Walmart entrance in South Africa is a ‘clear winner’ for consumers

Natalie Berg: Retail Analyst at Planet Retail UK

Walmart’s entry to South African market presents a “huge benefit” and will change the face of retail in the country, and local consumers will be the ultimate winners.

So explains Natalie Berg of Planet Retail, the world’s leading retail analyst firm which covers 9,000 retailers in 211 markets and counts 15 of the world’s top 20 retailers as clients. Berg is co-author of Wal-Mart - Key Insights and Practical Lessons from the World’s Largest Retailer, due for release in April 2012. Berg addressed members of the South African Council of Shopping Centres (SACSC) in Joburg, Durban and Cape Town, to provide insight into what Wal-Mart’s entry to SA will mean for local retail markets.

“Wal-Mart will make retailing more efficient in South Africa which is great news for consumers,” says Berg.

Berg warns that for retailers, Wal-Mart’s entry leaves no room for complacency. However, they should not make the mistake of trying to beat Wal-Mart at its own game.

Wal-Mart is the world’s largest company. It became the biggest international retailer by ruthless cost savings and back-end efficiency which allows it to offer the lowest possible prices and a wide assortment of brands. “It has also been brave, pioneering unchartered territories and formats. Its goal is to serve the underserved,” points out Berg.

SA is unchartered territory for the multinational retailers. With its purchase of a 51% stake in local discount retailer Massmart, Wal-Mart has gained first-mover status.

Berg says the SA market is an appealing prospect for multinational retailers.

“Buying power is increasing. Consumer spending per capita is set to grow by 7.3% compound annual growth rate (CAGR) in the next five years and by 2.3% in real terms. Overall consumer spending will grow by 9.1% CAGR and by 3.7% in real terms,” explains Berg. “Sub-Saharan Africa is the third-fastest growing region in the world and an increase in foreign direct investment will lead to further economic development.”

Importantly, Wal-Mart can have a positive impact on retail in SA for consumers. “This is an opportunity for Wal-Mart to drive efficiencies in SA’s high-cost retail environment, helping emerging consumers ‘save money and live better’,” says Berg.

The change Wal-Mart will bring to the SA retail market is potentially colossal but, as Berg advised SACSC members, it won’t take place overnight.

“Wal-Mart is spending the first year understanding the local consumer, the market and competition before making any major changes. In the long-term, it will embark on supply chain efficiencies to invest in price,” says Berg. “Wal-Mart’s famous everyday low prices won’t happen overnight, although support from Massmart is likely to speed up the process.”

This ‘learning period’ gives local suppliers and retailers a chance to adjust, adapt and prepare for Wal-Mart’s formidable retail model to kick-in.

“Wal-Mart’s first step into Sub-Saharan Africa, while exciting, has been greeted with some uncertainly from the retail community,” says Amanda Stops, GM of SACSC. “Wal-Mart is one of world’s most well-studied companies. This gave SACSC the chance to create a platform to learn as much as possible about the impact it could have on SA retail from an independent source, to drive creative and competitive retail strategies locally.”

Berg explains that fundamental to the Wal-Mart model is its ‘everyday low prices’ (EDLP), achieved through ‘everyday low costs’ (EDLC) and ‘global sourcing’.

EDLP means that, when Wal-Mart’s model is fully in place, it will offer shoppers a lowest price guarantee – beating out other retailers’ normal, and even, promotional prices. Driving down prices for the consumer, Wal-Mart is in a unique position to leverage its global scale in both general merchandise and food sourcing. This global sourcing is key to EDLP.

On the other hand, SA shoppers are most familiar with the ‘promotional high-low price’ model, where consumers can sometimes get products at lower prices during promotions. Berg notes they are not alone. In the UK, promotions make up to 40% of retail sales. “EDLP will take a big adjustment in SA consumer thinking,” says Berg.

EDLP at Wal-Mart is achieved through EDLC – cutting costs, without compromising quality. “Right along the distribution chain from warehouse to store, Wal-Mart will find more efficient ways of retailing in a bid to offer lower prices in store.”

Of course, financial sustainability and environmental sustainability go hand-in-hand. Wal-Mart has three goals: to be supplied 100% by renewable energy, to create zero waste and to sell products that sustain people and the environment.

Berg explains that suppliers will be expected to help Wal-Mart achieve these goals and drive efficiencies through initiatives such as shelf-ready packaging. “SA suppliers should also be prepared for a sustainability assessment, for energy cost reduction, material efficiency, responsible and transparent sourcing and ethical production,” says Berg.

EDLC needs to be in place to achieve EDLP, and Berg notes that this may take some time for Wal-Mart to achieve, with thousands of suppliers and contracts to tie-up first.

Berg told SACSC members to expect investment in Game Foodco format. “This is Wal-Mart‘s bread-and-butter and will likely be a major growth opportunity for suppliers that meet Wal-Mart’s cost and sustainability requirements”.

For local suppliers, there’s the opportunity for low-risk international export by getting their goods on Wal-Mart shelves around the world. Berg suggests suppliers seeking a spot on Wal-Mart’s shelves should focus on their power brands and review the sustainability of their business to identify ways of going greener and reducing costs.

Berg believes that Wal-Mart’s entry to the local retail landscape strengthens the market position of retailers attracting different customers, such as Woolworths. But others will find themselves making fundamental changes to face the new competition.

She says there are many ways retailers can complete with Wal-Mart - but price isn’t one.

Berg stresses completing with Wal-Mart by taking advantage of its weaknesses, rather than trying to fight on its strength - price. As a warning sign, she notes that in the last 20 years 30 food retailing supermarket groups in the US closed bankrupt.

Retailers with a high non-food share are most at risk. “Wal-Mart is likely drive frequent trips through a supercentre FoodCo format and offer cut-throat prices in non-food thanks to global sourcing.”

She proposes delivering a retail experience that is about more than just price. 

“Invest in loyalty schemes to reward and retain your most profitable shoppers. Store remodels, ancillary services and private label quality investment will help you to differentiate, while making higher margins for reinvestment in price.” She also proposes working with suppliers to create exclusive ranges, pack sizes and variants.

Pick n Pay’s Smart Shopper initiative and its ‘Finest’ premium private label are two excellent examples of this, according to Berg.

“Build strengths in areas where Wal-Mart has traditionally struggled, such as perishables and counter service. Establish credibility in food ranges now. There’s also opportunity to beat Wal-Mart in the digital chase, where it has lagged,” says Berg.

All this means we are likely to see a shake-up in the SA retail market, and more good news for the consumer.

“Yes, Wal-Mart will be a major competitive force but it will also ignite positive change, leading to a more efficient industry,” concludes Berg.