South African Retailers Expand Despite Economic Headwinds

Clothing Chains Bet on Discount Brands and Untapped Markets

Despite a recent downgrade in South Africa’s economic growth forecast, major clothing retailers are aggressively expanding their footprint, planning to open hundreds of new stores in the coming year. This move contrasts with more cautious growth strategies from food retailers.

Expansion Plans and Market Dynamics

Pepkor Holdings, The Foschini Group, and Mr Price Group collectively aim to launch as many as 600 new outlets, primarily focusing on their value-driven brands. This expansion occurs as the National Treasury revised its annual GDP growth projection downward to 1.6% from 1.8%, citing global trade disruptions stemming from US trade policies.

According to Atiyyah Vawda, an executive director at Avior Capital Markets in Johannesburg, “There is a level of retail saturation in South Africa and when economic growth is so weak, there’s limited scope for organic space growth.” She further explained that growth is being fueled by new acquisitions and under-represented brands in specific areas.

Retail space growth has slowed compared to previous years, and companies are carefully evaluating potential locations to ensure profitability. South Africa’s retail sector currently contributes approximately 85% to the country’s GDP, highlighting its importance to the national economy. (Statistics South Africa)

Untapped Potential in Informal Economies

Anthony Thunström, CEO of TFG, highlighted the significant potential in areas outside major metropolitan centers. “There’s a huge amount of development happening outside of your major metro areas in the country,” he stated, “there’s a massive informal economy and a lot of its cash that often isn’t really measured in your official GDP numbers.” This suggests a substantial, largely unrecorded economic activity driving demand.

However, retailers are exercising caution, prioritizing quality locations over sheer volume. Mark Blair, CEO of Mr Price, revealed that the company rejected approximately 70% of potential store locations last year, emphasizing a focus on strict profitability criteria. “We don’t want to get in sucked into a space race,” he said, “It’s not just growth, it’s quality space.”

Shifting Landscape and Online Growth

Despite expansion plans, clothing retailers have faced stock market challenges, with three of the five worst-performing stocks on the FTSE/JSE Retailers Index belonging to the clothing sector. This coincides with a growing trend of online shopping, with TFG reporting that nearly 6% of its local sales now occur through its online Bash platform.

TFG anticipates this figure to nearly double within the next two to three years. The rise of online sales is also influencing store strategies, with companies increasingly utilizing large distribution centers and “dark stores” to fulfill online orders, potentially reducing the need for extensive traditional retail spaces.

“That stock doesn’t necessarily have to sit in fully lit stores anymore,”

—Anthony Thunström, TFG Chief Executive Officer

TFG’s online unit recently achieved profitability, two years ahead of schedule, demonstrating the viability of this evolving retail model. The future of South African retail appears to be a blend of strategic physical expansion and a rapidly growing online presence.