18 Nov 2013 SA’s food retailers’ battle for LSMs 8-10
Woolworths is riding high in SA’s food retail sector, generating sales growth and profitability well ahead of its peers. But success attracts competition, particularly when the stakes are as high as they are in Woolworths’s focus market: the upper-income LSM 8-10 segment. A great article on their different approaches.
The attractions of the LSM 8-10 segment go beyond higher incomes. The segment is also growing apace, having expanded from 16,5% of SA’s adult population to 25% over the past decade, reports Afrifocus. In the process, 4,2m adults have entered the LSM 8-10 segment since 2003, boosting the total to over 9m.
For now Woolworths appears to be on an unstoppable growth path in food retail, thanks to a winning strategy. Multifocused, the strategy includes aggressive growth of trading space, entry into the big supermarket space and expansion of the product range, particularly in the area of branded groceries.
“Our strategy has received positive acceptance from customers,” says Woolworths CE Ian Moir. “We will increase our food trading space by 9% this [financial] year.”
The results speak for themselves and include an acceleration of food sales growth from 11% in the first half of Woolworths’s 53 weeks to June to 15% in the second half, a pace Moir says is continuing. Second-half growth was more than double the food retail sector average and took food sales in the full year to R17,5bn.
By comparison, the sales growth of Woolworths’s biggest competitors has been pedestrian. Pick n Pay reported 7,5% growth in sales in the 26 weeks to September 1. Shoprite achieved a 10,4% sales increase in the second half of its year to June, while Spar reported sales growth of 10,2% at the wholesale level in the six months to March.
But Woolworths’s strategy has one big flaw, says independent retail analyst Syd Vianello. “Some of Woolworths’s prices are completely out of line,” says Vianello. “If they carry on with their current pricing [policy], they will lose customers.” While product mix could have been a factor, Woolworths reported a 7,6% food price rise in its latest reporting period, well above Pick n Pay’s 4,2% increase and Shoprite’s 4,7%.
One of Woolworths’s biggest strengths has always been its attraction to consumers who seek the highest quality. But it is not an attribute that is exclusive to Woolworths, argues Vianello. Proof of this is that the growing upper-income segment and its quest for quality has spawned a new breed of food store, epitomised by Fruit & Veg City Group’s Food Lover’s Markets.
Established in 1993, Fruit & Veg built its name by offering quality fresh produce at low prices. Food Lover’s Markets are an extension of this model into the broad, top-end food retail market, says Fruit & Veg MD and co-founder Brian Coppin. “The opening of the first Food Lover’s Market seven years ago was a turning point for us,” says Coppin. The introduction of new Food Lover’s Market stores and the conversion of existing Fruit & Veg City stores has since been aggressive.
“We now have 90 Food Lover’s Markets and will open another 15 over the next 18 months,” says Coppin. “The remaining 30 Fruit & Veg City stores will also be converted to Food Lover’s Markets in the next few years.”
Coppin says finding suitable locations for new stores is no problem. “We are getting good deals on retail space,” he says. “A lot of new shopping centres are being built and they want Food Lover’s Markets in their centres.”
In its strategy Fruit & Veg is thinking big. “Food Lover’s Market stores range from 2500m² to 4000m², with one of 6000m² in Johannesburg,” says Coppin. But he concedes that big stores are not suitable for all franchisees. “Next year we will start opening stores of 1500m² to 2000m², which are better suited to most franchisees,” says Coppin. About 80% of big Food Lover’s Markets are corporate stores, he says.
Since opening its first Food Lover’s Market in 2006, Fruit & Veg has demonstrated the potential to make big gains in the upper end of the food retail sector. Sales will reach R6bn in 2013, up from R5bn in 2012 and R1,6bn in 2006, says Coppin. Over the seven years sales growth will have averaged almost 21%/year. Sales exclude Fruit & Veg’s joint venture with Caltex, which will add R1,2bn to sales in 2013 through 140 Caltex Fresh Stop franchise stores, says Coppin.
Another newcomer to the top-end food sector, Oxford Freshmarket, is making its presence felt in Durban. “Our strategy is simple,” says Oxford co-founder Brett Latimer…..