Fast-moving consumer goods companies in South Africa are dealing with a rather harsh reality: South Africans are cutting back on most things. When you consider the pressures of general inflation, an effective double tax on the middle class and up (they pay tax and then pay private school fees and medical aid and the like) and then all the other joys such as much higher vehicle prices thanks to a weak rand, it’s really no surprise that there are fewer treats in the shopping basket. In fact, there are just fewer items overall.
This isn’t just an anecdotal statement. In the past week, numbers came out from Libstar and RFG Holdings. In both cases, sales volumes moved in the wrong direction. Pricing increases and mix effects were necessary to try to get earnings moving in the right direction. This makes it exceptionally difficult to manage gross margins. Though pricing increases obviously help with margins, the problem is that manufacturing businesses are all about throughput and cost recovery. If volumes are down, the company is on a treadmill of cost pressures that pricing increases would struggle to mitigate.
If you want a simple way to see the wealth effect around you (or lack thereof), just consider the cars on the road. Go back a decade or two and you would have found that BMW and Mercedes-Benz were the top-selling cars in South Africa. I can still remember a time when a Merc C-Class was the reward for just getting into a decent-paying corporate job. Today, you need to be earning a serious amount of money to even consider a premium German car as a new purchase. Our roads are now brimming with Chinese SUVs instead. The meteoric rise of Suzuki in South Africa is another useful data point for this phenomenon, with Volkswagens now seen as upmarket choices.
What does this mean for the consumer market in general? Clearly, there’s an opportunity for value-based offerings such as Suzuki. The whole “rise of the middle class” dream has shifted down an income level or two. The best growth is to be found in consumers just coming into formal employment for the first time, which is why you see good news stories from retail malls in lower-income areas. At that income level, magic happens when monthly earnings go up by a couple of grand.
Love or hate our government, it has shifted wealth from upper-income groups into lower-income groups
Love or hate our government, it has shifted wealth from upper-income groups into lower-income groups. Ironically, much as we all have so many frustrations, that was pretty much its positioning to the electorate all along. You can either get angry about it, or strategise your wealth and investment exposure accordingly. I recommend the latter.
All for convenience
Another excellent example of a value-based strategy is the barbell menu you’ll find at your friendly local burger joint, or KFC for that matter. A barbell menu has choices at either end of the cost spectrum. Just the other day, I had a Phanda beef burger meal at Steers — less than R50 for a decent-sized burger and chips. I wouldn’t win any health awards by doing it regularly, but it’s hard to argue that I would have had a better convenience outcome at the local grocery store for that price.
For whatever reason, I’ve noticed a trend of convenience meals in grocery stores simply becoming too expensive. In most cases, they are healthier than fast-food alternatives, but families trying to put a warm treat in small tummies once a week are willing to prioritise taste and instant gratification over health.
Which company was historically the best provider of convenience meals to higher-income households willing to pay for convenience? Woolworths Food. What has happened to these consumers? Their affordability is under assault from all sides. The net result? Competitors that can provide a product of acceptable quality at a more affordable price eroded the Woolworths Food market share. Checkers, anyone?
With WeBuyCars soon to be a separately listed company, I’ll be watching that story with great interest. I’m a shareholder in Transaction Capital, so I’ll be one in WeBuyCars as well. I’ve always liked the flexibility of the company’s model and the way it can easily shift the inventory mix towards lower- or higher-priced cars as required. Without being tied to a specific manufacturer, it can also ride whichever wave consumers are riding. Right now, that means more affordable cars.
More than anything, I’m just very glad that I don’t own a Mercedes-Benz dealership in this country.
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