Analysis of South Africa's Retail Industry
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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.
The Industrial Development Corporation of South Africa Ltd (IDC) is a self-financing, national Development Finance Institution (DFI). It was established to promote economic growth and industrial development in South Africa. It has as its objective to secure and stimulate rapid and sustainable economic growth, creating employment and reducing poverty. The IDC operates in a broad spectrum of industries and with specialized knowledge and experience, are able to offer valid and appropriate financial assistance to a wide variety of individuals and companies. IDC also has as one of its goals to contribute to the goals of the Shared and Accelerated Growth Initiative of South Africa (ASGISA) by providing financing that will stimulate job creation, investment activity and economic growth; (DTI, 2009)
Notably the retail sectors that qualify for financing by the IDC are the following:- Chemical and Allied Industries, Metal, Transport and Machinery Products, Wood and Paper Industries, 2010 and Construction, Techno Industries, Textile and Clothing, Healthcare and Education, food and beverages and Agro Industries, Transportation, Financial Services, Security and Catering, (DTI, 2009)
Fund for Research into Industrial Development Growth and Equity (FRIDGE)
FRIDGE funds investigations, studies and facilitation processes leading to the generation of information, knowledge, and/or action initiatives which are aimed at improving South African industries' global economic competitiveness. The fundamental aim of FRIDGE is to fund research into studies where the major deliverables of the study are implementable policy outcomes based on objective facts emanating from that study. In other words, to facilitate the creation of findings which are not only informational but also achievable which can be "fed" back into the public and the private sectors. The FRIDGE is funded by the department of the trade and industry (the dti) managed by a Sub-committee of the National Economic Development and Labour Council (NEDLAC) Trade and Industry Chamber and its funds are administered by the Industrial Development Corporation (IDC). For more information on the studies conducted by fridge click here. (DTI, 2009)
Support Programme for Industrial Innovation (SPII)
The SPII is designed to promote and assist technology development in South African industry through the provision of financial assistance for projects that develop innovative products and/or processes. The SPII is focussed specifically on the phase that begins at the conclusion of basic research (at the stage of proof of concept) and ends at the point where a pre-production prototype has been produced. The Industrial Development Corporation of South Africa Limited (IDC), on behalf of the Department of Trade and Industry (the dti), manages the programme.
General taxation issues & Taxation specific to the retail sector
Taxation is critical to fulfilling government mandate to rebuild the country and create an economic order in which all South Africans are prosperous and business is flourishing. The State needs to implement tax regimes to fund social and economic programmes. Every year, the Minister of Finance presents the Budget, which outlines the total government expenditure for the following financial year and the ways in which this expenditure will be financed.
The South African tax system has a residence-based system. The principle taxes imposed in South Africa are direct and indirect taxes, as follows: Direct Taxes include income tax, secondary tax on companies (STC), capital gains tax (CGT) and donations tax. Indirect Taxes include value-added tax (VAT), estate, stamp and transfer duties, the latter on real estate, customs & excise duties, marketable security taxes, and skills development levies, municipal taxes on owners of real estate, airport taxes and fuel levies. (South African Receiver of Revenue)
Domestic companies are taxed at a flat rate of 30%. However, branches and agencies of foreign companies which have their effective management outside South Africa are subject to taxation on South African-sourced profits at a rate of 35%. (Brand South Africa, 2009)
Value Added Tax (VAT)
The principal source of indirect taxation revenue in South Africa is Value Added Tax (VAT). If a subsidiary or branch of a foreign-owned company sells goods or provides services, it must register as a vendor with Sars and charge and pay over VAT. The standard rate of VAT is 14%. Exports, certain foodstuffs and other supplies are zero-rated, and certain supplies are exempt (mainly certain financial services, residential accommodation and public transport). (Brand South Africa, 2009)
Capital gains tax
Capital gains tax is levied on non-residents to the extent that they dispose of immovable property situated in South Africa, or have a permanent establishment in SA and dispose of an asset of that establishment. (Brand South Africa, 2009)
Double taxation agreements
South Africa has entered into double taxation agreements with most of its trading partners, including: Austria, Belgium, Canada, Cyprus, Denmark, France, Germany, India, Ireland, Israel, Italy, Japan, Korea, Malta, Mauritius, the Netherlands, Norway, Singapore, Sweden, Switzerland, Taiwan, Thailand, the United Kingdom and the United States. (Brand South Africa, 2009)
Other taxes affecting subsidiaries or branches of foreign-owned companies:
- If a firm employs personnel, it must register as an employer with Sars and deduct tax (PAYE) from its employees' salaries.
- Regional service council levies on gross revenue and salaries. Rates vary between regions but approximate 0.14% and 0.35% respectively, to which VAT must be added.
- A skills development levy at the rate of 0.5% of payroll is payable.
- Transfer duty is payable on land and buildings (10% in the case of a corporate purchaser, but exempt if VAT is charged).
- Stamp duty at 0.25% is payable on transfer and issue of shares. Stamp duty is also payable on certain other agreements, such as leases and mortgage bonds.
- Customs and excise taxes.
- Compulsory workmen's compensation, assurance and unemployment insurance fund premiums are payable, although these are relatively insignificant. There are no other social security payments.  (Brand South Africa, 2009)
Pressure groups such as market lobbying, unions
The economic environment persuades all the other environments and is, in turn, influenced by them also in return (Nieman & Bennet. 2002, p.33). Economical circumstances take participation in influencing customer purchasing decision. The retailer now grows to be vulnerable to an enormous majority of the economic environments that they have no control over. There are three situations recognised as the mainly trying moments for retailers are during periods of inflation, recession and stagflation (Stewart & Abbott. 1993, p. 234).
Since the early 1990s, economic growth has been driven mainly by the tertiary sector - which includes wholesale and retail trade, tourism and communications. Among the key sectors that contribute to the gross domestic product and keep the economic engine running are manufacturing, retail, financial services, information and Communication Technology (ICT), mining, agriculture and tourism. (South Africa Major Business Sectors Compiled by: Swiss Business Hub South Africa Pretoria, March 2009)
The primary concern in analysing the economic environment is to assess opportunities for marketing the company's products or possibly for locating some of the company's production and distribution facilities outside of South Africa. (http://www.exporthelp.co.za)
Decisions about how much of a product people buy and which products they choose to buy are largely influenced by their purchasing power. If a large portion of a country's population is poor, the market potential for many products maybe lower than it would be if they were reasonable prosperous. If a country is expected to enjoy rapid economic growth and large sectors of the population are expected to share in the increased wealth, sales prospects for many products would clearly be more promising than if the economy were stagnating. (http://www.exporthelp.co.za)
Economic Environment analysis will consider factors such as the general economic outlook, employment levels, levels and distribution of income, growth trends, etc. It should be borne in mind, however, that when income levels drop, people will generally cut back on their purchases of luxury items before they cut back on necessities. Thus, poor countries which are allocating scarce foreign exchange reserves only to necessities (e.g. cheap clothing, simple agricultural tools, etc.) may prove to be more reliable markets than rich countries for certain export products. (http://www.exporthelp.co.za)
Below are some of the economic factors/ indicators which should be of interest to an economic environment. Some indicators applicable to the South African Retail Sector are discussed:-
Disposable income; Demographic factors; Competitive and complementary products; Industrialised vs developing countries; Degree of government intervention; International trade agreements; Trading blocs; Economic growth
Per capita income; Consumption expenditure; Urbanization ; Inflation; Foreign Trade & Payments; Exchange Rates
Contribution to GDP
The "wholesale and retail trade, hotel and restaurants" sector is the third largest economic sector in South Africa. The sector accounts for around 14% of total GDP, which is slightly less than that of manufacturing. Growth in this sector has been slowing down since 2006. By the second quarter of 2008, moreover, the sector began to register a marked contraction in activity, with the motor trade sub-sector being most hard hit, recording a 20% decline in the first quarter of 2009 compared to the previous quarter. In fact, it was the first sector to indicate signs of the onset of the impending recession. To date the sector continues to contract, registering a year-on-year decline of 3.4% over the first quarter of 2009, but there appears to be indications of an improvement as the slowdown in growth is currently not as sharp as in the previous periods. Sales of new and used motor vehicles continue to decline, however. (Climate Risk & Opportunity)
Our GDP was afected by rhe global economic crisis, experienced until Q2 of 2009 the first recession since 1992.In Q3 the economy registered a positive growth rate of 0.9%. Real FDP in Q3. The key contributors to the marginal quarted on qaste recovery were manufacturing(especially pertoleum basic material and stel as well as food processing, general government construction and personal services.
A reversal in the contraction of this sector as noted above would bode well for the economy, as the sector is the most labour-intensive and accounting for around 21% of total employment, marginally down from 22% in 2008 (StatsSA: 2009b). As is evident from Table 1 below, employment growth in the sector was most vigorous from 2003 through to 2005. Growth in the informal sector was particularly robust. From 2006, however, employment in the sector grew less robustly and in fact began to contract by 2007. (Climate Risk & Opportunity)
Most recently, employment in the sector has been one of the hardest hit by the financial downturn with a year-on-year decrease of 4.3% having been recorded in the first quarter of 2009. Whilst the gender distribution of labour in the sector is the most equal of all the sectors, with women accounting for around 49% of the total labour force in the sector, it appears that women have been most adversely affected. The year-on-year decrease in the rate of employment for women at 6.2% for the first quarter of 2009 is more than double that for men. By province, the sector employs the most people in Gauteng, Kwazulu-Natal and the Western Cape, respectively. It also accounts for between 20% and 25% of total employment for all provinces, except in the Eastern Cape. An important descriptive element of the sector concerns its large concentration of informal employment, particularly with respect to women. The sector accounts for around 47% of total South African employment in the informal sector, of which 60% are women, and around 21% of the formal sector, of which 30% are women (StatsSA: 2009b).
Investment in the sector has been increasing markedly this decade, for the first time breeching the R10 billion a year threshold in 2001. A robust growth spurt has been evident in the past few years with increases in Gross Fixed Capital Formation (GFCF) averaging 17% year-on-year from 2003 to 2008. From 2004, the year when South Africa was awarded the opportunity to host the 2010 FIFA World Cup, there is a marked increase in investment in the sector as revealed in the graph below. It is interesting to note that not even the general slowdown in economic activity dampened investment in 2008 in this sector, which is likely due in part to investment being fuelled by 2010 World Cup activities. (Climate Risk & Opportunity)
Overall GFCF across all sectors only grew by around 3% in the last quarter of 2008 and first quarter of 2009, but it suggests that there may have been a lag in the effects on the sector. Wholesale and retail sales figures have been declining in 2009, which is in line with earlier observations of declining GDP in the sector. As a result inventories have been reduced and investment has slowed. (Climate Risk & Opportunity)
Products that are utilized today by people are taken for granted and have been influenced by technology (Lancaster, Pearson & Reynolds. 1989, p. 30) and these are technological forces which come in the form of new technologies, rising technologies and new uses of matured technologies (Barringer & Ireland. 2008, p. 42). As stated by Solomon et al (2006, p. 52), today businesses view technology as a form of a major investment they cannot afford to pass them by, because technology gives them competitive advantages over their rivals.
Retailers in today's era have a call for further up-to-date (recent) and perfect information to create improved decision (results) in the yet altering completive environment. Computer technology provides them the potential to satisfy this need for information (Stewart & Abbott. 1993, p. 628).
Technology can be defined as the method or technique for converting inputs to outputs in accomplishing a specific task. Thus, the terms 'method' and 'technique' refer not only to the knowledge but also to the skills and the means for accomplishing a task. Technological innovation, then, refers to the increase in knowledge, the improvement in skills, or the discovery of a new or improved means that extends people's ability to achieve a given task. (http://www.exporthelp.co.za)
Technology can be classified in several ways. For example, blueprints, machinery, equipment and other capital goods are sometimes referred to as hard technology while soft technology includes management know-how, finance, marketing and administrative techniques. When a relatively primitive technology is used in the production process, the technology is usually referred to as labour-intensive. A highly advanced technology, on the other hand, is generally termed capital-intensive.
Changes in the technological environment have had some of the most dramatic effects on business. A company may be thoroughly committed to a particular type of technology, and may have made major investments in equipment and training only to see a new, more innovative and cost-effective technology emerge.
Indeed, the managing director of a multinational organisation manufacturing heavy machinery once said that the hardest part of his job had nothing to do with unions, pay or products, but with whether or not to spend money on the latest technologically improved equipment.
Computer technology has had an enormous impact on education and health care, to name but two areas affected. The advancements in medical technology, for example, have contributed to longevity in many societies. In addition, the introduction of robots in many factories has reduced the need for labour, and the use of VCR's and microcomputers has become commonplace in many homes and businesses.
Technology is a critical factor in economic development. Because of the advances of international communication, the increasing economic interdependence of nations, and the serious scarcity of vital natural resources, the transfer of technology has become an important preoccupation of both industrialised and developing countries. For many industrialised countries, the changes in the technological environment over the last 30 years have been immense particularly in such areas as chemicals, drugs, and electronics. It is vital that organisations stay abreast of these changes - not only because this will allow them to incorporate new and innovative designs into their products, but also because it will give them a firmer base from which to anticipate and counteract competition from other organisations. (http://www.exporthelp.co.za)
The transfer of technology is essential for attaining a high level of industrial capability and competitiveness. Multinational corporations are playing an increasingly important role in technology transfer because they invest abroad to expand production, marketing and research activities. There is also a growing consciousness amongst governments of the need to increase technology transfer to the developing countries to help stabilise their economic and social conditions. (http://www.exporthelp.co.za)
In spite of the many differences in social, political, cultural, geographic and economic conditions, there are some common characteristics in the technological environments of developing countries. The most common technology transfer from industrialised to developing countries has been in agriculture and health care. As a result of improved health care systems, infant mortality rates have been cut while the incidence of once common diseases such as malaria and typhoid has been reduced in Latin America, south-east Asia and Africa (although the incidents of the AIDS virus has increased alarmingly). Similarly, agricultural technology has increased agricultural productivity in Brazil, India and elsewhere. However, in most developing countries, technology has made little impact on the productive systems, income distribution and living conditions of the majority of the population. (http://www.exporthelp.co.za)
- Usage of technology at front end (consumer's, point of purchase and buying end)
- Usage of technology at back-end (manufacturing capacity, supply chain etc)
- Technological development
- Research Funding
- Associated technologies
- Dependent Technologies
- Information & Communications
Trends (Past and present changes) favourable or unfavourable How they impacted the growth of the market/industry sector
Micro environment analysis
Micro environment is identified as decision- making environment, and it integrates the objectives of the organisation, management of the purpose of the organisation, entrepreneurial capability, interest groups and all other aspect controllable by management (nieman & bennet. 2002, p.32).
Elements close to a company that impact the company's ability to serve its customers. There are six components of the microenvironment: the company's internal environment, composed of the management personnel and including the finance, purchasing, manufacturing, research and development, and marketing departments; the company's suppliers, who provide the goods and services necessary for the production of the company's products; the marketing intermediaries, composed of all the individuals or companies who help in the promotion, selling, and distribution of the company's products; the customers, consisting of the five types of markets in which the company may sell its products (consumer, industrial, reseller, government, and international markets); the company's competitors; and the company's various publics, which can be any individual or group that can affect the company's ability to achieve its objectives, such as citizen action groups, the media, or the government. (Dictionary of Marketing Terms)
Qualitative analysis - South African retail sector
According to Standard Bank Group Economics (17 February 2010), developments within the retail sales categories show that since mid-2009 a very mild recovery in retail sales growth of general dealers were reported. Food and beverage sales have seen negative growth over the last four months, while pharmaceutical goods, cosmetics and toiletries have shown some growth since August 2009. The latter is the only main category that has reported positive growth in December 2009. Although still negative, furniture sales have seen some recovery in growth since April 2009. The sectors that were the hardest hit in terms of their growth performance in 2009 Q4 were "retailers in hardware", "other retailers" and "retailers in textiles and clothing" These trends generally show that the semi-durable and durable goods' retail outlook is lagging the non-durable retail goods cycle.
Suppliers / producer environment
Every good or service is made or marketed as part of the value chain or supply chain. Retailers do not only sell. They buy vast quantities of raw materials, manufactured components, plant and equipment, supplies, and business services. (P. Kotler, 2000). Historically, retailers have tried to exploit relationships with suppliers. A great example was in 2007 when Pick 'n Pay Stores started a phased centralisation of supply distribution (streamlined store delivery system) in a move to boost profit. Under the system suppliers do not deliver to each supermarket but to centralised warehouses. A single Pick 'n Pay truck will then load a variety of goods for delivery to a particular store. Centralised distribution allow Pick 'n Pay to free up cash that was currently tied down holding more stock than was necessary. This was done to compensate for poor supplier service, exacerbated by delivery truck congestion at stores.
Retailers respond to many influences when they make their decisions. When supplier offerings are similar, business buyers can satisfy the purchasing requirements with any supplier, and they place more weight on the personal treatment they receive. Where supplier offerings differ substantially, business buyers are more accountable for their choices and pay more attention to economic factors. Retailers respond to four main influences: environmental, organisational, interpersonal, and individual.
Retailers always face extreme competition. The slow market growth for the retail market means that firms must contest for market share. According to Statistics South Africa, retail sales volumes contracted by 5.3% y-o-y. during 2009Q4, only slightly worse than the 5.2% contraction recorded during 2009Q3. The BER's retail survey indicates that sales continued to contract during the first quarter of 2010 albeit at a slower pace compared to previous quarters.
More recently retailers have tried to reduce the pricing competition by offering flier points, memberships and other special services to try to gain the customer loyalty. The major market players in the South African retail industry are giving each other stiff but healthy competition which is evident from the marketing strategy and segment policies.
The marketing concept states that organizations need to anticipate and satisfy consumer needs if they are to remain on top in terms of making profits. Marketing is about ensuring that whatever the firm does is done with consumer in mind J Blythe, (1997). The marketing concept is important because consumers have very wide choice as to where to spend their hard-earned money. Therefore, according to P Kotler, (2000), understanding consumer behavior provides clues for developing new products, product features, prices, channels, messages and other marketing mix elements. A consumer's buying behavior is influenced by cultural, social, personal, and psychological factors. Therefore, before developing marketing plans, marketers need to study consumer markets and consumer behavior. In analyzing consumer markets, firms need to research who constitutes the market (occupants), what the market buys (objects), why the market buys (objectives), who participates in the buying (organizations), how the market buys (operations), when the market buys (occasions), and where the market buys (outlets).
Focus on formal retail sector categories:-
Retailers in specialised food, beverages and tobacco stores,
Background and overview
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Retailers in pharmaceutical and medical goods, cosmetics and toiletries,
Background and overview
According to the Dti Industrial Policy Action Plan (2010), manufacturing employment in the pharmaceutical sector was 9,500 in 2007 (down from 16,000 in 1999). It is the fifth largest contributor to South Africa's trade deficit: R14.8 bn in 2008. While the South African pharmaceutical market is only 0.35% of the global market, it is also the world's largest market for anti-retrovirals. Currently, there are 900,000 AIDS patients receiving anti-retroviral treatment (ART) in South Africa, of which 800,000 are in the public sector and 100,000 in the private sector. The cost of ARV procurement by Government in 2009 is estimated at R2.8 billion, escalating to R7 billion in 2011. Apart from the economic burden, this poses risks to the security of supply of ARVs. Imports in 2008 were R16 billion while exports were R1.2 billion. The export market has been under significant pressure due to the crisis in Zimbabwe - this market accounted for 50% of South Africa's pharmaceutical exports until 2001 - and competition from exports from India.
According to T Hartzenburg, (2001), until 1993, the South African pharmaceutical supply chain followed the traditional, and still predominant, international model. This model is presented in Figure 3. Multinational pharmaceutical companies feature prominently in the production stage of the supply chain. Distribution of pharmaceutical products is by independent wholesalers, who buy stock for their own account from manufacturers, and on-sell to retailers. Wholesale distribution of pharmaceutical products is done either by full-line or short-line wholesalers. Full-line wholesalers distribute the full range of available pharmaceutical products, and short-line wholesalers trade in a selection of products only.
Wholesalers cover their costs and make a profit based on the difference between the price at which they buy form the manufacturers and that at which they on-sell to the retail trade. The price differential takes the form of a discount granted by manufacturers to wholesalers off the list price. Wholesalers pass on a significant portion of this discount, as is demonstrated by reported margins, to retailers as they compete for market share. Retailers on-sell to consumers in the final stage of the supply chain. These are pharmacies (mostly individually owned, although several retail chains do exist) and since 1984, dispensing doctors.
T Hartzenburg, (2001) notes that the private segment of the market for pharmaceutical products is characterized by highly inelastic demand. This is due to the 'must have' nature of prescription drugs. T Hartzenburg, (2001), further asserts that the inelasticity would be further be enhanced by the extensive membership of medical aid schemes in this market segment. Also, since the cost of such drugs is veiled by the medical aid scheme, it does not directly confront the consumer, with the result that price sensitivity is muted.
Changes in the wholesale distribution of pharmaceutical products have led to changes of the supply chain, with the establishment of three exclusive distribution enterprises, (i) International Healthcare Distributors, (ii) Kinesis Logistics and (iii) Pharmaceutical Health Distributors.
The three distribution arrangements, share a number of characteristics, but also differ in some respects. In the case of IHD, the arrangement may be characterised as a joint venture (JV) involving several manufacturers in an exclusive distribution arrangement. Kinesis Logistics, whose holding company SAI is owned by five pharmaceutical manufacturers, is also a joint venture. Therefore, both IHD and SAI, involve a measure of vertical integration in the sense of the involvement of two successive stages of production in the supply chain.
The third distribution arrangement, Pharmaceutical Health Distributors (Pty) Ltd is a logistics company, which in association with other companies provides distribution, warehousing, debt collection, batch tracking, order processing, picking , packing credit control and debt management to its principals. T Hartzenburg, (2001).
Retailers in textiles, clothing, footwear and leather goods
Background and overview
Since the mid-1990s, the South African clothing and textile sector has been characterised by structural and associated crises, resulting in a significant decline of the industry (the dti, 2005, Sector Development Programme: Textiles and Clothing).
Barnes (2005) compares the average of a number of indicators for the sector for the periods 1994-1998 and 1999-2003, showing a clear deterioration in the sector's performance, with real value added, real exports and employment all declining. Real value added at basic prices had slumped by 10.4%, real exports by 4.4%, employment by 0.6%, output per employee by 11.9%, remuneration per employee by 6.8% and gross mark-up by 7.8%.
Although exports increased by 1.8% per annum and employment by 1.1% per annum from 1994-1998, both declined during the 1999-2003 period, by 8.0% and 1.1%, respectively (Barnes, 2005, Strategic Assessment of the South African Wearing Apparel Sector).
Although the gross domestic fixed investment (GDFI) output ratio grew by 50% over the two periods, this growth in investment was from only 0.02% to 0.03% of output. In the same vein, average fixed capital stock grew by 18.18%, but only from 0.11% to 0.13% of output (Barnes, 2005, Strategic Assessment of the South African Wearing Apparel Sector).
Over the period 1994-1998, the productivity index for the indicators labour productivity, fixed capital and multi-factor productivity was negative, with less than zero units of output produced by each. From 1999-2003, labour productivity rose to an average of 0.67 units of output per employee, fixed capital productivity to 0.6 units and multi-factor productivity to 0.58 units. So although the productivity index for each indicator turned positive, it was still exceptionally low (Barnes, 2005, Strategic Assessment of the South African Wearing Apparel Sector).
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Retailers in household furniture, appliance and equipment
retailers in hardware, paint and glass
Summarize the findings in following form:
Trends (Past and present changes) favourable or unfavou
Cite This Dissertation
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