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 e-commerce 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 two 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.
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 handheld 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 e-commerce 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.”
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 e-commerce 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 e-commerce 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 e-commerce 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 delivery. But the inverter had then 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, says 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 middleman and sell direct to the consumer,” he says. “That’s the next challenge.”
How Shoprite’s Sixty60 blitzed the competition
Shoprite’s Sixty60 app has taken the online grocery market by storm since it was piloted in eight stores in the Western Cape and Gauteng in late 2019. Still in the testing phase as recently as February, the mobile-only app came into its own during the lockdown as virus-wary consumers dodged shopping centres. “Based on the number of active orders we’re receiving and the growth that we’re experiencing, I am very comfortable that we are a leader in this space,” says Neil Schreuder, Shoprite’s head of strategy and innovation. “We already have more than 700,000 app downloads, and our app has been ranked as the No 2 shopping app after Takealot. “Even before Covid-19, Schreuder says the appetite for online grocery shopping far exceeded his expectations. During the app’s pilot phase last year, demand was four times higher than Shoprite had forecast. The pandemic only accelerated this: Schreuder says actual sales during the lockdown exceeded Shoprite’s predictions twentyfold. “Since the lockdown, order volumes have rocketed,” he says. “If anything, the demand sparked by Covid-19 caught us a little by surprise, but we managed to get fit by running, so to speak.” Sixty60 is now available in 100 stores (up from 87 at the end of June) and will be extended to more than 150 by the end of the year. Shoprite says this will give it access to more than 80% of the addressable online grocery market in SA. So how was Shoprite able to do it all so quickly?
Schreuder says part of the reason is that it adopted a different model to that of dedicated online giants such as Amazon: instead of building standalone fulfilment centres that require huge upfront investment, Shoprite chose to use its more than 2,000 stores as a launchpad for its e-commerce strategy. Which does create some limitations. For example, though the app allows customers to choose from more than 7,000 products, each order is limited to 30 items. “We increasingly live in a world of instant gratification, so Sixty60 is aimed at the daily shopping basket, rather than the big month-end shop,” says Schreuder. “The endgame of online grocery retail is fast and now.” That’s why the app is called Sixty60. When it was first conceived, Shoprite’s team wanted to offer customers a way to place orders within 60 seconds, with delivery completed in 60 minutes. Then they worked backwards from that goal to figure out how to integrate their existing infrastructure with the app, in-store pickers and a third-party delivery team. However, it hasn’t been seamless. Though more than 80% of current orders are fulfilled within an hour, Schreuder acknowledges that one of the challenges has been completing orders when one or more items are out of stock. Shoprite initially solved this by allowing in-store pickers to select a second-choice item on the customer’s behalf, but that is being phased out. From October, the app will allow customers to select their second-choice items upfront when placing orders. “We want to empower the customer as much as we can so multiple-substitution optionality is coming,” says Schreuder. Shoprite is also considering expanding the Sixty60 basket-size limit beyond 30 items. It’s working with its logistics provider, RTT Couriers, on a plan to use larger vehicles for bigger orders. Asked whether Shoprite would consider insourcing the logistics, Schreuder says he doesn’t see that as necessary right now. “Our arrangement with RTT Couriers is such that the drivers who fulfil our orders are 100% dedicated to Shoprite,” he says. “Though we co-designed the on-demand driver and distribution technology, we own the branding and the experience … the drivers who deliver our orders are dedicated to Sixty60 only.”
Pick n Pay plays the long game
You wouldn’t know it, but Pick n Pay’s online shopping service, launched in 2001, is the oldest digital grocery platform in SA. Its 2020 annual report also describes it as “the largest online grocery business in Sub-Saharan Africa”. That’s largely premised on the fact that the retailer’s Grocery Essentials on-demand service, through its partnership with Bottles, operates out of more than 100 stores across 22 towns and cities in the country. Whether its claim of being the largest online service in the sector still holds is debatable: Shoprite has crept up on Pick n Pay, expanding the reach of its Sixty60 app to 100 stores, and it’s planning to grow further. This is one of the reasons some analysts tell the FM that Pick n Pay has dropped the online shopping ball — though not everyone is so critical. “[CEO] Richard Brasher is doing a good job of turning Pick n Pay around by investing in price points, improving the look and feel of older stores to give them a more deli-like feel, and expanding the distribution network,” says Hannes van den Berg, a portfolio manager at Ninety One. “I don’t think the market is giving him enough credit. Brasher is playing the long game with Pick n Pay and I think his strategy is going to pay off.”
Woolworths battles to find its feet
Woolworths Holdings provides extensive detail on its online sales, which accounted for 8% of its R78.26bn in turnover for the year to July. That’s up from 5% the previous year, underlining Woolies’ ambition to expand this channel. Online growth in its SA food business has been particularly impressive at 57.2%, even if this still contributes just 1.2% to overall food sales. Its SA fashion, home and beauty business grew online sales at 35.4%, but this amounted to 2.6% of the division’s turnover. “One would have expected Woolworths to have performed better in the online space as it caters very much to the prime demographic that is open to the online experience,” says Casparus Treurnicht, portfolio manager at Gryphon Asset Management. “Shoprite seems to have stolen a march on it.” Woolworths’ performance during the lockdown was abysmal: anyone who tried ordering groceries online would’ve been confronted with a wait of days. Ironically, that may have been due to the company’s focus on quality, particularly of refrigerated items. “Woolworths has placed a very big focus on its cold chain system, which is by far the most advanced and best run cold chain system in SA,” says Brian Thomas, portfolio manager at Laurium Capital.
“However, the problem is that because there’s been so much focus on cold chain management and quality, it’s not always that easy to effectively manage small online orders from individual stores.” As one might expect, the group’s best e-commerce performance is in Australia, where David Jones grew online sales by 74.1% in the last year, contributing 14.2% to its overall turnover. Ideally, the group will apply the lessons learnt in the more developed Australian market in SA. Another dilemma is that, as it says in its 2019 annual report: “The rise in shopping online means that most retailers, ourselves included, have too much space for our future customers.” The catch-22 of seeing online sales growth cannibalise store sales — and space — may, in fact, affect Woolworths more than others, given that its high-end offering is probably among the best-suited to e-commerce. “Online is still a model that Woolworths is grappling with,” says Evan Walker, portfolio manager at 36One. “It’s still getting its systems right.” The group’s performance during the lockdown reveals it still has a way to go.