State of the Retail Nation: South Africa


State of the Retail Nation: South Africa

  • The South African FMCG sector achieved 13.4% growth, largely driven by higher prices versus consumption growth.
  • Consumers adapt staples usage, and snacks fight for spending.
  • Not all is doom and gloom — soft drinks are seeing some of the lowest annual inflation.

Analysis provides key insights

Amidst a sea of uncertainty and a bevy of price increases, NIQ’s latest State of the Retail Nation analysis has presented a more focused picture of food inflation and reveals that interesting shifts are shaping the South African FMCG sector (including liquor and tobacco) that is now worth R593 billion in annual sales (at the end of March 2023) — a 13.4% increase from the previous 12 months.

However, our South Africa Consumer Panel Commercial Lead, Steve Randall, stresses a key caveat:

“It’s important to understand that the overall growth we calculate is the combined increase in value (rand sales) and volume (units sold). The stark reality is that this real growth is primarily being driven through price increases and not organic consumption growth.”

Inflation nation — a fresh take

Randall also points out that the consumer price index (CPI) is often overrepresented and sometimes misunderstood when conducting a robust analysis of the real impact of food price increases.

“Overall CPI is currently sitting at 6.3% (down from 6.8% in the previous month), and as a result, people say it is cooling, but food inflation is still sitting much higher at 12.2% and has only started to normalize in April and May of this year.”

The statistical service of South Africa’s food inflation figure has wide recognition in the market, and it is a useful measure, but it can only realistically look at a subset of items and observed prices at a singular point in time.

NIQ is fortunate to have barcode-level information across the broadest market coverage gathered from its vast Retail Measurement. This consists of scanned barcode data at 10,000 modern trade stores, coupled with a statistically representative panel of traditional trade stores, and covering 100,000 FMCG products, providing NIQ with the richest possible dataset from which a robust analysis can be conducted. Randall explains, “We use item-level data to calculate inflation and consider items that have sales last year and this year. Due to our granularity, we use a naturally weighted basket (not a statistically estimated basket), which results in a more accurate view.”

In-depth analysis

Using this focused approach, NIQ conducted a thorough analysis of the inflation pressure areas within FMCG during the last 12 months. Unsurprisingly, cooking oil experienced the highest annual inflation rate (into Q1 2023), having experienced a 40% increase. It remains the biggest contributor towards overall net FMCG inflation, contributing a 7.2% share of inflation even though it accounts for less than 2% of total sales.

Interestingly, the full effect of these massive cooking oil price increases has created a change in consumer consumption patterns around this product. In response to the price increases, volumes purchased have dropped steadily over the last 3 quarters, indicating that consumers are curtailing their usage of this product despite its essential nature.

Cooking oil’s steep prices have also had knock-on effects across the consumption chain, given that it’s also a complementary product to frozen chicken — the price of which has also risen. This means the cost of what could have been considered a staple meal — namely chicken cooked in oil — has drastically increased.

Consumers may look towards alternatives like pork which is now comparably priced to frozen chicken, or tinned protein, which offers a longer, more cost-effective shelf life versus frozen protein. In addition, rice might also be considered a better alternative to maize meal, which has experienced a 17.6% annual increase versus the inflation for rice which is at 1%.

It is important to note that increased promotional intensity, coupled with increased promo seeking from consumers, does bring down the level of inflation in the category. This is evident in a category like rice, while a category such as coffee has seen high inflation (15.5%) due to decreased promotion and higher everyday prices.

Long life is top of mind

Delving into the longer life phenomenon, Randall comments,

“When consumers are expecting prices to go up, they tend to spend more on long-lasting groceries and household items in an attempt to save money by buying products in bulk now to avoid higher prices later.”

Snacks taking a knock

The NIQ analysis also reveals that the snacking super group faces pressure in certain categories, with volumes purchased contracting due to price increases. For example, extruded snacks have experienced 14.9% annual inflation. This is exacerbated because this category is characterized by incidental or impulse spending on perceived treats that are not deemed essential, especially in a tight shopping basket.

“Where consumers used to be able to buy chips, chocolates, and biscuits, they’re now having to spend more on a loaf of bread and other food items and are therefore cutting back on treats. When deciding between a pack of biscuits costing R25, a slab of chocolate at R21, chips at R20, and a 6-pack of yogurt at R18, they may well opt for the yogurt, which represents 6 snacking occasions, or chips that look larger and are therefore seen as offering more value for money.”

On this point, Randall explains that packaging size in snacks also has a large role in the preference dynamics within this category. “There is often a disconnect between package size and the actual volume of a product which at times creates a misperception of real value.”

Beverages keep price increases at bay

Fortunately, it isn’t just doom and gloom when it comes to price increases. Soft drinks are seeing some of the lowest annual inflation at 5.7% — far lower than the average of 10.7% of the other Top 40 products. Whereas soft drinks should be driving 11% of overall inflation, they’re only driving 4.4%. Manufacturers of these products are somehow managing to keep a lid on input costs and absorbing them in the value chain.

Looking ahead, Randall feels resilience can be built into manufacturer and retailer strategies despite the uncertainty around load-shedding and the specter of continued increases in the price of diesel.

“We are advising our clients on key ways to combat current consumer constraints by asking how their products can be offered as solutions to on-the-ground problems like price increases and meeting this need with innovative but responsible pricing strategies. In addition, digging deeper into traditional trade (independent) retail channels that are yielding better volumes than many modern trade outlets at present is also recommended as a key option to consider…”

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