Markets

SA e-tail penetration trails well behind other markets

Whether this will change, and at what pace, remains to be seen.


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South Africa has an e-tail penetration that is 23 times lower than South Korea and China and is also tracking well behind developed markets like the US and the UK. 

E-tail or Internet retail comprises of all goods and services sold online. Services would include flight tickets and accommodation, package travel, event tickets and other (including dating services). Goods would include home & garden, telecoms, FMCG, media & entertainment, clothing, shoes & personal lifestyle, toys, consumer electronics, IT, sports and recreation and other (including car components, stationary, etc.). 

Globally, Internet retail has certainly been a disrupter in the past and while we expect online retail sales to continue to gain market share, the pace could be slower than expected. The incumbents may be well set up in their respective main markets but significant capital investment is still required when entering new markets. This is especially important if the company wants to offer competitive delivery times and prices. 

For example, Amazon sales are available in South Africa through its .com website but the average wait is eight to ten days and the purchase is subject to import taxes. Further to this, almost every country has a different level of preference toward buying certain categories online. In the US, media & entertainment is the largest online goods category (17%). In the UK, 35% of the online sales of goods is in the clothing category. In China, home & garden is the largest category and constitutes 23% of online goods sales. In South Africa, IT makes up 18% of online good sales. It is therefore vital that companies understand these preferences and ‘localise’ their offerings.

To understand a market’s potential and relative attraction, there are some key indicators to be aware of, including the size of the economically active population (ages 15 years+), urbanisation rates, population density, internet access, download speeds, data pricing, per capita income, economic growth rates, unemployment, logistics, and the ease of doing business. Comparing South Africa to our BRICS counterparts and some other developed countries confirms why e-tail has not taken off to the extent it has in other countries and illustrates why companies such as Amazon are not exactly lining up to set up shop.

The good

Our logistics performance index is quite high. This remains a competitive advantage that we can maximise and should continue to invest in. Unfortunately, we have spent the last decade slipping in terms of our global comparison.

The bad

South Africa’s absolute population is not exactly enticing from a global perspective, while large within the SADC region, we are tiny relative to our BRICS counterparts.

The costs associated with distribution makes urbanisation and population density important. South Korea, for example, has a high level of urbanisation (83%) and incredibly high population density (492 people per square kilometre), making it easier for goods to be delivered and more attractive for consumers to buy online. South Africa’s urbanisation (and the rate at which its growing) and population density is low, relatively speaking. Even though India has lower urbanisation, it has a massive population, high population density, and the urbanisation rate is comparatively high.  

Internet penetration among the economically active population again leaves South Africa wanting. Our small population combined with a low Internet user penetration rate translates to an addressable market of less than 20 million. This places us in the same ballpark as Australia – but then per capita income growth is ten times higher in that country. On the flip side, India only has an Internet penetration of 27%, but this translates to over 250 million Internet users. Although per capita income is much lower the absolute market size is significantly bigger.

Our download speeds have been improving and we are now in line with Brazil, China and India, however still four times slower than market leader South Korea. Data download speeds are linked to user experience. For example, the ability to download more content quickly enables complementary features such as virtual fitting (for clothes).

The ugly

Reading our download speeds in conjunction with data costing leaves us lagging Brazil, China and India considerably. Overlaying the cost of data with our income per capita again has South Africa lagging all the markets under comparison. Regulators must focus on bringing data costs down. Above supporting e-tail growth, cheap data access can also have a major positive social impact.

While South Africa’s income per capita employed is high, the overall number trails most of our peers because unemployment remain stubbornly high. To reduce unemployment, we require policy certainty and direction that motivates capital (both foreign and domestic) to invest in South Africa.

South Africa is also struggling to generate meaningful economic growth and although we are ahead of both Russia and Brazil (for now), policy is not aimed at economic growth but rather towards redistribution. Unfortunately, we have reached a point in South Africa where the pie needs to increase in size. Redistribution should remain our long-term primary goal, but we need the economy to continue growing if we want to affect worthwhile economic upliftment for all.

Lastly, and perhaps most constraining, we have been slipping sharply in ‘the ease of doing business’ area. Delays in gaining construction permits, getting access to electricity, registering a business, and trade are just some of the factors at play here. This is symptomatic of present state inefficiencies. 

Taking our average rank on each of the measures under investigation, we are the least competitive market among the group in question for e-tail to thrive. 

Unless our ranking improves there is little reason for global capital to enter South Africa from an online perspective, which leaves South African companies to pioneer this market.

The market is still quite concentrated and currently, the five largest players locally make up 28% of the market. These are Takealot (12% of the online retail market, part of the Naspers group), Apple (6%), Pick n Pay (5%), Woolworths (3%), and Holdsport (2%). When Takealot merged with Kalahari in 2014, the entity gained significant scale. Also, omni-channel has become a significant factor (illustrated by Pick n Pay and Woolworths). 

Although Media & Entertainment as a category will continue to grow fast (with Naspers again playing a role), we expect omni-channel to win in South Africa in most categories and for the largest growth to come from brick and mortar stores introducing and focusing on their online presence. Companies with an already settled presence in South Africa will also benefit from a solid understanding of the local market. For now, we still anticipate that e-tail will be mostly driven by high LSM groups. 

From an investment perspective, the larger omni-channel players are preferred. These companies must be cash flow positive and already sit on lazy balance sheets ready to invest in further growth opportunities. Pick n Pay, Woolworths, Mr Price and Massmart have a competitive advantage in e-tail with Spar and Shoprite set to lag. For Spar, the business model and structure does not lend itself to successfully competing. Shoprite generally targets the lower LSM markets who have not been able to embrace online retail and its current offering is limited at best.

In summary, South Africa has many issues it needs to address before it becomes an attractive e-tail market and attracts best in class foreign entrants. Policies need to be cohesive and target areas which will provide the most upside compared to our peers.

Nick Crail is fund manager at Ashburton Investments.

Sources: CIA world fact book, Akamai, Numbeo, IMF, The World Bank.

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