incomplete without some reflection on political risk. In his comment on the political environment, Guy Hayward, CEO at Massmart, summarises the South African outlook as follows: “In the absence of clear and cogent long-term socioeconomic policies however, business necessarily becomes short termist and risk averse; avoids marginal longer-term expansion plans; and/or may seek alternative growth markets.” The group continues to track economic and political developments in the 12 African countries, other than South Africa, that it operates in. “We remain excited, but measured, about the long-term growth opportunities across selected African countries and expect to open five new stores in four countries outside South Africa during 2016,” he concludes.

Voluntary rescue highlights risks of African retail sector

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