While there are hopes that the two-pot pension system can enhance cash flows for local retailers, discount online retailers that ship from China are a dark cloud on the horizon. Indications are that low-cost online retailers are already munching into the market share of well-established local retailers.
Retailers with a higher proportion of sales in apparel are likely to be more vulnerable. But there is a view that the threat could ease as goods bought online start to incur the same taxation — which would level the playing fields.
That the online apparel market is tough is evidenced by the fact that Takealot has sold Superbalist to a consortium of retail and private equity investors led by Blank Canvas Capital.
At Vukile Property Fund, 80% of the gross lettable area is held by the national retailers (most of which are listed) and 20% by independents.
A large number of these independent retailers are referred to as “second-tier” retailers, which Itumeleng Mothibeli, MD of the Southern African business at Vukile, says are “regional family businesses”. Some are established; they have been around for a while in one province and have now expanded into other provinces in partnership with landlords. Some are mature, significant businesses that have more than 100 stores and are growing. These include Fashion World, Webbers and Jam Clothing.
Mothibeli says these second-tier retailers are nimble, quick to move and customer-centric, and found mainly in township and rural areas. They are likely to be more resilient in the face of the onslaught from online retailers.
These businesses are closer to the ground and offer a more complementary offering than the broader retail market, predominantly the listed players. Apparel retailers in this segment include Ambassador, Power Fashion and Studio 88 — the latter two having been bought by Mr Price. The second-tier retailers are selling items not necessarily sold on Shein, such as prepaid electricity and church uniforms. They understand what the community requires and will try to meet those demands. “Because of the dynamics, there are a lot of complexities [for online retailers].”
These complexities are more particular to rural areas where last-mile penetration can be challenging if there is no fixed address. Then there’s the concern about safety of delivery and a lack of access to data. However, Mothibeli notes: “There’s low penetration but it’s growing aggressively.”
The key for investors in the retail sector is to divine which retailers are most exposed to the threat of offshore online retailers and which will be most resilient. Jean Pierre Verster, CEO and founder of Protea Capital Management, says Shein revolves mainly around cheap clothing of reasonable quality, while Temu peddles “all sorts of odds and ends and knick-knacks”.
The retail pie is shrinking ... and every new competitor that comes into the market, be it an Amazon or a Shein, has to take market share away from somebody else
— Alec Abraham
Verster expects TFG and Mr Price to feel some pain from Shein because it is more focused on value apparel. “I don’t think Shein and Temu go so low into the LSM rankings that they would really affect Pep and Ackermans, or Power Fashion, to a great extent.”
He says when consumers have less money they look for value — which boosts Shein and Temu. “But at some point, if you have so little money that you can’t even afford to try it, you can’t experiment. You would stick to the value you can feel and touch rather than just seeing a picture on your phone. The shopper does not know if the online product is really going to look like the picture. They might not want to take the chance of spending R100 or R200 or R300 [on something] ... which may be delivered in two or three weeks’ time or might not.”
Though Mr Price and TFG still appear vulnerable to the Chinese online retailers, the longer-term impact might be muted. “We might have seen the biggest shift of money being redirected towards Temu and Shein already because of the recent closing of the de minimis loophole of the import duties. Perhaps it won’t grow at the same rate as it has; it might even stabilise.”
Verster points to international trends, stressing that in other countries Temu’s first forays saw a very sharp increase in usage with a lot of money being spent on the platform. “But then it levels off relatively quickly, because it is a bit of a novelty or something people try. But quite often people are disappointed with the quality and don’t become repeat users.”
Verster says food retailers would be most resilient, along with clothing and general merchandise retailers serving the upper-end LSMs, such as Truworths and the premium brands in TFG and Woolworths.
Alec Abraham, senior equity analyst at Sasfin, says Pep is more protected from cheap online retailers than Mr Price. “Shein is more fashion-forward, and I think the Pep customer is not necessarily going to switch to Shein. I think an operator like Truworths is also going to be a bit protected. You have an older customer base and they’re looking for something different.”
Abraham expects that at the top end, Truworths and Zara will be more resilient and at the bottom end, Pep. Those in the middle such as Foschini, H&M and Mr Price will probably feel the most pressure from Shein, he says.
“The main problem we have in South Africa is that consumer wealth is shrinking. The retail pie is shrinking ... and every new competitor that comes into the market, be it an Amazon or a Shein, has to take market share away from somebody else. That’s not a comfortable situation.”
Evan Walker, portfolio manager at 36One Asset Management, reckons the big unknown is whether Amazon will decide to compete in the local apparel market. “It could be a formidable player in that market.”
Shoprite has entered clothing through Uniq by Checkers. Pick n Pay’s clothing segment is also a strong operator.
Walker says all the retailers are vulnerable to online competition. “The advertising is very alluring. And my criticism of most of these South African retailers is they look very dated. The Pepkor stores, the Ackermans stores, the Mr Price stores, the Pick n Pay stores ... you walk through them and they feel like they did 15 years ago; the décor is the same, the posters are the same. The actual retail presence feels very dated.”
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.