South Africa is a player in the local and international retail industry. Retail like all business operates and is affected by external forces as well as internal forces. The external forces are commonly referred to as macro and micro environmental factors have a direct or an indirect impact on the retail industry.
Retailers do not have much control over environmental forces unlike marketing variables. It is therefore crucial that every retail business identifies these forces and monitors them effectively to reduce negative impact on growth and profit margins.
Retail is primarily about buying decisions and behaviours. Economics play a large part in influencing both individuals and organisations with regard to their buying decisions and behaviours. South Africa like any global player has as a top priority the aim to grow in terms of economic activity.
The effect that the retail sector has on the SA economy and also on international impact of our retail sector on imports and exports are evaluated. The more business is conducted the more tax is available to the government to provide appropriate services and establish its various development programmes.
Facts that are critical to success of South Africa retail industry are looked in relation to Market size and scope of growth of the retail industry in South Africa? Growth prospects and issues related to the industry? Size of segment of the organized market & what are its growth prospects? Major players in South African retail industry, their strategies for growth, and their position in the market? Emerging trends in the South African retail industry? Opportunities & challenges before the retailers in South Africa?
Key findings are summarised, presenting the valid information relating to the contribution of the retail industry in the economic growth of the country. In the final stage of the analysis, a conclusion signifying which segment of Retail is most attractive is made, detailing the reasons for such conclusion, from beginning to end showing importance of the factors contributing to its attractiveness.
Retailing encompasses all activities involved in selling gods or services directly to final consumers for their personal non business use. Although most retailing is done in retail stores, in recent years non-store retailing has been growing much faster than has store retailing. Non-store retailing includes selling to the final consumers through direct mail, catalogs, telephone, the internet, TV home shopping shows, home and office parties, door to door contact, vending machines and other direct selling approaches. (Kotler, 2005) For purposes of this assignment only formal retail will be discussed. There are different type of retailers classified in terms of several characteristics including the amount of service they offer, the breadth and depth of their product lines and the relative prices charged and how they are organised. Major Store Retail types include Speciality Stores, Department Stores, Supermarkets, convenience stores, Discount Stores, Off-Price Retailers and Superstores. (Kotler, 2005 pg368)
The sector encompassing ‘wholesale and retail trade, hotels and restaurants’ is an important contributor to GDP and employment for South Africa. It is evident that the preparations toward hosting of the 2010 FIFA World Cup have likely influenced a large increase in investment in the sector as hospitality services, for example, gear up for this major event. That said, the sector has been hard hit by the recent global economic slowdown, evident in the contraction in growth of the sector itself, as well as decreases in employment. The latter is of serious concern considering that the sector is South Africa’s third largest and also employs 22% of the labour force, with a large proportion being women from the informal sector. (Climate Risk & Opportunity – A15 Retail and Tourism, 2009)
Key Players in the South African Retail Market : Pick n Pay; Metcash Ltd; Massmart Holdings Ltd; Woolworths Holdings Ltd; Spar Group Ltd; Edgars Stores Ltd.
According to the Economist Intelligence Unit, the South African economy is expected to have contracted by 1.8% in 2009 in the wake of the sharp downturn in global demand and commodity prices, tougher financing conditions, weak household spending and low business confidence. Growth will bounce back in 2010 to 2.8% spurred by the hosting of the World Cup. However, the struggling sectors, mainly manufacturing and retail, will remain in doldrums. There is a risk that electricity shortages, will re-emerge in 2010-11, constraining energy-intensive sectors, such as mining, as new base-load power station are not expected to come on stream until 2012. (rru.worldbank, 2010)
The overall Ease of Doing Business ranking slipped this year mainly due to a 22 spot drop in the Starting a Business Indicator. South Africa still ranks in the top 100 in eight indicators. The lowest ranking is in the Trading Across Borders indicator. (rru.worldbank, 2010)
Macro environment analysis
According (Neiman and Bannet (2002), p. 32), Macro Environment takes in consideration of all the external influences that restrain a bearing in the business, but is not compact beneath its direct subject of influence. The importance falls on the renovation that unmanageable micro-variables bring about, and their implications for the business, yet enduring alongside, each other of changes in the environment, in charge to be able to forecast the changes in the environment which can turn to be a difficult mission.
The universe of sociological elements that affect a company’s ability to serve its customers or sell its goods and services. There are six major macro environment forces: cultural, demographic, economic, natural, political, and technological. The cultural environment includes institutions and other forces that affect the basic values, behaviors, and preferences of the society-all of which have an effect on consumer marketing decisions. The demographic environment includes the study of human populations in terms of size, density, location, age, sex, race, occupation, and other statistical information. The economic environment consists of all factors-such as salary levels, credit trends, and pricing patterns- that affect consumer spending habits and purchasing power. The natural environment involves all the natural resources, such as raw materials or energy sources, needed by or affected by marketers and marketing activities. The political environment includes all laws, government agencies, and lobbying groups that influence or restrict individuals or organizations in the society. The technological environment consists of those forces that affect the technology and which can create new products, new markets, and new marketing opportunities. (Dictionary of Marketing Terms)
Regulatory and Political Environment:
Regulatory and political environment denotes local, state, national, and global laws and regulation which concern businesses. Many business decisions are motivated by the legal and regulatory controls (Solomon, Marshall & Stuart. 2006, p. 52). Retail Merchants like other industries are subjected to a number of local and international regulations. Political and legal factors contribute to the environment in which managerial decisions must be made. (Daniels) They are an integral part of the retail operating environment.
There are regulations governing the conduct of business in various sectors of the South African Economy.
Regulatory bodies and processes
the South African Retail Council (SARC (Consumer Goods Council)
A unified retail body that will strengthen retailer’s position and voice in the industry. The objective of SARC is to deal with issues pertaining to retailers’ interests, the pressing challenges facing the retail industry as a whole including: a fragmented retail representation to key stakeholders; and duplication of efforts and costs. As a collective voice for the industry SARC will shape the environment in which retail business takes place in South Africa. Fundamentally, SARC will focus on two particular areas as impacting on the retail industry: Economic & legislative Affairs; and Labour Relations. As a unit within the CGCSA, SARC enjoys the benefit of sharing the existing infrastructure and well established resources currently enjoyed by CGCSA. SARC is mandated to engage in debates and discussions of legislation drafting which will impact on retailers; to give direct input into the South Africa’s regulatory frameworks. SARC’s mandate with regards to labour relations would be to work with the government on labour issues especially regarding transformation and equity compliance.
Members also have an opportunity to network through seminars, workshops and conferences thus getting an opportunity to learn and build relationships; Information and Resources: regular updates on industry position statements, policy papers or briefings and government submissions.
Consumer Goods Council of South Africa
The Consumer Goods Council of South Africa is a Section 21 company representing over 11,000 member companies in the retail, wholesale and manufacturing of consumer goods. Its vision is to be a formidable and respected industry voice in South Africa. Its mission is to promote partnership amongst stakeholders across the consumer goods industry in resolving shared non-competitive matters in the most efficient manner to the ultimate benefit of the consumer. (CGCSA)
In meeting the objectives to the Competition Acts, the commission is focused on restricting anti-competitive practices, eliminating abuse of dominant positions and strengthening merger control. Three institutions are created in terms of the Act to achieve the above objectives:
- The Competition Commission, which is independent but whose decisions may be appealed to the Competition Tribunal and the Competition Appeal Court;
- The Competition Tribunal, which has jurisdiction throughout South Africa and is independent from the competition institutions; and
- The Competition Appeal Court, which has status similar to that of a High Court and jurisdiction throughout South Africa.
(Department of Trade and Industry South Africa) Sources: Government Communication and Information System, Waksman’s Attorneys: Business Guide to South Africa, DTI
Office of Consumer Protection
The Office of the Consumer Protection (OCP) functions as part of the consumer and Corporate Regulation Division of the Department of Trade and Industry (the dti). The OCP administers the Consumer Affairs (Unfair Business Practises) Act 71 of 1988. The office also enforces other legislation administered by the dti that contains consumer protection provisions. The Office of Consumer Protection is committed to protecting consumers against unfair business practices through complaints resolution, investigations, prosecutions, education and voluntary compliance programmes. It does this by:
- Promoting the spirit of fair trade between consumers and service providers;
- Educating consumers about their rights and duties;
- Providing quick and fast resolution of complaints through negotiated settlements;
- Investigating and resolving matters relating to unfair business practices;
- Prosecuting Offenders
ITAC was established through an Act of Parliament, the International Trade Administration Act 71 of 2002, which came into force on 1 June 2003. The aim of ITAC, as stated in the Act, is to foster economic growth and development in order to raise incomes and promote investment and employment in South Africa and within the Common Customs Union Area by establishing an efficient and effective system for the administration of international trade subject to this Act and the Southern African Customs Union (SACU) Agreement. The core functions are: customs tariff investigations; trade remedies; and import and export control.
In the context of Macro Environment analysis a legal system is the mechanism for creating, interpreting and enforcing the laws in a specified jurisdiction. The South African Retail environment is a regulated one exhibiting elements of constitutional law, criminal, civil and commercial laws. According to (International Business Environments and Operations 12th Edition, Daniels, Radebaugh, Sullivan; Pg 158) The constitution of a country is designed to guarantee an open and just political order, the criminal law is designed to safeguard the social order, the civil and commercial laws ensure fairness and efficiency of business transactions. Aspects of all three components bear on the decisions made by managers and investors. This accurately describes the legal environment in which the South African Retail market operates.
The legislation applicable in the country is a method used by the government to regulate retail business practices, defining acceptable practices for conducting business transactions, to specific the rights and obligations of parties engaged in the business transactions and to afford legal redress when needed.(Int. bus Environ & Operations)
The South African legal climate is that of a democratic mixed legal system, engaging, common law, civil laws codified in various legislation, regulations and customary law. South Africa offers a balanced legal and political system safeguarding the interest of consumers as well as corporations, small medium enterprises. The political climate as well as the social environment is stable. The legal environment is derived partly from the political climate in a country and has three distinct dimensions to it: The domestic laws of home country; the domestic laws of foreign markets; International law in general. (http://www.exporthelp.co.za)
Domestic laws govern marketing within a country, e.g. the physical attributes of a product will be influenced by laws (designed to protect consumers) relating to the purity, safety or performance of the product. Domestic laws might also constrain marketers in the areas of product packaging, marking and labeling, and contracts with agents. (http://www.exporthelp.co.za)
South Africa’s commercial legal system has been influenced by English law. English courts create and follow precedents just as South African courts do. (http://www.exporthelp.co.za)
Central to all commercial activities is the contract. The purpose of a contract is to specify the respective rights and obligations of the parties to an agreement and outline specific procedures or actions that must take place.
Buyers and sellers are at times also subject to international law, which may be defined as that body of rules which regulates relationships between countries or other international legal persons. There is neither an ‘international parliament’ empowered to create international law; nor an ‘international police force’ to enforce it. The principal sources of international law are treaties and conventions. Other sources of international law are custom (i.e. international practice that is accepted as law) and the general principles of law recognised by civilized nations or natural law (the basis of human co-existence). The Incoterms (2000), as published by the International Chamber of Commerce, are not, strictly speaking, part of international law.
Another area in which international law plays an important role is in controlling the use of the sea and the environment outside the territorial waters of countries. The control of international air travel by organisations such as IATA (International Airline Transport Association), or structures such as The Hague-Visby Rules in relation to ocean freight, may also be regarded as part of international law. (http://www.exporthelp.co.za)
Legislation affecting the Retail Market in South Africa:-
Labour Laws in South Africa (Department of Labour South Africa)
Workers in the retail sector are protected by a plethora of legislation (listed below). Notably the protection afforded by legislation and regulations deals with: – wages,, hours of work, leave, prohibition of child labor and termination of employment.
Amended Labour Relations Act; Basic Conditions of Employment (Amendment) Act, 2002 ; Basic Conditions of Employment Act, 1997; Basic Conditions of Employment Act
Labour Relations Act ; Labour Relations amendment Act 2002; Employment Equity ; Employment Equity Act ; Skills Development Act ; Unemployment Insurance Fund; Rules for the conduct of proceedings before the CCMA; Skills Development Act; Sectoral Determination: 9: Wholesale and retail sector; No. 85 of 1993: Occupational Health and Safety Act as amended by Occupational Health and Safety Amendment Act, No. 181 Of 1993
There is a plethora of regulations impacting the SA Retail labor and some of these are:-Driven machinery, Electrical Machinery, Construction ,Asbestos ,Lift escalator and passenger conveyer, Electrical Installation, Environmental regulation for workplaces, Facilities, Certificate of competency. South African Paint Manufacturers’ Association: Guide to Health & Safety in the workplace
Employment Equity: Code of good practice: Employment Equity, EEA 2: Employment Equity report, EEA 4: Income differential statement, EEA 10: Occupational categories, Technical Assistance Guidelines on the employment of people with disabilities)
Land and Building Laws (Dealing with Licenses, Registering Property)
Construction Industry Development Board Act, 2000; National Building Regulations and Building Standards Act (Act 103 of 1977); Land Reform (Labour Tenants) Act
Tax Laws (Paying Taxes)
Taxation Laws Amendment Act, 1999; Taxation Laws Amendment Act, 2004; Value-Added Tax Act, 1991
See discussion on Tax below.
Constitution of South Africa
Commercial and Company Laws (Starting a Business, Protecting Investors, Closing a Business)
Companies Amendment Act, 2004; Companies Act, 1973; Competition Act, 1998
Civil Procedure Codes (Enforcing Contracts, Closing a Business, Protecting Investors)
Magistrates’ Courts Rules of Court
Banking and Credit Laws (Getting Credit, Protecting Investors)
Banks Act, 1990; Insolvency Act
Unfair Business Practices Act no 71 of 1988
EXCHANGE CONTROLS (SOUTH AFRICAN RESERVE BANK)
Financial Regulations (Financial Services Board)
Consumer Protection Act no 68 of 2008
(Data to follow)
Consumer Affairs (Unfair Business Practises) Act 71 of 1988
The act deals with unfair business practise which is defined as any businesses practice which directly or indirectly has, or is likely to have, the effect of harming relations between business and consumers, unreasonably prejudicing any consumer, deceiving any consumer or unfairly affecting any consumer.
Competition Amendment Bill, 2008
In 2006 DT reviewed the current competition regulatory framework. The review of the existing competition law regime was informed by a need to respond to the industrial policy objectives such as promotion of competitiveness; Observations on the challenges of the competition authorities in dealing with uncompetitive outcomes resulting in artificially high prices to the detriment of consumers; e.g. competition problems resulting from complex monopolies or multi-firm conduct; To strengthen efforts on cartel enforcement by introducing personal liability on directors who cause their firms to engage in cartel activities. (Department of Trade and Industry South Africa)
To address these, the dti proposes to introduce Competition Amendment Bill, 2008 (“Bill”). The Bill is not intended to overhaul the current competition regime but is focused on key areas aimed at Strengthening the existing provisions of the Competition Act; Providing the competition authorities with extra powers to deal robustly with uncompetitive practices; and Enabling the Competition Commission to play a more proactive role in investigating markets and take measures to ensure market transparency.
Competition Commission Act 1998 (Werksmans Publications)
The Competition Act affects every business operating in South Africa, and the serious consequences of contravention necessitate a sound understanding of its basic principles. An overarching law, the Competition Act, prohibits anti-competitive behavior such as price-fixing and collusion between competitors, and the abuse of dominance. The Act also provides for a merger control regime in terms of which the prior approval of the competition authorities must be obtained for certain mergers and acquisitions.
South African competition law differs from foreign models in that the focus is not purely on competition issues, but also on certain public interest and social goals – such as the promotion of small businesses, the interests of employees and black economic empowerment. South Africa has a well-developed and regulated competition regime based on best international practice. South Africa’s economic system is predominantly based on free market principles. However, as in most developed economies, competition is controlled.
The Act fundamentally reformed the country’s competition legislation, substantially strengthening the powers of the competition authorities along the lines of the European Union, US and Canadian models. The Act provides for various prohibitions on anti-competitive conduct, restrictive practices (such as price fixing, predatory pricing and collusive tendering) and “abuses” by “dominant” firms (firms with a market share of 35% or more).
South African authorities embarked on a major overhaul of competition policy, which led to the formulation of a new policy, the Competition Act, No. 89 of 1998, which seeks to achieve the following objectives:
- To promote the efficiency, adaptability and development of the economy;
- To provide consumers with competitive prices and product choices;
- To promote employment and advance the social and economic welfare of South Africans;
- To expand opportunities for South African participation in world markets and recognise the role of foreign competition in the Republic;
- To ensure that small and medium-sized enterprises have an equitable opportunity to participate in the economy; and
- To promote a greater spread of ownership, in particular to increase the ownership stakes of historically disadvantaged persons (HDIs).
Broad-Based Black Economic Empowerment Act No 53 of 2003
Broad-Based Black Economic Empowerment (B-BBEE) is a specific government policy to advance economic transformation and enhance the economic participation of black people in the South African economy. The Department of Trade and Industry’s (the dti’s) growth strategy includes a focus on broadening participation, equity and access to redress for all economic citizens, particularly those previously marginalised. The Black Economic Empowerment (BEE) Act, No. 53 of 2003, facilitates the dti’s work in this area by establishing a legislative framework for the promotion of BEE; empowering the Minister to issue Codes of Good Practice and publishing Transformation Charters; establishing the BEE Advisory Council; and making provision for matters connected therewith. (Department of Trade and Industry South Africa)
International Trade Administration Act 71 of 2002,
The object of the Act is to foster economic growth and development in order to raise incomes and promote investment and employment in the Republic and within the Common Customs Area by establishing an efficient and effective system for the administration of international trade subject to this Act and the SACU agreement. (Department of Trade and Industry South Africa)
Intellectual Property Rights
South Africa has a developed system of intellectual property law covering patents, industrial designs, copyright and trademarks. It is also a signatory to most of the international conventions in this field.
In terms of Section 24 of the Constitution and the National Environmental Management Act (NEMA), the Department of Trade and Industry (the dti) is to take care that a sound balance is maintained between environmental and socio-economic aspects in all policies, plans, programmes and decisions, including the encouragement of investment, granting of incentives and all other interventions. the dti encourages existing industries to implement Cleaner Production (CP) as an internationally adopted tool that incurs savings, increases competitiveness and elevates companies to higher levels of resource and energy efficiency.
the dti at the 2002 World Summit on Sustainable Development established the National Cleaner Production Centre (NCPC), which implements CP in priority sectors, focusing on textiles, agro-processing and chemicals. NCPC sector projects are conducted in terms of Trade and Investment South Africa (TISA) Customised Sector Programmes (CSP).
POLITICAL ENVIRONMENT (http://www.exporthelp.co.za)
The political environment has an impact on the attractiveness of economic prospects of a particular country or region, also a company’s international activities. The decision on whether or on to transact will be influenced by various factors including financial penalties on a company or if unanticipated events in the political arena lead to the loss of income-generating assets. (http://www.exporthelp.co.za)
The greater the level of involvement in a foreign markets, the greater the need to monitor the political climate of the countries business is conducted. Changes in government often result in changes in policy and attitudes towards foreign business. Bearing in mind that a foreign company operates in a host country at the discretion of the government concerned, the government can either encourage foreign activities by offering attractive opportunities for investment and trade, or discourage its activities by imposing restrictions such as import quotas, etc. (http://www.exporthelp.co.za).Companies should therefore continually adjust their policies accordingly.
Nearly all governments today play active roles in their countries’ economies. Although evident to a greater or lesser extent in most countries, government ownership of economic activities is still prevalent in the former centrally planned economies, as well as in certain developing countries which lack a sufficiently well developed private sector to support a free market system. (http://www.exporthelp.co.za)
Reflected in a government’s attitudes and policies towards business are its ideas about how best to promote national interest in the light of the country’s economic and political resources and objectives. Foreign products and investment seen to be vital to the growth and development of the economy often receive favourable treatment from the government in the form of reduced tax, exemption from quotas, etc. On the other hand, products considered by a government to be non-essential, undesirable, or a threat to local industry are frequently subjected to a variety of import restrictions such as quotas and tariffs. It is also important to be aware of the nature of the relationship between South Africa and the foreign target market. This was a major consideration during South Africa’s political isolation. Fortunately, South Africa’s international relations have normalised and today South Africa is viewed very favourably, from a political perspective, by the rest of the world.
The political environment is connected to the international business environment through the concept of political risk. Political risk is determined differently for different companies, as not all of them will be equally affected by political changes. Political risk is of a macro nature when politically inspired environmental changes affect all foreign investment. It is of a micro nature when the environmental changes are intended to affect only selected fields of business activity or foreign firms with specific characteristics, (possibly by expropriation).
When business is conducted in developing countries, the risks of greatest concern are civil disorder, war and expropriation. When business is conducted in industrialised countries, labour disruptions and price controls are generally seen to pose the greatest threats to a company’s profitability. (http://www.exporthelp.co.za)
As in any other industry, the retail trader has to follow and honour laws and regulations of the host country and central regulations. At some level of the state, the retailer has to pay licence fees, and comply with community health and fire, safety standards, as well as zoning and building codes. At the point of the government and central controls can have a variety from pricing to employee hiring to the insurance of credit (Stewart & Abbott. 1993, P. 115).
South Africa operates an open market economy often retailers have challenges with compliance with the technical standards, regulatory and conformity assessment regimes are substantial, even when they are transparent. (Koch)(Technical Barriers to trade Barriers Faced by South African SMME’S Michael A Peet & Steven F Koch)
Government regulation comes in many forms, such as tax regulation, labour regulation and regulations concerning the import and export of goods. These regulations have both costs and benefits, which government must balance. Regulation is a broad area that impacts on companies in many different ways. A study conducted and using data gathered from a number of South African Company surveys to investigate how government regulations impact on firms showed the following findings:-
Funding, grants and initiatives
Sources of funding for Companies or individuals doing business in South Africa are mainly from Commercial Banks. Funding from Bank Loans affords tax efficient benefits where the funds are used for the purpose of trade and in the production of income. The interest paid on the loan is tax deductible, subject to the transfer pricing and thin capitalization provisions. (DTI, 2009)
Local borrowing virtually includes all forms of borrowing and financing facilities, e.g. bank loans, overdrafts, facilities and finance leases, credit extended to local suppliers of goods and services, borrowing limits are set on pre-set formula.
Types of loans (DTI, 2009) include:-
Mortgage Loans: each commercial bank applies its own policies;
Unsecured loans: to finance working capital through overdrafts, depending on good standing of the company. Alternatively the banks can require security in the form of personal guarantees by the directors, physical security such as bond over unbounded property, or a cession of the book debts of the company.
Discounting and factoring: discounting of e.g. foreign bills, trade bills, bankers acceptances or promissory notes.
Corporate Finance: for medium sized companies, tailor made solutions for larger or more complex needs.;
Export Finance and Guarantees
State Assistance: The state owned Industrial Development Corporation (IDC) finances the private sector to facilitate commercially sustainable industrial development and innovation to the benefit of South Africa and Southern Africa. Finance is in the form of equity, quasi equity and medium tern loan finance. Interest rates are competitive and risk related and based on the prime bank overdraft rate.