Understanding our operating environment
SPAR operates within a highly competitive fresh food and grocery industry. As a wholesaler and distributor of goods and services to independent retailers, servicing a range of customers across the entire LSM market, SPAR is exposed to a number of macro-economic factors and changing consumer behaviours. The retail sector is changing perhaps more rapidly than ever before. The external environment provides the context in which we operate but also helps inform our strategy and identify risks and opportunities.
SPAR supports 1 711 stores in South Africa and 153 stores in the rest of sub-Saharan Africa, providing us with exposure to these economies, with South Africa forming the majority of our exposure. Following the recent acquisition of an 80% stake in BWG, SPAR will in the next financial year also be fully exposed to the economies of Ireland and South West England.
The impact of sustained weakness in the global economy continued during the year under review and undoubtedly had a negative impact on the economies of sub-Saharan Africa.
While weak global demand has impacted the South African economy, domestic issues continued to dampen growth in the country. Consumers’ disposable income remained under pressure due to a number of factors. Rising fuel, food and utility prices affected both our consumers and retailers. Labour unrest weighed heavily on the economy, especially the extended strike experienced in the mining industry, as well as the month-long strike in the metal sector. Job creation remained muted in 2014, while crime and security issues remain a concern for consumers and retailers alike. The country’s broader economy struggled to reach a growth rate of 2%. Business confidence dropped to the lowest levels seen in 14 years, while consumer confidence further declined.
Operations in the rest of the African continent remain a second engine of growth. Despite the partial dependence on faltering commodity prices, expansion in sub-Saharan African economies remained resilient. However, these opportunities are not without risks and challenges, including political risk, currency risk and overcoming the local knowledge gap. (For more information on how SPAR has overcome these challenges in one such African country, see our case study on the Angolan opportunity).
Competition is high in all the markets we serve and business operating environments remain challenging. The landscape is characterised by aggressive competitor marketing activity and new entrants, including non-traditional competitors. Demand for retail goods is showing a steady increase with a shift away from traditional, informal retailers to a modern shopping mall experience. This has resulted in fewer traditional convenience strip mall developments being opened, which have historically been the format of choice for SPAR stores. To mitigate this risk, SPAR fosters relationship with developers to ensure access to newly planned property and retail developments.
REGULATIONS AND LEGISLATION
During the past few years, new legislation, including the Consumer Protection Act, the Liquor Act, BBBEE legislation and labelling requirements, has changed many aspects of retailing. This has resulted in a more challenging retail environment in South Africa. SPAR remains committed to supporting our retailers in complying with all relevant legislation and regulations.
The outlook for global growth remains modest with some signs of recovery forecast.
In South Africa, economic growth is expected to remain subdued in the new financial year. Market conditions are expected to remain tough with possible additional strain experienced by both retailers and consumers due to rising interest rates, power outages and the risk of further labour unrest.
Growth in sub-Saharan Africa is expected to remain strong at 2.5% and in Ireland the economy is expected to improve further, with employment gaining momentum and gross domestic product expected to grow by 5%.