South Africa

South Africa occupies the southern tip of Africa, its long coastline stretching more than 2,500km from the desert border with Namibia on the Atlantic coast, southwards around the tip of Africa, then north to the border with subtropical Mozambique on the Indian Ocean. It is one-eighth the size of the USA, twice the size of France, and over three times the size of Germany. South Africa measures about 1,600km from north to south, and roughly the same from east to west.

 It has three capitals; Cape Town is the legislative capital and is where the country’s Parliament is found; Bloemfontein is the judicial capital, and home to the Supreme Court of Appeal and Pretoria is the administrative capital, and the ultimate capital of the country.  The largest and most important city is Johannesburg, the economic heartland of the country. Other important centres include Durban and Pietermaritzburg in KwaZulu- Natal, and Port Elizabeth in the Eastern Cape.

It is a large market of some 57.8 million people, half of whom are aged under 17 years of age. International travel to South Africa has surged since the end of apartheid to reach some 9 million foreign tourist arrivals in 2009. Tourism is also one of the fastest growing sectors of South Africa’s economy.  South Africa hosted the Fifa World Cup in 2010, the first time it had been hosted in an African country and is seeing the rewards of a higher profile on the global stage.

South African consumers have not always been interested in international brands, but this is changing. The relatively small size of the middle class means brands have to present themselves as more aspirational than they may be in their home market.

Domestic growth is unlikely to break the 3% barrier this year, as the effects of a global economy grappling with sovereign debt issues, bail-out hangovers and slowing growth continue to dampen prospects for improvement.  This means that the South African economy cannot rely on demand from abroad for growth opportunities. The private sector is seeking economic policy reforms to assist in economic growth and job creation, two of the government’s main priorities.  This policy reform and massive infrastructure spending which are sorely needed for the economy to achieve any reasonable growth in the medium term, are yet to materialize.

ECONOMIC SUMMARY
ECONOMIC INDICATORS*200920102011E2012F2013F
GDP growth -1.53.13.52.53.0
Consumer spending -1.64.44.83.42.9
Manufacturing production -12.84.92.42.24.0
Investment-4.3-2.04.56.54.5
Unemployment rate (%) 24.024.924.924.924.8
Inflation 7.14.35.05.65.6
ZAR/€ (average) 11.79.710.110.510.8
ZAR/US$ (average) 8.47.37.38.28.5
Interest rates 3-month (%) 8.26.55.65.45.1
Interest rates 10-year (%) 8.78.68.57.97.7

NOTE: *annual % growth rate unless otherwise indicated. E estimate F forecast

Source: StatsSA/SAPOA/Trading Economics

ECONOMIC BREAKDOWN
Population 50.59 million
GDPZAR755 billion (Q3 2011)
Public sector balance N/A
Parliament Multi party democracy
Head of State/PresidentJacob Zuma
Prime Minister /Vice PresidentKgalema Motlanthle
Election date2014
RETAIL SALES GROWTH:
% CHANGE ON PREVIOUS YEAR
S. AFRICA2009201020112012E2013F
Retail VolumeN/AN/AN/AN/AN/A
Retail ValueN/AN/AN/AN/AN/A

LARGEST CITIES (2006)
CITYPOPULATION
Johannesburg10,267,700
Pretoria2,345,908
Durban3,468,086
Cape Town3,497,097
Port Elizabeth1,300,000
Bloemfontein2,759,644
Polokwane508,277

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South Africa: -30.559482, 22.937506

MAJOR DOMESTIC FOOD RETAILERS

Pick ‘n Pay, Shoprite Checkers, Spar, Woolworths, Game

MAJOR INTERNATIONAL FOOD RETAILERS

Walmart

MAJOR DOMESTIC non-FOOD RETAILERS

Edgars, Foschini, Mr Price, Ackerman, Jet, Pep

intERNATIONAL RETAILERS in South Africa:

Zara, Mango, Soviet, Levi’s, Gucci, Burberry, Max Mara, Hugo Boss, Haagen Daz, Rolex, Dior, Louis Vuitton

Food & Beverage Operators

McDonald’s, KFC, Pizza Perfect, Fishaways, Steers, Spur, Adega, Keg, Nandos

TYPICAL HOURS
MONDAY- THURSDAYFRIDAY/SATURDAYSUNDAY
9.00 - 18.0009.00 - 21.009.00 - 17.00

 

South Africa with a population of some 57.8 million people has one of the most developed retail markets in Africa. Development in South Africa is almost as extensive as in the UK or France.  The growth of the black middle class has helped increase in consumer spending. Retail sales, the main indicator for the industry, have been losing momentum after a period of strong performance which bucked the trend for the rest of the economy. This out performance will be missed by the larger economy if it slows dramatically, and could have a significant impact on GDP. As a result, retailers and shopping centre owners will have to ensure they are working towards attracting customers to maintain turnover targets.

The retail market is dominated by large retail chain supermarkets and hypermarkets such as Shoprite Checkers, Pick n Pay, Spar, Woolworths, and New Clicks. The range of outlets also includes convenience stores / petrol station forecourt stores, small general dealers (Seven Eleven stores and the like), specialty stores handling a single product line (such as health foods, confectionery, fish or meat), and the other independents such as general dealers, cafes, spaza shops, street vendors, and hawkers.  According to AC Nielsen, some 70% of all retail sales are done through 6% of retail stores, which include the major supermarkets, the branded forecourt stores and franchises. The retail market remains fragmented with more than 80,000 independents and spazas selling the remaining 30% of goods.

The major retail chains have enormous purchasing power and are in a position to dictate their buying terms to suppliers who are generally required to deliver products to central depots or warehouses, where the products are then distributed to supermarkets and retail outlet stores nationally. Access to the smaller formal retailers is generally through agents and distributors. The informal retailers and spaza shops generally procure in bulk through wholesalers such as Makro, Trade Centre and the hypermarkets in the large cities.

Total existing stock of shopping centre space in South Africa totalled 18.5m sqm in 2010. There are over 1,400 retail centres of over 2,000sqm across South Africa, of which some 50 are over 50,000sqm.  Most of the shopping centres are around the metropolitan areas. Sandton City near Johannesburg at 158,000sq.m is the largest.

Although online and smartphone shopping are gaining importance as retail channels in South Africa, it will be some time before this trend reaches the levels already found in the US and Europe.  US department store Macy’s, and others, are making products available to South African shoppers in Rands with a six- to eight-day delivery, and local retailers such as Mr Price are becoming more active in e-commerce. Access to smartphones has significantly increased internet penetration. Online shopping accounts for a very small proportion of online sales but in the the future it may arguably pose some degree of threat to traditional retailers in an already tough market.

It is possible to enter the South African retail market direct, though many also franchise and enter via concessions/shop-in-shops.

New Entrants to the Market

ZaraLevi StraussCanterburyiStoreTopShop
Walmart

KEY FEATURES OF LEASE
ITEMCOMMENT
Lease TermsTraditionally, South African leases have been for a term of 5 years with an option to renew. Anchor tenants leases are usually 10 year terms. Break options were rare in the past but now increasingly negotiable. In the absence of a clear agreement in the lease, the tenant has no legal right to break so long as the landlord fulfils his obligations. Where agreed, breaks are typically at the first rent review for office and industrial space but are not currently common for retail. The authorised use will depend on the terms of the lease which will also state the degree to which this may be varied by the tenant.
Rental PaymentRents are typically payable monthly in advance. Turnover/percentage rents are common place in shopping centres and factory outlets, hotels and airports. A security deposit is not normally required for a tenant with a strong covenant or where a parent company guarantee (or less frequently a bank guarantee) is provided. For weaker covenants, a deposit will be required with at least 3 months rent equivalent commonplace.
Rent ReviewIndexation is common practice, together with fixed uplifts in rental.
Service Charges, Repairs and Insurance A service charge is usually payable in multi-tenanted buildings and covers management fees, security, cleaning, landscaping, internal maintenance of common parts, external maintenance and insurance, servicing of elevators, water, heating, air conditioning, management fees and property taxes. It excludes internal maintenance and insurance of rented accommodation, utility charges and VAT. The landlord is responsible for external /structural matters in shopping centres (charged back via service charge) or tenant (except in multi-let buildings). The tenant is responsible for internal matters. The landlord usually insures the main structure and external fabric but will charge this back to the tenant. Insurance for common parts is also paid by the landlord and charged back. The tenant usually pays for internal insurance directly.
Property Taxes and other costs The local government authority charge the "rates," the local property tax, which is payable on commercial property. The government sets rateable value on an ad hoc basis. VAT at 14% is not charged on rental payments (tax advice should be sought).
Disposal of a LeaseSub-letting is usually possible under the terms of the lease, subject to landlord’s approval. Assignment rights are not normally barred in the lease but will also be subject to consent, which should not be unreasonably withheld. Early termination is only by break clause, to be negotiated at outset of lease by mutual consent upon negotiation. At lease end, the tenant is responsible for re-instating the premises to the same condition as at the start of the lease, subject to normal wear and tear. All tenant improvements must be approved by the landlord subject to the alteration covenant in the lease and the fact that approval should not be unreasonably withheld.
Valuation MethodsN/A
Legislation A mandatory standard form of lease does not exist although a market standard is in place. There have been varying initiatives to simplify and shorten the lease, particularly to help smaller businesses.