South Africa’s cautious consumer
In
light of the country’s challenging economic environment, how can consumer-goods
companies and retailers succeed in South Africa?
Over the past decade, more than three and a half
million South Africans have been lifted out of extreme poverty. As of 2015, the
country’s consuming class1grew to encompass about nine
million households, accounting for $191 billion2in private consumption. Yet,
despite this expansion of the consumer pool, private consumption in South
Africa has been growing at a fairly subdued annual rate of 2.8 percent over the
past five years and a mere 1.6 percent in the past year—slower than Africa’s
other major economies.
South African consumers
are under tremendous financial pressure due to higher prices (inflation has
averaged 5.4 percent over the past five years, edging up to 6.4 percent in
2016) and low real growth in wages (averaging 1.3 percent in the past five
years). To buy what they need, many South Africans have had to dig into savings
or make purchases on credit.
Our recent survey of
1,000 South African consumers confirms that most of them are indeed concerned
about their financial prospects and thus holding back spending. Almost 70
percent of respondents said they worry about imminent job loss. More than half
said they are living paycheck to paycheck. No surprise, then, that they are
cutting back on spending, delaying purchases, and shopping around for the best
deals.
The South African
survey was part of our global survey involving more than 22,000 respondents from 26 countries Our aim was to understand
how consumers feel about their financial prospects and how these sentiments are
affecting their buying behavior. The insights we gleaned carry important
implications for consumer-goods companies and retailers doing business in today’s challenging South African market.
Concern and caution
Most South Africans are
making cautious financial decisions. Slightly more than half of survey
respondents said they are finding it harder to make ends meet than they did a
year ago, and 55 percent said they live paycheck to paycheck. More than 60
percent agreed that their precarious financial situation is causing them to
delay purchases or cut back on spending.
This pervasive sense of
financial instability in South Africa stands in stark contrast to the rising
confidence of consumers in certain parts of the world. The majority of
consumers surveyed in mainland China and North America, for instance, expressed no
concern about job loss.
Even if their financial
situation were to improve, South African consumers wouldn’t necessarily loosen
their purse strings. Survey respondents said that if their income were to rise
by 10 percent, they’d spend only about 22 cents of every additional rand; the
rest would go into savings and toward paying off debt. Among consumers who said
they’d spend a portion of their extra income, most—60 percent—would buy
everyday necessities. More than 40 percent said they’d allocate some of the
money to clothing and home goods.
Four traits
The survey responses
brought to light a set of behavioral shifts among South African consumers.
These shifts, to some extent, are also evident in other parts of the world,
especially in emerging markets.
Collectively, they underscore the challenges and opportunities that consumer-focused companies will face in the near term. Companies
doing business in South Africa would do well to keep in mind the following four
traits of today’s South African consumers.
1. They proactively search for savings.
Consumers are reducing
their spending in a variety of ways. Seventy-five percent of South Africans
agreed that they’re “increasingly looking for ways to save money.” More than
half said they are tightening their belts by comparing prices, seeking out
sales and promotions, delaying purchases, and shopping at several stores to
find better deals. In addition, they’re changing their eating habits—in
particular, eating at home instead of dining out and cooking from scratch more
often.
2. They are brand loyal—but only if the price is right.
Three out of every four
South African survey respondents said they’ve modified their buying behavior
when it comes to their favorite brands. Many haven’t abandoned their preferred
brands but are shopping around to find retailers that sell these brands at
lower prices. Some are also purchasing in smaller quantities, waiting until the
brands are on sale, or buying only with discount coupons.
3. Once they trade down, they might not go back.
In the survey, 21
percent of South African consumers, compared with only 12 percent of consumers
globally, reported trading down—that is, buying cheaper brands or private-label
products instead of their preferred brands. Among consumers who traded down, 36
percent opted for private-label products. The most vulnerable categories (those
with the highest trade-down rates) were pasta, bottled water, and
household-cleaning supplies, perhaps indicating that some branded products in
these categories may not have differentiated themselves enough and thus don’t
stand out in the minds of South African consumers
Many consumers who
traded down didn’t regret it; they were satisfied with the less-expensive
options. Indeed, 57 percent of those who traded down said they intend to stick
with the less-expensive option and not return to the brand they bought
previously. That said, 43 percent of down-traders in South Africa (compared
with 31 percent of down-traders worldwide) expressed a desire to go back to the
more-expensive brand they used in the past. This suggests that the value brands
and private-label products available in the South African market have room to
improve with regard to quality. It is perhaps also a testament to the powerful
allure of aspirational brands for South African consumers.
A small fraction of
South Africans bucked the trade-down trend: 5 percent decided to upgrade their
purchases in certain categories—in particular, alcoholic beverages and
cosmetics. This indicates that higher-end brands in these categories can thrive
even in a depressed economy, so long as they can persuade consumers that they
are worth the price premium.
4. They shop across channels and find value at
discounters.
Another important
change in spending habits has to do with where people shop. South Africans
claimed to have shifted a considerable fraction of their spending toward modern retailers and away from the small independent retailers collectively known as the
fragmented trade or informal trade. Indeed, South Africa’s modern retail trade
continues to grow at the expense of the fragmented trade, as big-name retailers
expand into more local markets and as more consumers demand the breadth of
products and low prices that large modern retailers provide. In particular,
consumers’ search for value has driven a channel shift to discounters and
hypermarkets, where consumers expect to find lower-priced offerings
Implications for consumer companies
In light of these
consumer behaviors, what actions should consumer-goods companies and retailers
take in South Africa? How can they best position themselves for future success?
In our view, they would do well to consider the following imperatives. Some of
these are applicable to companies operating both in South Africa and elsewhere
in the world; others are specific to the South African market.
At every price point, get credit for value
With many consumers
seeking savings opportunities, companies must give consumers solid reasons to
choose their product or store over alternatives. Our research shows that the
perception of value for money is by far the biggest factor influencing South
African consumers when they consider a brand or a retail store, make a purchase
decision, and decide to become loyal to a brand or store. Our research also
shows that value perception is informed by more than just low prices. Getting
credit for value requires companies to pull several levers—for example,
consistent value communication across all consumer touchpoints, price
investments in the items that consumers are most likely to shop around for, and
targeted promotions.
Products don’t
necessarily have to be in the lowest price tier, but any price premium needs to
be explicitly linked to well-defined benefits. That means emphasizing not just
the emotional attributes of a product but its functional benefits as
well—reminding and reassuring shoppers about the particular features that make
the product worth its price. Consider the success of salon-quality hair-care
brands: consumers feel they’re getting good value for money, even though the
salon-quality brand might be twice as expensive as their old shampoo brand.
Invest in advanced revenue-growth-management (RGM)
capabilities
Through investments in
robust RGM solutions and analytical talent, leading companies arrive at
data-driven answers to critical questions such as these: What role does each
brand and each pack size play in the assortment? How, if at all, does that role
differ by channel and by geographic region? Which promotions are most
effective, and why? Based on such insights, companies devise granular
strategies for their brands, portfolio, pricing, and promotions and tailor these
strategies to each channel, customer segment, and geographic region.
Using advanced RGM
analytics, a South African consumer-goods manufacturer discovered the pivotal
role that smaller pack sizes play in owning the opening price points. In
addition, RGM analytics enabled the company to boost the effectiveness of its
promotions—it not only doubled the return on its promotional investments but
also improved consumers’ perception of the affordability of its products.
Be thoughtful about channel strategy, especially with
regard to the informal trade
As large modern
retailers expand across South Africa, they put more pressure on CPG
manufacturers to increase promotional spending and trade discounts, eroding
manufacturers’ profits. Ironically, many manufacturers themselves are
contributing to the channel shift from informal to formal retail by paying
insufficient attention to the informal trade. For instance, manufacturers often
provide informal retailers with an inferior offering when it comes to product,
promotions, and in-store investment. By contrast, CPG companies that serve the
informal trade in a distinctive but cost-efficient way—providing customized
pack sizes, regular consumer promotions, and an appropriate level of in-store
investment—are rewarded with higher sales and margins. For CPG companies that
don’t have the scale to serve the informal trade directly, effective
third-party-distributor management can allow them to reap the benefits of a
direct-sales system without incurring the full costs of serving many small
outlets themselves.
Be crystal clear about who your target consumer is, and
define a truly differentiating value proposition
Instead of trying to
appeal to the generic “consumer,” the most sophisticated companies gain a
thorough understanding of the various consumer segments and microsegments, as
well as the factors that drive buying behavior in each: What attributes does
each microsegment value the most in a specific category? What will consumers in
these microsegments pay for, and what don’t they care about? Delving into these
questions requires gathering data from multiple sources—including transactions,
consumer research, and social media—and harnessing the power of advanced
analytics.
Retailers, for their
part, must give consumers compelling reasons to shop their stores. Winning
retailers don’t try to differentiate themselves in every possible dimension,
but rather in only one or two. Apparel retailer H&M, for example, built its
reputation on its ability to offer fast fashion at highly attractive prices.
Although other retailers have since entered the fast-fashion fray, H&M’s
stores globally and in South Africa still attract long shopper queues.
Bifurcate your portfolio; avoid getting stuck in the
middle
As South African
consumers trade down and selectively trade up, companies whose portfolios
consist primarily of midtier products might have little to offer. Such
companies could consider developing a low-priced offering aimed at down-traders
and mass consumers; companies that play in categories with high trade-up rates
might also consider developing a premium offering. In these product-development
efforts, a design-to-value approach and skillful management of portfolio
complexity will be essential to achieving profitable growth.
Companies can learn
from the experience of a beverage manufacturer that captured growth in China by
establishing a “price ladder” to encourage trading up within its brands. The
company launched a series of progressively more-expensive offerings, from value
to core to premium and finally to superpremium. It also consistently raised the
price ceiling through innovation—for instance, introducing an “artisanal”
beverage that came in a sleek container with a distinct shape, color, and
design. That product sold at five times the retail price of the brand’s core
offering. The result of this clear pricing hierarchy: double-digit increases in
net revenue and significant market-share growth.
CPG companies and retailers in
South Africa will most likely continue to face low levels of consumer spending
and an increasingly competitive landscape for at least the next several months.
To win in this environment, companies must relentlessly sharpen their focus on
delivering exactly what the customer wants at the lowest possible cost, even as
they seek to build strong brands and position themselves for future growth.
By Damian Hattingh, Karl-Hendrik Magnus, and
Sidhika Ramlakan
http://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/south-africas-cautious-consumer?cid=other-eml-alt-mip-mck-oth-1607
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