Companies that sell outdoor apparel and equipment appear to have fared well during the recession largely because they cater to specialist markets.

Morné Strydom, the marketing manager of outdoor apparel group First Ascent, believes what sets it and its competitors apart from the rest of the clothing retail sector is the focus on products designed for niche outdoor activities such as climbing, kayaking and mountain biking.

“These are not mainstream sports like soccer, rugby and cricket, where the bulk of the market for outdoor goods is focused,” he said.

Strydom said that the key to staying afloat during the recession was remaining relevant to its target market, who were in the living standards measure (LSM) 8 to 10 bracket.

Despite the downturn, the group managed to maintain an upward trend in sales in the past year, though it did not grow as much as hoped.

Strydom believes the higher-LSM customer, who had been hardest hit by the recession, is likely to still buy outdoor gear for the purposes of “escaping the daily drudgery”.

Cape Union Mart chief executive Philip Krawitz said that the group’s outdoor apparel had to be of exceptional value if customers were to keep coming back. “In this market, products have to be durable,” he said.

Cape Union Mart took a knock in sales performance over the past year largely because of a decline in tourists, and locals staying put during the recession.

Shanay Narsi, an analyst from BoE Private Clients, said that apparel sales performance was likely to be better than equipment, as equipment was more durable.

Foschini financial director Ronnie Stein said that the group’s Due South chain decided to change its merchandising mix and would soon be stocking its own Due South brand as well as the imported and more expensive The North Face and Columbia brands.

Capestorm said that in the past year its destination stores had fared better than stores that were located in shopping centres. Andrew Baxter, the managing director, said the group anticipated improvements in revenue in the summer selling period.

“Rumours that we are listing soon are just that, but we are not ruling out this possibility in future,” Saltzman said last week. Retail analysts believe this move would elbow in on the territory of listed rival Clicks and claim that Dis-Chem may even get a better rating than its contender. According to Christopher Gilmour, a retail analyst from Absa Asset Management, Dis-Chem is far more focused than the Clicks group, since it does not have “distractions like Musica” and its stores generally have a wider range than the Clicks group. “But Clicks excels on the wholesale pharmaceutical side,” he added. Retail chains are steadily moving in on the pharmaceutical market with the Clicks group dispensing medicine at nearly 200 pharmacies in its stores countrywide. Excluding its recently established franchise stores, Dis-Chem has just under 40 outlets nationally but said it planned to expand because having a national presence would allow the company more exposure to medical aid claims. Retailer Pick n Pay, which operates 17 pharmacies, plans to introduce 40 more soon, while Woolworths and Netcare are operating a third trial pharmacy in Eastgate. The Shoprite group has 72 Medi-Rite pharmacies nationwide, of which 15 are in Shoprite stores.

Dis-Chem’s most recent move was the roll-out of its first three franchised stores – in Nelspruit, Port Elizabeth and East London. These would be the first of 11 across the country, Saltzman said.

Explaining the move, he said: “We did extensive research on feasibility for these site locations after which we undertook the challenge of finding the correct franchise partner to work with.”

Other sites for Dis-Chem’s franchise stores include KwaZulu-Natal’s South Coast, Pietermaritzburg and Welkom.

“We are looking to expand beyond South African borders into Africa,” he added. Expansion into Namibia and Botswana was the next likely step.

Retail analyst Syd Vianello of Nedcor Securities believed the franchise model would give Dis-Chem huge momentum but he ruled out the possibility of a listing right away. “If they were thinking of listing, the depths of a recession is certainly not the time,” he said.

Gilmour added that a lot of investors would like to see Dis-Chem listed. He believed that at some point the founders “will cash in their chips and take it to the market”.

Building materials retailer Cashbuild’s dominant footprint in markets with lower household income and rural cash-based areas have proven an effective strategy.

Retail analysts said it was the group’s positioning in the market that had led to its 10 percent increase in operating profit to R251.3 million for the year to June.

“Cashbuild is also an extremely well managed business, with a simple and clearly defined strategy to reliably provide its well understood customer base what they want at reasonable pricing levels, thus a combination of market positioning and good execution have contributed to the results,” said Vanessa van Vuuren, an equity analyst at Sanlam Investment Management.

Cashbuild posted an increase of 10 percent in its full-year headline earnings and said it was optimistic about trading prospects for the next quarter. It issued a dividend of R2.46 a share. Cash and cash equivalents fell by 9 percent to R348m. Revenue increased by 25 percent to R5.065 billion.

A recession can show which retailers have the correct strategy, and those giving value for money are now the victors.

Speaking on the retail sector’s performance this year, Michael van Wyk, the head of retail at Deloitte, said at the weekend that retailers offering value-for-money products would stand out above the rest.

Van Wyk said this could especially be seen where customers had started buying down by purchasing generic brands of goods and not necessarily trademarked goods.

“People strive to buy branded goods, but if customers associate your generic brand with that of a reliable retailer that offers good service, they will continue to buy that product,” he said.

This is already evident in the rising sales of no-name brands at some of the major retailers.

According to Pick n Pay spokeswoman Tamra Veley, Private Label is the biggest brand in Pick n Pay as sales of the in-house brand have outperformed total store sales consistently over the years.

“This can be attributed to the fact that Pick n Pay brands offer guaranteed quality at a better price,” she said.

Shoprite’s private labels represent just more than 10 percent of products in its groceries and perishables categories. “This also puts us in a position to negotiate lower prices with suppliers of branded products,” a Shoprite spokesperson said.

Van Wyk believes people can no longer necessarily afford “nice-to-haves” and retailers must have this trend entrenched in their operations to succeed.

A study on global retailers by Deloitte earlier this year said retailers would continue to concentrate on market share but it would become harder in a recessionary environment.
“Consumers are intensely value-oriented, even more so than in the past. We are seeing this already with consumers shifting to more price-focused retailers,” the study said.

Even so, retail sales for the first half show a marked slowdown in consumer spending, which is likely due to job losses and stringent lending rates. Durable goods sales fell substantially while food and beverages remained the biggest contributor to retail sales.

Van Wyk believes that the downward trend of retail sales is starting to slow. Chris Gilmour, an analyst from Absa Asset Management, agrees.

Retail trade sales at constant prices for June reflected a decrease of 6.7 percent compared with the previous year.

“There is bound to be a better performance in July, although it is not likely to be profound,” Gilmour said. “Salary increases between 8 percent and 10 percent and lower inflation catalysed the last lull in consumer spending at the start of this decade.”

He added that the South African retail sector was slowly pulling out of the recession.

Looking ahead to Christmas sales, Gilmour said they were likely to be better than the previous year on the back of the interest rate cuts this year.

“About 60 percent of the economy relies on consumer spending, so if Christmas sales do not improve, we have a problem.”

Recessions mean wistful meanders past designer dress racks and reluctantly hanging on to your four-year-old car. It means more Land Rovers stay put in showrooms and lavish dinners at swanky restaurants become few and far between.

But retail analysts believe the sales of cosmetics may be bucking the trend and they are tossing the term “lipstick index” around left, right and centre.

This is with good reason. Leonard Lauder, the chairman emeritus of Estée Lauder, coined the term “lipstick index” during a previous recession, claiming that lipstick sales could be an economic indicator in that cosmetics purchases tended to be inversely correlated to economic health.

Of course, the economic indicator bit has since been discredited, but the phrase stuck and has found its way back into analysts’ parlance when considering the local retail industry in a recession.

For instance, if Foschini’s recent sales figures are used as a yardstick, cosmetics sales are bustling while things look rather rocky in the jewellery division. In the past five months, sales of lipsticks and perfumes grew 17.7 percent while that of sparkly golden trinkets fell by 3 percent.

Another recent example came from diversified food manufacturing group AVI, where the sales of personal care goods far outweighed those of pumps and moccasins at its Spitz footwear subsidiary.

One analyst noted that because AVI’s personal care brands, such as Lenthéric, fell into lower price categories than competitors, the group had undoubtedly been on the receiving end of the so-called buying down trend displayed by consumers.

Clicks chief executive David Kneale supports the argument that life’s little luxuries need not cost an arm and a leg.

He posits that even during a recession people still need to relax and feel good about themselves. “Cosmetics remain an affordable indulgence,” he says, adding that the group has already seen exciting growth in this division this financial year.

And so, even though we are spending less, the point is that we’re still buying.

The economy, which comprises about 60 percent consumer spending, needs us to buy. And we will continue buying even if it means we have to look past the branded goods. It appears that in-store brands are on the rebound as people opt to move away from name brands.

Woolworths, Shoprite, Pick n Pay and Spar have all introduced in-store brands, with Pick n Pay’s brand making up at least 10 percent of goods on its shelves.

A few years ago, Woolworths started selling branded goods while Shoprite’s private labels put in a good performance over the past year. But, according to one retail expert, it is not that generic brands are significantly cheaper than the ones with the distinctive labels, it is the value attached to the actual store selling them.

In tough times we look for value – something Woolworths chief executive Simon Susman is determined to get right in his final year at the helm. Recently Susman agreed that the group did not act fast enough in getting Woolworths basics to the counter on time. And it showed in the company’s financials.

At the same time, on the near-opposite end of the consumer spectrum, value retailer Mr Price still appears to be cashing in on the trading down trend through a careful selection of fashion at low prices.

By Roy Cokayne

Major construction firms are confident of growth in their order books beyond next year’s Fifa World Cup projects, which have buoyed the industry in the past lean years, though funding remains a pressing concern.

Industry players spoken to yesterday confirmed a respectable order book beyond 2010 from the private sector, but they encouraged the state’s commitment to infrastructure development, which would significantly boost growth.

Brian Bruce, the chief executive at Murray & Roberts (M&R), said last month the group had a project pipeline worth R96 billion in June last year, including South Africa’s nuclear programme, and R59bn of that pipeline was cancelled during the year.

But Bruce said the group had seen R63bn of new projects come into its pipeline in the same period and a lot of other opportunities were still being considered and investigated behind this pipeline.

“So the world has not come to an end. There is opportunity out there,” he said.

Louwtjie Nel, the chief executive of Wilson Bayly Holmes-Ovcon (WBHO), said a question often asked was what would happen after 2010.

Nel said WBHO had an order book of R15.3bn going into its new financial year compared with R18.3bn last year but only R1.9bn of the work left in its order book related to the World Cup, including stadiums, roads and the King Shaka airport.

He said it had picked up R3bn of private sector work in the past three months, including the Mall of the North in Polokwane, its portion of the joint venture for the Sandton City upgrade, the mixed use Lynnwood Junction development in Pretoria and two other retail property extensions for Atterbury Properties.

“I think we are easily going to pick up another R3bn in retail projects before the end of this year,” he said.

But Mike Wylie, WBHO’s chairman, believed the construction sector was headed for a tough 2011 and 2012.

Group Five chief executive of Mike Upton has expressed concern about the six- to eight-month delay in the award of some public infrastructure contracts, particularly by Eskom, that would have put an additional R10bn to R15bn in contracts in the market.

But Upton said the group’s management saw sufficient opportunities to grow.

Marius Heyns, Basil Read’s chief executive, said despite uncertain times, the trend of development, particularly in sub-Saharan Africa, would soon resume, even if the growth trajectory was flatter.

Steve Meintjes, an analyst at Imara SP Reid, said growth in the construction sector would depend on the government’s ability to fund its capital spending programme timeously.

It should be easy for the state to access money offshore as investors could not get yield anywhere and there was reportedly more interest in emerging markets, particularly for state debt related to infrastructure.

The state should continue with its infrastructure expansion and the construction boom would continue although margins were likely to decline and earnings growth to slow, he said.

By Florence de Vries

In the midst of a recession, clothing firms have stood out head and shoulders above the rest of the retail sector, fuelling debate about the psychology behind sartorial indulgences when times are tough.

Since its makeover, women’s clothing stores within the Foschini group – two years in the marking – are paying off handsomely for the company.

Speaking at the group’s annual general meeting yesterday, Foschini chief executive Doug Murray told shareholders that the ladies’ wear stores, which contribute roughly 30 percent to group turnover, had previously underperformed but that there were some strong results coming through.

Foschini has been repositioned to raise levels of fashionability and quality to be more desirable to its clientele. Only marginal improvements could be seen in the numbers, but Murray said the first five months of this financial year showed “exceptionally strong evidence of a turnaround”.

In the year to February, the star performer in the Foschini stable was the Fashion Express division. Where Foschini stores’ turnover grew 1.2 percent, Fashion Express doubled on that with turnover growth of 5.4 percent, further evidence customers were “buying down”.

“Retailers in other sectors are really struggling where clothing retailers have stood out and are doing rather well,” said Mark Ansley, an equity analyst at Cadiz Asset Management.

Competitor Truworths continued to impress retail analysts in the year to June with sales of merchandise at Truworths, the parent firm of Identity, Uzzi and YDE stores, growing by 11 percent to R6.2 billion.

Overall clothing and general goods showed a slight increase of 0.4 percent in the year to June at Woolworths, while the lower price tags at Mr Price fuelled total sales to grow by 11.9 percent over the 18 weeks to August 1.

“Other (non-clothing) retailers are scratching their heads, but it appears that in a recession, clothing purchases tend to be psychological,” Ansley said. He said the consumer seemed to be feeling pain in so many areas and that clothing had become a “throwaway indulgence”.

“It’s not going to break the bank to treat oneself to an item of clothing.”

Ansley added that the Foschini group was a “volatile player” whose performance varied from year to year.

“But the group does appear to have turned the corner and delivered on the repositioning of the brand.”

Similiarly, Woolworths had battled in the past two years to get its fashionability on par, and chief executive Simon Susman had acknowledged this. Woolworths would continue to focus on “basics” and not necessarily “fashionable” items in the current financial year.

Meanwhile, retail giant Edcon reported slower sales growth for the quarter to June compared with the previous year, but managed to maintain its market share in the clothing retail industry.

Foschini shares added 1.2 percent yesterday to R59.10.

It could as easily have been made by the UK, EU, Irish, Australian, New Zealand or Norwegian competition authorities because the reality is that everyone is doing it.

Just about every competition regulator around the globe has either looked into the workings of their retail sector or will be in the very near future.

The interest reflects the fact that governments across the world are keen to ensure that “consumers are well served by an industry that accounts for a significant proportion of weekly household expenditure”, as the UK competition commission wrote in its report on the subject last year.

Given the high level of interest that surrounds the retail sector in other jurisdictions, accusations that the South African competition commission is responding to pressure from the “new government” seem ill considered. They also reflect a poor understanding of the workings of the competition authorities in this country.

Far from acting at the whimsical instruction of the government of the day, over a year ago the competition authorities announced their intention to focus on key sectors of the economy.

High profile

To this end they have been looking closely at various segments of the food sector, such as dairy, bread and milling, as well as the building industry.

So far, evidence from the high-profile investigations into the food industry certainly justify the commission taking a closer look at other layers of this industry, particularly the all-important retailers.

In addition the Competition Act of 1998 states that one of the purposes of the act is “to provide consumers with competitive prices and product choices”. No doubt a key objective of the investigation will be to establish whether or not consumers are getting these.

Given all of these considerations it is easy to see why local retailers did not seem surprised by the competition commission’s announcement last week that it “has initiated an investigation against major South African supermarket chains Pick n Pay, Shoprite/ Checkers, Woolworths and Spar (who together comprise more than 60 percent of the market by turnover), as well as the major wholesaler-retailers Massmart and Metcash, for alleged contraventions” of the act.

Although the timing of the investigation had been prompted by concerns raised by various stakeholders and the public in general, the commission decided that, before it responded to these concerns, it would undertake its own “preliminary review” of industry practices.

Results from this preliminary review identified several potential concerns. These included concentration of buyer power, long-term lease agreements, category management and information exchange.

Similar concerns have been raised in all of the countries that have investigated their retail industry and will no doubt be referred to by some of the wide range of parties involved in the commission’s investigation.

In March this year the European Parliament approved a resolution aimed at dealing with a variety of concerns in the industry.

These included that, throughout the EU, retailing is dominated by a small number of supermarket chains; that retailers were “fast becoming gatekeepers, controlling farmers’ and other suppliers’ only real access to EU consumers”; and that large supermarkets were abusing their buying power to force down prices paid to suppliers to unsustainable levels and impose unfair conditions upon them.

Below cost

The EU resolution also stated: “Pricing below cost, while not viable in itself for any undertaking, can only be applied by big (diversified) undertakings for a short period of time and only to drive their competitors out of the market.”

The EU believed that, in the long term, such practice benefited neither consumers nor the market as a whole.

Concerns were raised about instances where dominant players used their position to enforce excessive payment deadlines, listing charges, threats of delisting, slotting allowances, retrospective discounts on goods already sold, unjustified contributions to retailer promotion expenses or insistence on exclusive supply.

Significantly the EU resolution dismisses one argument that might have supported our own retailers, which is that their power acts as a countervailing force to the power enjoyed by a handful of large food manufacturers.

“In some member states,” remarked the EU, “both the buying and selling side of the market tend to be equally concentrated, thus aggravating the distorting effect on the market.”

The most recent investigation into the retail sector undertaken by the UK’s competition authorities gives some indication of the very wide range of issues that interest groups in South Africa might expect our own commission to address in its investigation.

These include: the need to protect small shops that contribute to a sense of community identity; widespread availability of cheap alcoholic drinks, which was encouraging alcohol consumption, binge drinking and leading to violence, disorder and loss of social cohesion; the reduction in choice of grocery stores was limiting the choice of healthy food options and contributing to obesity; grocery retailers’ visual requirements for the presentation of fresh produce resulted in waste and increased pesticide use, which has adverse environmental effects; working conditions among agricultural workers supplying the large retailers were of concern, particularly in relation to developing countries.

The rather unwieldy list of issues that the UK competition authorities were expected to address is probably a reflection of the very large role that powerful retailers play in the lives of consumers in today’s concentrated markets.

But as the UK authorities remarked: “There are limits as to how far these issues can be addressed in the context of our investigation.”

Competition policy

Its 2008 report noted that an effective competition policy made a key contribution to the broader economy with a positive impact on economic growth, innovation and living standards.

“The benefits to consumers (of effective competition policy) include lower prices, better product quality, greater choice and more innovation.”

What the UK authorities had to establish had to do with whether the interests of UK consumers are well served by grocery retailers, whether competition is effective and whether it will remain so.

In its final report the UK competition commission found that despite all the issues “in many important respects, competition in the UK groceries industry is effective and delivers good outcomes for consumers”.

Those who have come to expect high drama in this area of public policy may be disappointed to hear that the steps being taken to address the perceived problems in the UK were limited to making recommendations to the government and tightening the provisions of the Supermarket Code of Practice with the possibility of establishing an ombudsman.

In the EU the focus was also on making recommendations to national governments.

Nandi Mokoena, the manager of strategy and stakeholder relations at the competition commission, seems keen to restrain unrealistic expectations among South Africa consumers.

Although the commission has concerns, it has to investigate rigorously each of these concerns before determining whether or not they lead to anti-competitive outcomes. Mokoena refers to what is known as the “rule of reason” contravention of the Competition Act, which, unlike a straightforward price-fixing contravention, requires that the commission shows the effect of the conduct and determines whether the anti-competitive effect outweighs the pro-competitive effect.

“We have to show the effect of the conduct that concerns us, we can’t just talk about it conceptually,” said Mokoena, noting as an example that in some areas exclusive lease agreements could actually be pro-competitive. She refused to be drawn on any possible outcomes, noting that it was a highly complex situation.

She also explained that the commission had not yet decided how to process input from the public. It might be persuaded by the strongly favourable response to the public hearings into banking to provide a public forum.

As for how long it would take, Mokoena said that would be determined by the degree of co-operation received.