South Africa: Spotlight on Key Market Trends in Luxury Goods
With value sales of R5.6 billion (US$684 million) in 2010, the South African luxury goods market ranked 23rd out of the 26 countries covered by Euromonitor International’s luxury goods research and accounted for 0.4% of the global market. In terms of real growth over the 2005-2010 period, South Africa ranked 10th, just behind Hong Kong and ahead of Singapore.
Over 2005-2010, four of the 10 categories researched recorded positive real value growth. Luxury electronic gadgets led the way with constant retail value growth of 68%, followed by fine wines/champagne and spirits (21%), super-premium beauty and personal care (14%) and luxury travel goods (7%). Luxury jewellery and timepieces (-4%), writing instruments and stationery (-7%), accessories (-14%), fine china and crystal ware (-16%), tobacco (-35%) and designer clothing and footwear (-9%) all registered negative growth.
South Africa’s recovery from the global economic downturn of 2008 and 2009 has been relatively subdued, reflecting the country’s elevated unemployment levels. GDP is exceeding the pre-crisis peak but the economy is still operating well below its potential. Real GDP is expected to rise by 3.6% in 2012. Public investment (mainly in infrastructure) is an important driver. More than R160 billion of state money is being put into new roads, ports, energy and other infrastructure, but this spending is likely to create fiscal problems.
Economic growth (in real terms) averaged around 5% per year over 2004-2007 but the pace began to slow in 2008 and real GDP contracted in 2009. The recession (the first since 1992) was mainly due to a downturn in manufacturing and mining, two key areas of the economy. Nearly one million jobs were lost in South Africa during the recession.
Much of South Africa’s economic rebound can be attributed to the massive stimulus programme launched by the government. Short-term investment and consumption related to the football World Cup in 2010 was estimated to have contributed 0.7% to the overall rate of growth. A somewhat better performance was recorded in 2011 when real GDP rose by 3.4%.
Many communities remain woefully short of public services and their discontent is growing. In response, the government has promised clean water for everyone and electricity in all homes by 2012. These goals seem increasingly unlikely given the slow pace of progress, which is being held back by a lack of managerial expertise and skilled workers. A shortage of spare power capacity is another concern. A period of rolling blackouts in 2008 was halted only by the downturn. The problem can be expected to return as the economy gains momentum.
In 2010, the level of competition within the luxury goods retail market was intense as consumers were still somewhat limited in terms of their spending power, and the key drivers of overall sales in the market were non-luxury retailers, offering consumers prices which were relatively low.
South African consumers saw their retail spending power decline further as a result of the rise in inflation, particularly due to an increase in electricity tariffs in 2010. The National Energy Regulator of South Africa (NERSA) granted the state-owned power utility company Eskom a nominal 25% tariff increase for the 2010/2011 financial year in March 2010. This is set to spark a rise in the rate of inflation as producers will experience an increase in the cost of production, which will also then be passed on to retailers in the form of price increases. This, in turn, will have a negative impact on consumer purchasing power.
With the South African economy still recovering from the recession, this tariff increase has been a major blow. Most retailers have already begun to increase their prices in order to meet their operational costs. Luxury retailers are already feeling the impact of reduced spending as consumers are now focusing on buying basic and essential products, and they are cutting the quantities previously purchased of most non-essential products, including luxury goods.
Whilst low- and middle-income consumers tend to shop at department stores such as Edgars, Woolworths and Foschini, which offer a range of designer labels at the lower end of the premium scale, high-income consumers wanting to buy international luxury goods have to visit the luxury boutiques located in the large regional shopping centres, such as the V&A Waterfront in Cape Town or Sandton Mall and Hyde Park Corner in Johannesburg. This is where the bulk of luxury brands are based.
Fine wines/champagne and spirits, super-premium beauty and personal care, luxury electronic gadgets and luxury travel goods the only growth areas over the review period
Accounting for almost half of all luxury goods sales, fine wines/champagne and spirits is by far the largest category in South Africa, estimated to be worth R2.8 billion (US$343 million) in 2010, having increased in constant terms by 21% (70% in current value terms) since 2005.
Led by fine still light grape wine, which accounted for almost 40% of value sales in 2010, the category has been driven by demand from higher-income earners looking for quality over price. These consumers have been less affected by the economic crisis and would sooner cut back on the quantity rather than the quality of the wines and spirits they consume.
As the economy struggles to come out of recession, consumers are still feeling the economic pinch and are curbing their spending when it comes to “absolute luxuries”. Nevertheless, consumers are still choosing quality and are prepared to pay more for premium and affordable luxury products within certain areas. This is especially true when it comes to super-premium beauty and personal care. Indeed, super-premium beauty and personal care, led by super-premium hair care, registered real value growth of 14% (60% in current value terms) over the 2005-2010 period to reach sales of R945 million, making it the second largest category in South Africa after fine wines/champagne and spirits.
Relatively ostentatious products such as luxury electronic gadgets continue to perform well in South Africa. Indeed, luxury electronic gadgets was the fastest growing area within luxury goods over the review period, with constant retail value sales rising by 68% (136% in current terms) to reach R138 million (US$17 million) in 2010. However, while luxury electronic gadgets led growth over the review period, the category accounted for just 2.4% of overall luxury goods sales and was one of the smallest areas covered by Euromonitor International’s luxury goods research. Similarly, while luxury travel goods registered 6.5% real value growth (58% in current terms) over the same review period, in 2010 its total estimated sales reached R116 million (US$14 million) to account for 2% of overall luxury goods sales. As a result, growth within these two areas had only a very limited impact on the overall luxury goods market.
Luxury jewellery and timepieces, writing instruments and stationery, accessories, fine china and crystal ware, tobacco and designer clothing and footwear all underperforming categories
Unlike in more traditional luxury markets, such as France and Italy, where designer clothing and footwear is the largest category, in South Africa it was valued at an estimated R648 million in 2010, giving it a ranking of third behind super-premium beauty and personal care and fine wines/champagne and spirits. This suggests that South African consumers are less interested in designer wear, borne out by the fact that during the recession women’s and men’s designer outerwear declined by 11% and 9% in real terms, respectively, as consumers reined in their expenditure on such items in favour of other luxury goods.
Luxury jewellery and timepieces registered value sales of R313 million (US$39 million) in 2010, having declined by a real 4% over the 2005-2010 review period. The decline experienced by the category over the review period was tempered by buoyant sales in the men’s categories, while women’s luxury jewellery and timepieces both registered real double-digit declines. Men’s luxury jewellery was a significant growth area, up by 41% in real terms in the five years to 2010. This growth was in line with the general trend towards male luxury, but also, ironically, can be attributed to the recession. Worried about job security, many men have abandoned casual business dress for a more formal look in the office, and are therefore interested in accenting their wardrobes with jewellery such as a gold ring or a discreet neck chain.
All categories within luxury accessories (R379 million in 2010) declined in real terms over the review period, with the worst performers being luxury eyewear (-15%) and women’s luxury accessories (-48%). Similarly, luxury fine china and crystal ware, amounting to R123 million (US$15 million) in 2010, and luxury writing instruments and stationery, with sales totalling R50 million (US$6.2 million), have been adversely affected by the recession as consumers have deferred purchasing such items until the economy picks up. In addition, the decline in weddings during the 2008-2009 downturn also had a negative effect on sales of such products.
Luxury Goods South Africa: Retail Value 2010 RSP
Although South Africa possesses the most unequal level of income distribution in the world, total consumer expenditure is still expected to rise strongly by 42.2% in real terms over 2011-2020. Over this period, spending among poorer households will expand more rapidly than among richer households across most categories, thus somewhat narrowing the country’s income inequality. The wealthiest groups in South African society are typically middle-aged and living on the Western Cape, a luxury goods hotspot.
The government has pledged to create five million jobs by 2020. Officials have identified infrastructure, mining and agriculture as priority areas. Economic prospects, however, are being held back by energy problems and weak external demand.
South Africa is one of Africa’s most important and attractive consumer markets. While the largest social class in South Africa in 2010 was social class E, with 46.4% of the population aged over 15 in the lowest-income category, the anticipated expansion of social class A by 6.7% between 2011 and 2020 will increase demand for luxury goods. In turn, this will make for a positive outlook for luxury goods, which is forecast to grow by 16% in the five years to 2015 to reach a value of R6.6 billion.
Two of the 10 categories covered by Euromonitor International’s luxury goods research are expected to post above-average growth in percentage terms over the forecast period, with all categories, apart from luxury tobacco and super-premium beauty and personal care, set to achieve double-digit growth over 2010-2015. The strongest value growth over the forecast period is expected to be seen in luxury electronic gadgets (36%), fine wines/champagne and spirits (34%) and luxury fine china and crystal ware (13%), while luxury tobacco and super-premium beauty and personal care are set to be the poorest performers, declining by 78% and 2%, respectively, over the same period.
Accounting for 56% of total luxury sales, fine wines/champagne and spirits is expected to retain its leading position, reaching a total value of R3.7 billion by 2015, followed by designer clothing and footwear and super-premium beauty and personal care with sales of R961 million and R924 million, respectively. Together, these three leading categories will account for over 80% of overall luxury goods sales by 2015.
Marketers of luxury goods which are looking for more sophisticated consumer markets should seek out the country’s wealthier regions, such as the Western Cape or Gauteng. However, the poorer regions also provide scope for strong consumption growth at the lower, more affordable end of luxury. The region that will see one of the largest per household rises in nominal consumer expenditure between 2011 and 2015 will be Limpopo, one of the poorest regions, with growth of 11.1%. Meanwhile, the region with the highest nominal growth in total consumer expenditure over the same period will be Mpumalanga, at 29.8%, also one of the country’s poorer regions.