Janice Kew
WHEN Brait agreed to pay about $1.2 billion (R14.9bn) for UK fashion chain New Look last month, South African billionaire Christo Wiese’s investment company took a leaf from an increasingly popular book.
Amid a lack of acquisition opportunities on its home continent, Brait followed the likes of retailers The Foschini Group (TFG) and Spar Group in bypassing the potential of Africa’s growing middle class and targeting European consumers instead.
“They’re buying established businesses with established brands, distribution channels and shops, and this in a market that’s showing recovery,” Byron Lotter, a money manager at Vestact, said. “Expansion into Africa is slower and a lot more difficult.”
While sub-Saharan Africa has long-term potential, a shortage of retail locations and high transportation costs are among factors limiting expansion opportunities in that region, according to Guy Hayward, the chief executive of Wal-Mart Stores’ South African unit Massmart. That’s preventing companies taking full advantage of middle class households – those consuming $15 to $115 a day – that Standard Bank Group estimates will grow to 40 million by 2030 from 15 million now.
Retailers’ spending
Local retailers have spent at least $1.5bn buying European companies this year, while Steinhoff International’s $5.3bn takeover of Pepkor will see the furniture seller expand into markets such as Poland, the Czech Republic and Australia.
Steinhoff plans to list on the Frankfurt Stock Exchange this year to increase exposure to investors in Europe.
South African shopping chains have been struggling to grow sales at home as unemployment of more than 26 percent, power shortages and rising inflation stifles consumer spending. In contrast, the UK, for example, is experiencing falling joblessness and had deflation of 0.1 percent in April.
Ronnie Stein, the chief financial officer of TFG, said on May 28 that the fashion chain was growing as fast as it could in the rest of Africa – yet that was not quickly enough to meet the company’s goals. TFG’s shares have increased 17 percent this year, compared with a 12 percent gain by the general retailers index.
TFG expansion
TFG plans to have 375 stores in its Rest of Africa region by 2020, compared with 148 now, yet also agreed to buy UK clothing chain Phase Eight for £140 million (R3bn) in January.
“If we found the same opportunity in South Africa we would have done it,” Stein said. “We are not slowing Africa growth at all, but we’ve now got the opportunity to grow in the rest of the world as well.”
South African retailers expanding in Europe also benefit from diversifying their sources of revenue beyond the rand, according to Stein. The currency has weakened about 17 percent against the dollar in the past year, and is trading close to a 14-year low.
Woolworths closed its three stores in Nigeria in 2013 because of high rental costs, duties and difficulties transporting goods to shops. Seeing faster growth through the purchase of stores in established markets, the seller of organic foods and clothing brands such as Country Road bought David Jones, Australia’s oldest department-store chain, for $2bn last year.
Mr Price Group will open its first test store in Australia in the second half of the new financial year to March 2016, it said on June 2. – Bloomberg