Frustrated retailers turn to Europe for growth

(retail, shutterstock)
(retail, shutterstock)
Shutterstock [http://www.shutterstock.com]

Johannesburg - When Brait [JSE:BAT] agreed to pay about $1.2bn for UK fashion chain New Look last month, billionaire Christo Wiese’s investment company took a leaf from an increasingly popular book.

Amid a lack of acquisition opportunities on its home continent, Brait followed the likes of retailers the Foschini Group [JSE:TFG] and the Spar Group in bypassing the potential of Africa’s growing middle class and targeting European consumers instead.

“They’re buying established businesses with established brands, distribution channels and shops, and this in a market that’s showing recovery,” said Byron Lotter, a money manager at Johannesburg-based Vestact, which oversees about R2.3bn of assets.

“Expansion into Africa is slower and a lot more difficult.”

While sub-Saharan Africa has long-term potential, a shortage of retail locations and high transportation costs are among factors limiting expansion opportunities in that region, according to Guy Hayward, chief executive officer of Walmart Stores’ South African unit Massmart Holdings [JSE:MSM].

That’s preventing companies taking full advantage of middle class households - those consuming $15 to $115 a day - that Standard Bank [JSE:SBK] estimates will grow to 40 million by 2030 from 15 million now.

Retailers have spent at least $1.5bn buying European companies this year, while Steinhoff International's [JSE:SHF] $5.3bn takeover of Cape Town-based clothes retailer Pepkor Holdings will see the furniture seller expand into markets such as Poland and the Czech Republic as well as Australia.

Spending slowdown

Shopping chains have been struggling to grow sales at home as unemployment of more than 26%, power shortages and rising inflation stifles consumer spending. In contrast, the UK, for example, is experiencing falling joblessness and had deflation of 0.1% in April.

Ronnie Stein, chief financial officer of Foschini, said on May 28 that the fashion chain is growing as fast as it can in the rest of Africa - yet that’s not quickly enough to meet the company’s goals.

Foschini plans to have 375 stores in its Rest of Africa region by 2020, compared with 148 now, yet also agreed to buy UK clothing chain Phase Eight for £140m in January.

“If we found the same opportunity in South Africa we would have done it,” Stein said by phone, referring to Phase Eight. “We are not slowing Africa growth at all, but we’ve now got the opportunity to grow in the rest of the world as well.”

Rand flight

South African retailers expanding in Europe also benefit from diversifying their sources of revenue beyond the rand, according to Stein. The currency has weakened about 17% against the dollar in the past year, and is trading close to a 14-year low.

Woolworths [JSE:WHL] closed its three stores in Nigeria in 2013 because of high rental costs, duties and difficulties transporting goods to shops.

Seeing faster growth through the purchase of stores in established markets, the seller of organic foods and clothing brands such as Country Road bought David Jones, Australia’s oldest department-store chain, for $2bn last year.

READ: Woolworths profit jumps on Aus acquisition

Mr Price [JSE:MPC] will open its first test store in Australia in the second half of the new fiscal year ending March 2016, it said June 2.

READ: Mr Price to open stores in Australia this year

“The prize in Africa is as big as ever, but it’s probably harder and further away,” Massmart’s Hayward said.

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