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South Africa is facing a credit rating downgrade to junk status in the next few months. Not only is the country becoming an increasingly less appealing environment for investors, but a less appealing environment for locals too. Consumer goods are becoming increasingly expensive, and locals are feeling the financial pressure.
The Reserve Bank has increased its benchmark interest four times since the beginning of 2015, and inflation is currently sitting at 7%, significantly higher than the average 4.5% it was experiencing over the period January to December 2015.
The rapid rise in inflation is due to several contributing factors. 2015 began with regular load shedding or rolling blackouts scheduled by South African electricity supplier Eskom. This was due to the Majuba power plant, which contributed to 10% of South Africa’s power, losing its capacity to generate power after one of its coal silo’s collapsed in November 2014. The following month two further power plants due to diesel shortages. Rolling blackouts were implemented in order to control electricity consumption, with controlled areas being without power for several hours, in accordance with a national schedule. The scheduled outages had a detrimental impact on the economy, impacting the supply of goods and services as factories and offices were unable to operate for hours at a time.
The bad start to 2015 continued as the worst drought in 23 years took its grip on the country. The El Nino brought about severe drought, with farmers planting only a quarter of their crops. Corn prices have surged by 50% as the drought impacted planting. Detrimentally, the country harvested their smallest maize crop since 2007. In March 2015 South Africa had to start importing yellow maize from countries such as Argentina and the Ukraine. This has had a significant impact on food prices as whilst white maize is a staple food for the majority of lower-income consumers, yellow maize is used as animal feed, and in the manufacture of breakfast cereal and snack products. The impact of the weakening Rand is coupled with the drought as the price per tonne of white maize has increased from R1970 per ton in November 2014 and is now approximately R2550 per ton, showing an increase of 29%.
The impact of the drought has been compounded by the plunging Rand against the USD, further boosting the price of imported maize and resulting in double-digit food inflation. The currency suffered detrimental damage due to an unstable political situation. The unforeseen firing of Finance Minister Nhlanhla Nene in early December 2015, replacing him with unknown Des Van Rooyen. This appointment sent the rand plunging by as much as 5.4% against the dollar in a single day. Whilst this decision was reversed a few days later, with former Finance Minister Pravin Gordhan taking up the post, the damage done was detrimental and the Rand has never fully recovered.
Manufacturers are struggling to absorb all the increasing costs and still remain profitable, and subsequently, costs are passed on to the consumer. Whilst manufacturers have taken on differing strategies in order to minimise the impact of rising costs on consumers- for example, the de-gramming of chocolate tablets and bar soap to the increase in the number of larger, bulk packaging in categories such as beauty and personal care (shampoo) and home care (laundry detergent); one cannot fail to notice the rapidly increasing prices on supermarket shelves. Leading supermarket retailer Pick n Pay now promotes their products on-shelf with large red signs saying “Beat inflation” and the price increases are a hot topic amongst South African consumers.
A notable trend in new product launches is cross- branding as manufacturers leverage on existing strong brands when introducing new products. This is also a less expensive and less risky strategy when looking to introduce new products in order to stimulate the market.
The big question is how this impacts consumer’s spending habits, and what manufacturers can do to capitalise on the current consumer purchasing trends. Whilst in the past, manufacturers have offered discounts such as buy and get an extra 20% free, it is now crucial for manufacturers to continue to drive volume sales. Thus, consumers only obtain a discount if they buy in bulk. For example “buy 3 slabs of chocolate for R24.99”, or “two 125g bags of potato chips for R19.90”. This is particularly true for non-essential items such as confectionery and savoury snacks. In terms of home care, leading players may offer promotions for products such as washing detergent whereby if one purchases a liquid detergent, one would get the same brand of washing powder free.
However, it is only the middle to upper LSM groups who can afford to stockpile products when they are on promotion. The lower income consumers are struggling with the soaring food prices and have had to change their purchasing habits to exclude what others may consider essential.
Retailer strategies such as Pick n Pay Smart Shopper will also impact where consumers choose to shop, as savvy consumers look to earning points and cash- back according to where they shop. For every R100 consumers spend, they obtain R1 back. Shoprite/Checkers has implemented a strategy whereby they cap the price of a standard brown bread at just R4.99 a loaf. Considering that the average price of packaged brown bread is closer to R15 a loaf, this offers consumers a considerable saving and is priced lower than it was a year ago. The retailer also has a coupon system, Eezi Coupons, where consumers can get instant shopping discounts via their smartphones. To redeem the coupon, consumers need to request a 6 digit code which is passed on to the teller. The difference in this approach is that savings are only an option on featured products, rather than all products sold through the store.
Overall, there is a move to smaller shopping baskets and more frequent store visits as consumers minimize their cash outlay on one supermarket visit. This trend is compounded by the trend in the retail environment towards smaller format stores which have lower rentals and are more conveniently located with longer opening hours. The days of housewives doing the weekly grocery shopping are changing as more women enter the workforce, and consumers look to saving money.