Store Wars: The battle for wallets goes digital

by Garth Theunissen
Until February, the battle for customers’ digital shopping baskets was a minor skirmish on the fringes of the larger retail war taking place in shops around SA.

Then Covid-19 arrived, sparking a seismic shift in consumer behaviour. Retailers, for years complacent or absent from the online marketplace, had to go from zero to 100 almost overnight. Suddenly, the digital basket had been thrust into the frontline.

Ross Jenvey, founder of investment company Kingson Capital, says on-demand ecommerce service providers including OneCart, Checkers Sixty60, Bottles, Quench and Zulzi have experienced growth of between 200% and 500% in daily orders since the lockdown began in March.

All indications are that it’s a permanent shift, too. By September, even as the lockdown eased, Google data showed that search requests for “online grocery and delivery services” in SA were still twice as popular as they were just six months before.

“Prior to Covid-19 most local retailers were earning between 1% and 2% of their revenue in SA from online sales,” says Hannes van den Berg, a portfolio manager at Ninety one. “Since the pandemic hit, most of them have doubled or tripled that to between 3% and 5% of their domestic revenue.”

Retailers need to grasp the magnitude of this moment. Some have clearly done so.

Shoprite head of strategy & innovation Neil Schreuder describes this as a “once in a generation shift to online”.

Remarkably, no less than 20% of the people who now use Shoprite’s Sixty60 online shopping app are older than 50 – evidence, he says, that Covid-19 has sparked “a multigenerational” adoption of online shopping.

One reason is that the elderly, who are more susceptible to the virus, are wary of visiting shopping centres. In May, an SA Council of Shopping Centres survey found that 22% of consumers weren’t comfortable visiting shopping centres and preferred buying online.

“The pandemic has accelerated online sales penetration by at least 2 years,” says Arthur Goldstuck, CEO of World Wide Worx, a technology market research firm. It predicts that Covid-19 will push online sales to 2% of SA’s total retail turnover by the end of this year – against 1.4% two years ago.

And yet, for all this growth, the 2% figure is still insignificant by global standards.

In the US, online sales account for 16.1% of total retail sales, according to the latest data analysed by Digital Commerce 360. In China, the figure is even higher, at 25%, while in South Korea and the UK it is 22%, according to consulting firm McKinsey.

“In the majority of cases, [online sales] equate to the revenue of one or two large stores, even for the more proactive retailers who’ve invested heavily in building online capacity,” says Brian Thomas, a co-portfolio manager at Laurium Capital.

Digital dilemma

This underscores the dilemma faced by local retailers feeling the pressure to expand online: why focus on digital platforms, which require significant investment, when traditional bricks-and-mortar stores still rake in the bulk of revenue? And, more to the point, why do so when it could end up cannibalising physical store sales?

Evan Walker, a portfolio manager at 36One, says this dilemma partly explains why local retailers have resisted investing in online retail “for years”, and now find themselves “way behind the curve”.

While Covid-19 has forced them to play catch-up, they’re having to do so at a time when the domestic economy faces its bleakest outlook since the turn to democracy.

“Online shopping is a must for all the big listed retailers, but the problem is that it’s going to erode their bricks-and-mortar store base and isn’t going to make them any money,” says Walker.

“From a shareholder perspective that doesn’t add much value because customers are still going to buy the same amount, but it’s going to cost retailers a lot of money and effort to build a working online presence.

“The problem is that they’re in a catch-22, because if they don’t do it, they’re going to end up losing market share to those that do.”

Schreuder says Shoprite’s Sixty60 app didn’t cost all that much to develop, as the company had already invested heavily in improving its IT systems.

It meant that when Covid-19 began pushing shoppers online, Shoprite could capitalise on the trend. Other than extra labour and training costs for its in-store pickers, the cost of hand-held devices and delivery arrangements, many of the building blocks were already in place.

“The main thing we’ve done is build code,” says Schreuder. “Because we have such a big geographic footprint we were able to use the proximity of our stores to the addressable market to our advantage”.

However, Ninety One’s Van den Berg believes retailers won’t be able to avoid additional investment as they expand their online presence.

He argues that as ecommerce becomes more important to retailers' revenue, they will have to reconsider their current model of outsourcing logistics. That will require more cash, and will probably lead to retailers buying equity stakes, or full control, of their logistics partners.

“If they want to maintain a good handle on quality and efficiency, they will have to look at moving the logistics function in-house as they grow in scale,” he says. “Just look at Takealot, which initially used Mr Delivery as a third-party provider but eventually bought it to in-source the logistics function. The experience overseas also tells you that greater scale implies a greater need to in-source logistics.”

Of course, Van den Berg says, SA is a “materially different” economy to developed markets such as the UK or US – which means the structural impediments to greater online retail penetration can’t be ignored.

For example, apart from a broken postal system and high crime, varying living conditions add to the challenges of delivering goods. In rural areas and some townships, addresses can be hard to locate. And in the suburbs, the high walls and electric fences are an obstacle.

“In the UK you can, fairly easily, order five pairs of shoes in different sizes, try them on and then return those you don’t want. In SA it’s not that simple,” says Van den Berg. “It’s not as easy for Mr Price or Sportsmans Warehouse to deliver shoes to an address in SA as it would be in the UK.”

Profit squeeze

But if retailers are going to have to plough immense amounts into online platforms, what does this mean for investors?

One immediate consequence is that their profit margins will fall. As it is, SA retailers enjoy notably higher margins than their overseas counterparts – particularly in high-end fashion and clothing, where gross profit margins can exceed 50%.

But as ecommerce thrives, these margins will take strain, particularly as pure online rivals – including Takealot, Superbalist and HomeChoice – make inroads.

This isn’t exactly good news for investors, who’ve seen stocks tumble this year: Pick n Pay has fallen 26.9%, Woolworths has lost 22.8%, and Spar has shed 6%. Among grocery retailers, only Shoprite has defied the mood, rising 8% this year.

Nor have other retailers been spared: Massmart (-37.7%), Dis-Chem (-35%), Pepkor (-34.5%), Mr Price (-27.2%) and Clicks (-11.8) have all lost ground.

Still, those willing to invest in online retail are likely to win in the longer term.

“SA retailers have operated almost like mini-monopolies,” says Walker. “They haven’t had that much competition but online is going to change that”.

Takealot has already emerged as SA’s biggest ecommerce platform, with market research firm Statista ranking it first by revenue, with $69m earned in 2019, followed by Makro ($36m) and Builders Warehouse ($16m), based on a store-by-store analysis.

With Statista saying that 35% of South Africans bought at least one product online in 2019, it’s a no-brainer that online retail will grow as consumers become more accustomed to transacting online.

The World Retail Congress ranks SA among the top five countries to watch (outside the world’s 30 biggest online markets) based on a projected ecommerce compound annual growth rate of 13.2% until 2022.

“In major metros like Joburg, Durban or Cape Town – and even smaller regional centres like Bloemfontein, East London and Port Elizabeth – growth in online shopping will continue despite structural impediments like internet access and logistics”, says Casparus Treurnicht, portfolio manager at Gryphon Asset Management.

These structural impediments don’t only pose a challenge when getting the product from the warehouse to the consumer; they can be an even bigger issue for customer returns.

Walker calls this “reverse logistics”, and says it’s probably the biggest hurdle to meaningful online retail penetration in SA.

“Transactions sometimes go wrong and that’s where customer frustration creeps in,” he says. “Every retailer has a different methodology when it comes to returning goods or rescheduling deliveries. Do they give you an online credit or do they return money to your credit card? Food retailers often don’t have stock, which means you then sit with an online credit that you have to spend at a later date.”

While online credits make sense for relatively inexpensive everyday grocery items, they become problematic when dealing with expensive one-off purchases.

Walker recalls his own experience of buying an inverter online, only for it to be returned to the warehouse as he was not home at the time of the delivery. But the inverter had been sold to someone else – leaving him with a large credit as the retailer was out of stock mid-lockdown.

“What do you do if you want to return something, especially an expensive one-off item?” asks Walker.”

“Sometimes online shopping feels more frustrating than it’s worth.”

One solution, say’s Walker, would be to integrate more independent third-party providers into retailers’ logistics systems. “We have thousands of Uber drivers and guys on scooters, many of whom are now without work, who could handle these deliveries,” he says.

And this is just the first headache for retailers, battling to adjust to a far more digital-intensive post-Covid world. Walker says other, bigger challenges loom.

“The next problem for retail is that the big international brands like Nike are already looking at how they can bypass the middle-man and sell direct to the consumer,” he says. “That’s the next challenge.”

Republished with permission from Financial Mail

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