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JEREMY MAGGS: Amidst a sea of uncertainty and a raft of price increases, the consumer intelligence company, NIQ’s [NielsenIQ] latest State of the Retail Nation analysis has presented a more focused picture on food inflation and reveals that interesting shifts are shaping the South African FMCG [fast-moving consumer goods] sector. It’s worth around R593 billion in annual sales. I want to give you some insight into this now with Steve Randall; he’s the South African consumer panel commercial lead at NIQ. So Steve, firstly, can you elaborate on the dynamics that have led to an increase in the FMCG sector over the past 12 months or so?
STEVE RANDALL: Ja, so I think it’s quite an interesting phenomenon that we’re seeing currently in South Africa. So if you were just to look at one number in isolation, that near on 14% value increase within the FMCG segment looks quite attractive. But there’s a couple of underlying phenomena that we need to unpack to understand how we get to that number.
Ultimately, what we are seeing right now is a lot of that increase is actually being driven through the inflation phenomenon that we have seen within the South African market over the last couple of, let’s say 18 months, and really that’s the primary cause of this increase that we do see because actual volume increases have stagnated somewhat within the economy. We’re sitting at about 3% increase from a volumetric perspective. So really, that concern is just that price-driven value increase that we see within the market right now.
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JEREMY MAGGS: So if we are seeing price increases rather than organic consumption driving this, what are the implications for the sector over the long term?
STEVE RANDALL: Ja, so it’s quite interesting, I think from that perspective. What we are naturally probably going to start seeing is that the consumer is going to react a little bit more towards easing some of the concerns they see from their overall budget. Pay increases and the high unemployment rate that we do see within South Africa, and when I say pay increases, not necessarily seeing them in line with what we’re seeing from a price perspective.
So what the consumer is going to do is they’re going to have to react a little bit more abruptly, potentially, versus what we might have seen historically, and the consumer’s going to make different decisions ultimately within the environment.
So what that might seem to be is they might start to shift towards alternative retailers that offer different prices.
They might shift towards alternative brands that have cheaper offerings, maybe not as good a quality of some of their preferred brands, but ultimately might still be providing some of their needs.
We might see an overall consumption decline within the economy, and that’s problematic for manufacturers that when they see the demand driving down slightly, they might slow their production run, and that might actually lead to a slight negative impact for our overall GDP within the economy.
JEREMY MAGGS: If I’m correct, there is a discrepancy between CPI [consumer price index], which is cooling down, but this worrying food inflation quotient, which remains high. What’s behind that discrepancy?
STEVE RANDALL: Ja, so it’s a very interesting one, and I think some people don’t necessarily look into the detail, and certainly, CPI and food inflation are very good metrics to look at you on a regular basis. But the discrepancy is quite notable, and really when you unpack what goes into the CPI basket, it’s not just food items; it includes durable goods, it includes services and the likes of those sorts of things.
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So when you isolate into food inflation, which obviously when you consider where you spend most of your money on, you’re not always buying necessarily a new radio every month, but you are buying a loaf of bread or at least a few within a month. So certainly, that has a larger impact in terms of your budgetary spend from a month-to-month basis.
So what we see from a discrepancy perspective is there’s a lot of strain within the manufacturing environment right now. I think there’s a couple of factors that are influencing that. We’ve got the issues that we see outside of our borders with the Russia-Ukraine conflict. We see issues with global supply chains being impacted, and certainly, you might find that South Africa’s one of the lower countries on the list where your raw materials might be shipped to and ultimately, that has a huge impact on supply and demand and, therefore, we see price increases happening within the food segment.
But even when you consider local manufacturers and the phenomenon that they have to face in the local environment, things like the increase in load shedding, the increase of petrol and diesel prices all going up certainly has an impact in terms of their ability to produce and ultimately the price that they have to put towards the consumer at the end of the day. Hence, why we’re seeing the price for food goods actually accelerated versus what we see from a CPI perspective.
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JEREMY MAGGS: Why are you specifically concerned about the increase in cooking oil prices?
STEVE RANDALL: So I think it’s just one of the few things that we have seen go up, but it’s certainly not the only one that’s gone up at quite a rampant rate. We have seen other categories like coffee, for instance, which has seen a reduction in terms of promotional expenditure and higher everyday prices within the last six months coming up.
But we focus on cooking oil just as a very small example of what we’re seeing within the market. Cooking oil doesn’t really have a substitutable product, whereas you might shift from bread to rice or maize meal, for example, you can’t really shift your spend towards an alternative product within cooking oils. So really, the consumer has to take on the brunt of the cost increase that we do see within that category, and ultimately that budget has to be sacrificed from alternative areas or from other portions of their spend.
That means that they’re probably going to start cutting back on things like out-of-home consumption. They’re probably going to start cutting back on things like new clothes during the year and so on.
Certainly, that’s where we actually see, based on survey work that we did towards the end of last year, that’s exactly the areas where the consumers are focusing their cutbacks on in order to focus more of their budget towards transportation costs, as well as food costs, which they’re anticipating to continue to rise, at least into the first half of 2023, which we’ve seen, and potentially into the latter half of the year as well.
JEREMY MAGGS: Just a quick one in conclusion, back to the way in which consumer strategies are shifting due to these inflation pressures that you talk about; on the upside, are there product categories then that are either emerging as more popular alternatives or are simply bulletproof?
STEVE RANDALL: Ja, that’s a really good question, I think, and it’s interesting how savvy the South African consumer specifically actually is. So not just categories but also where they might shop is changing at an accelerated rate. So certainly, we do see categories that are a little bit slower to move on prices. We see that particularly within the beverage categories, inclusive of alcohol, where we look at, for example, beer sitting at about 5% or 6% inflation, so it’s much lower versus some of the food categories that we do see.
Then when we look at soft drinks and energy drinks sitting at about 2% to 5% inflation, that’s a lot easier for the consumer. So some of the spend does ultimately move towards alternative categories. When you look at something like staples as a whole product group, what’s interesting that’s happened within staples, you might assume that the consumer doubles down onto staple categories when times are tough, but it doesn’t suit all staple categories at the same time.
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So what we see, for instance, is bread inflation is sitting closer to 15%, but rice inflation is only at 1%. What’s really interesting is when we look at the NIQ home panel data, where we track 4 000 households within the South African market, we actually see the consumer shifting towards rice, away from bread, and that’s directly relatable to the price increases that we do see within the market, but it’s not just categories.
What’s really quite interesting right now is when we look at the different channels where consumers can shop, what has actually happened is we see a slightly lower inflation within the independent retail or the traditional trade side of the equation, which we do see consumers actually picking up on. What we call this sort of segments is the low-end or the informal trade.
What we see within that market is quite an interesting dynamic. We see nice growth coming through from there, and ultimately the consumer is seeing this no longer as a channel just for top-up shopping, they’re seeing more attractive prices for some of their day-to-day goods versus modern trade stores, and ultimately that does benefit them.
So it’s not just a top-up shop destination, it’s actually a destination for a full basket of groceries, and that’s quite an exciting evolution for certain manufacturers that can cotton onto that a little bit earlier than others.
JEREMY MAGGS: Steve Randall, I’m going to leave it there and thank you very much.
