Understanding our operating environment
In the 2018 financial year, South African consumers experienced a 1% increase in VAT, a new levy on beverages containing sugar, dramatic increases in fuel prices and food safety concerns following the Listeriosis outbreak. The deflation in maize and flour prices offered little respite.
The group operates in a defensive sector as people need to eat and drink. Reduced confidence and disposable income therefore has a lower impact than on other forms of retail. However, positive consumers traditionally spend more, which means lower levels of consumer confidence will affect our business.
Consumers are cash strapped and uncertain about their prospects. Fuel increases mean that the cost of public transport increased, resulting in consumers buying local, thereby stimulating more informal trade in township areas.
Consequently, mid-month peak shopping flatlined in most areas, with bulk purchases happening at month end. We further experienced a shortening in the month-end period: where retailers previously enjoyed up to an eight-day month-end peak, this decreased to an average of three days. This is compounded by consumers cherry-picking among specials and promotions at month end.
Promotional activity is prevalent in retail stores and drives ever-more aggressive advertising campaigns. Loyalty programmes abound to gain a bigger share of consumers’ wallets.
When consumers are under pressure, this has a knock-on effect on retailers, who in turn postpone investing into their stores. Retailer loyalty is declining slightly as they search for better deals and supplier discounts.
These trends are compounded by macro aspects such as climate risk and political change. The drought in the Western Cape highlighted a range of vulnerabilities in the supply chain. We are experiencing increasing levels of community activism around services, which are expected to increase in the build-up to elections in 2019. Some stores experienced strike action which resulted in temporary closures. These incidents disrupt delivery and transport, affecting consumer and retailers’ safety. 125 SPAR stores experienced robberies during the year.
Where neighbouring territories provided healthy and growing demand in the past, most of these countries are under pressure as they fight their own battles with liquidity, commodity cycles, political uncertainty and low-growth scenarios.
The drought in the Western Cape that began in 2015 was declared a natural disaster in February 2018. Fears that municipal water supplies might be cut off on ‘Day Zero’ had a significant impact on the economy of the province, including commercial farming and tourism. Through water-saving measures and water supply augmentation, Cape Town managed to reduce its daily water usage by more than half. Although the crisis was averted, it had a lasting impact on communities and trade. Farmers experienced significant losses and seasonal workers received lower income.
The water crisis had a direct detrimental effect on sales in the northern and central Karoo areas of the province, as well as coastal or holiday areas – the latter due to lower tourism numbers.
At the Western Cape distribution centre, the drought required us to rethink our approach to sustainability. We sunk three boreholes and added an adiabatic cooler to reduce our water consumption and any pressure on municipal supply. We launched an internal awareness campaign by providing employees with regular tips on how to save water and informing them of alternative water wise options. We also assisted our retailers in mitigating water risk and ensured the responsible pricing of bottled water.
We launched a water security assessment in June 2018 at all distribution centres to obtain a holistic view on how much and how SPAR uses water. This information will be used to implement groupwide plans and education around the use of water.