Paid Post by Absa Insights

Consumer goods sector: How the next 5 years may play out

Food retailers have done exceptionally well, benefitting from an increase in “at home” consumption.

“There’s been a change in consumption patterns,” says Evan Walker, a portfolio manager at 36ONE Asset Management.  “But that is beginning to normalise.”

Similarly, in the clothing category, the “work from home” trend is also impacting on retailers.  Suits are out; tracksuits and pajamas are in. “You don’t even know if I’m wearing trousers,” quips The Money Show’s Bruce Whitfield from behind his webcam.

Nimble retailers with the ability to use data to quickly adjust supply chains haven’t faced the declining sales of less agile peers.

“Wellness” and “local is lekker” are having a moment – and consumers demand value

Covid-19 has massively accelerated consumers’ shift towards anything related to “wellness”, says Anthony Thunstrӧm, CEO at The Foschini Group (TFG).  He expects the dramatic shift to casual wear and wellness to continue for another 12 to 24 months.

Thunstrӧm says consumers across income groups are demanding better value.

SAB already sources more than 95% of the ingredients it uses locally.  It also increasingly procures merchandise and point-of-sale materials in South Africa.

Only about 5% of consumers in South Africa has ever bought alcohol online, says SAB Marketing Director Vaughn Croeser.  “Where we see acceleration is on the business-to-business side – helping our retailers optimise revenues through algorithmic selling and using artificial intelligence to determine the right order quantities.”

TFG sees a significant expansion of local manufacturing of its lines over the next five years.  The rapid shift to online buying during the pandemic will continue, it expects, even as consumers trickle back into the malls.

Investment risks

A great risk to investments into the consumer goods sector remains South Africa’s deteriorating fiscal situation, says Walker.

“If the public sector wage bill doesn’t come down dramatically in the next three years, we’ll be looking at currency north of 13 to the dollar and a bond rate of 20%. It must be curtailed, or we won’t have a domestic economy. It’s as simple as that.”

Landlords have a tough five year ahead of them, reckons Walker. “Retailer are going to be brutal – and they should be!”

“I’m on the side and waiting,” says Walker.

“We’ve had a huge shock to the system with Covid,” says Isana Cordier, Head of Consumer Goods and Services at Absa Corporate and Investment Banking. “Hopefully, people wake up. We need to bring manufacturing back to South Africa. The economy will recover, but next year is going to be particularly tough.”

Consumer health

Before Covid-19, about 90% of TFG customers paid in-store, providing an opportunity to “on sell”. When the pandemic hit, the retailer worked with food retailers to service these clients, and also with Absa to enable digital payments.

TFG is not relying on credit to boost its sales.  In fact, it has reduced its credit offerings to customers.  “Cash growth in our stores have increased,” says Ntuli.  Today, TFG encourages and rewards cash payments, lay-bys and timeous payments of accounts.

“The consumer is definitely under pressure, and I don’t think that’s going to change for a while.”

[46:35 to end]

Link to podcast

This page was paid for by Absa Insights. The editorial staff of CNBC Africa had no role in the creation of this page.