Competition among food retailers targeting low-income consumers is intensifying but, as the market becomes crowded, succeeding will be a greater challenge.
Shoprite is the dominant player, while Pick n Pay and Spar have also established themselves and now new entrant Massmart’s Cambridge Food is set to shake things up, but to what extent is unclear.
Syd Vianello, an analyst at Nedbank Capital, said on Friday that the low-income market was one of the fastest-growing sub-categories. But he questioned whether this rapid growth would continue as certain factors, such as child support grants that had helped to underpin demand growth, were already embedded in the system.
Andrew Mills, the marketing director of Pick n Pay’s Boxer, said there was significant untapped opportunity in historically disadvantaged areas, where “we have been expanding our store footprint rapidly. We will continue to be aggressive in our roll-out. However, we are cautious about where we open stores because the decision must be based on whether the location is accessible to consumers who often rely on public transport.”
Spar chief executive Wayne Hook said that low-income consumers represented an opportunity to grow.
Up to 40 percent of Spar stores serve this sector and the group’s expansion will focus on emerging markets rather than affluent areas where Spar is already well represented.
Hook said that margins were lower at these stores, which sold mostly basic food commodities. Spar’s aim was to drive through volumes and manage costs carefully.
Vianello said Shoprite’s dominance in the low-income market was due to its early entrance and its focus on price.
He added that Pick n Pay’s Boxer was an incredibly successful operation, but it flew below the radar. “If someone got… to grips with all the issues, Boxer could become a serious competitor to Shoprite. Boxer is a little gem.”
For Cambridge to be a serious player, it would have to grow a lot faster, he said.
Cambridge said recently it intended to grow to 100 stores by 2015 from its existing 27.
Vianello noted that each year Shoprite opened three times the number of stores Cambridge intended to open in a year.
He added that the shift from informal to formal retail would enable Cambridge to establish itself without taking market share from Shoprite, but it might slow the latter’s growth
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Vianello said Cambridge’s biggest impediment to rolling out stores was space, which meant it would pay over-the-top prices for property. And it could embark on predatory pricing – the pricing of some merchandise at deep discounts – which would put a cap on other players’ gross profit. “But it doesn’t mean it will take market share,” Vianello said.
But the backing of Walmart, which has acquired Massmart, may give it an edge.
Masscash retail director Jay Currie, who is responsible for Cambridge, said Walmart would bring its global procurement expertise, store kitting programme and operating experience in managing costs.
Cambridge targeted the lower end of the market as Spar, Woolworths and Pick n Pay already had 80 percent to 90 percent market share in the upper end. In the lower end, the big retailers have only a 40 percent to 50 percent share, with the balance held by sizeable regional players.
Currie said about 60 percent of food spend was from 80 percent of South Africans who did not own cars, which was why Cambridge focused on commuter nodes. These areas have high foot traffic, but are difficult to access for deliveries.
Cambridge could do this because Pick n Pay and Spar were higher-income brands that had been stretched for lower-income markets. “We’ve come late so we can forget the upper (end of the) market and design our format just for lower (income) consumers.”
Cambridge’s model is a hybrid of retail and wholesale catering for individual customers, bulk-buying by stokvels at negotiated prices and by hawkers. However, it also competes with hawkers.
Hook said Spar’s model for low-income consumers differed from the model for wealthier shoppers in store image and product range, such as chicken feet versus sushi.
He added that the key element to trading in the low-income market was understanding customers, who spent a greater proportion of their money on food and needed to get “bang for their buck”.
Vianello said strategies to enter this market had differed, with Spar using the same brand in all categories, while other retailers had developed distinct brands for low-income consumers. - Samantha Enslin-Payne