— By James Noble, Head of Wholesale, Retail and Franchising – Absa Business Banking
No business has been left unscathed by the COVID-19 pandemic. Even businesses in the fast-moving consumer goods (FMCG) sector that trade in groceries, health, hygiene, long-life consumables and pharmaceutical products, have been impacted due to shorter trading hours and more conservative purchasing behaviour by consumers.
For many operators in the wholesale and retail sector in South Africa, the future is bleak.
Numerous sub-sectors in this market came to a halt during lockdown Level 5 and many are still closed or slow to restart.
Consider the deep impact of the lockdown on restaurants and fast food outlets, vehicle dealerships, tourism attractions, entertainment venues, textile outlets and beauty salons. Walk through any shopping district and you will see doors closed, stores cleared and signage disappeared. The increase in vacant shop fronts is evidence of the pain this sector is suffering.
Shifting consumer buying behaviour
Consumers are uneasy. Faced with unemployment, income insecurity and the unknown duration of the crisis, their value consciousness — already evident in trade statistics pre-COVID19 — will undoubtedly deepen as affordability remains top-of-mind.
As we moved through lockdown levels, Absa noted interesting trends in the trade sector. Purchases and transactions in the first quarter of 2020 were lower than in 2019, representing the negative GDP growth already battering the South African economy.
During lockdown Level 5, transactions across the board dropped between 50% and 72%, depending on monthly cycles. While the situation improved during Level 4 (with a spike at the beginning of the month as the economy opened up), flows dropped by up to 39% later in the month.
The same trend could be seen in June, when lockdown moved to Level 3.
The drop in the volume of transactions could be expected, but it is interesting to note increased volumes and average values of transactions at the beginning of May after lockdown Level 4 was implemented. Customers started shopping less frequently, but buying more to minimise visits to the shops during the month.
Players least impacted included those selling meat, clothing (Level 4), groceries, health and hygiene products. Worst hit were airlines, hotel and travel, fuel, liquor, restaurants and tobacco.
The future: Sector and business responses
We anticipate three types of responses from businesses in the various industry sectors post-COVID19.
These responses depend on two elements: The health of the industry from a structural point of view prior to the crisis and the impact of the pandemic on that sector.
Response #1: Deep change
The first set of responses will be the most dramatic. In sectors where structural challenges existed prior to COVID19, further weakened by the crisis, we anticipate long-term and systemic change. This includes operators in tourism, hospitality, airlines, entertainment and some manufacturing.
The current crisis presents a unique opportunity for such players to fundamentally adapt and ultimately operate in a stronger sector. Far-sighted innovators with a willingness to adapt will be the survivors of tomorrow.
For example, international travel will become prohibitively expensive for most, opening doors for new high quality and diversified domestic offerings. The entertainment industry will require alternative delivery mechanisms, potentially fast-tracking digital or artificial experiences. And manufacturers heavily dependent on supply chains from afar will seek to de-risk via local production, thus opening up whole new sector value chains and resulting in new job creation.
Response #2: Tweak the business model
Then there are those sectors that did not necessarily face deep structural challenges, but have been impacted profoundly by the COVID19 crisis, such as non-essential manufacturing and retail, catering, financial and professional services. Here we will likely see some adaptation to existing business models.
Through support such as government Master Plans, we believe the manufacturing sector can be lifted, but we will need to pick our focus areas carefully.
For example, the local automotive industry’s success is based on the availability of incentives, capital finances, strong support from OEM’s, a well-developed and mature component manufacturing supplier base and strong industry and labour support organisations.
To replicate this success in textiles, durables or technology will require government commitment and courageous decisions. The retail sector will see more direct-to-consumer e-commerce and online shopping, home deliveries and thus increase the need for distribution centres closer to where the customers are.
Professional services will see work-from-home practices become permanent, changing what buyers look for in their homes, such as a dedicated working space, a home gym and suitable tech infrastructure.
We’ve already seen how players in these industries are seeing the benefits of new business models: some quick- service restaurants now focusing on home deliveries saw better turnovers during Level 3 than before the lockdown.
And in the automotive aftermarket, businesses saw record turnovers in May compared to the previous year as consumers focused on maintenance and repair of their vehicles.
Response #3: Business as usual
The third type of business response will be in sectors that have been least affected by COVID-19.
We fear that we may see a business-as-usual approach and lack of innovation. Food and pharmaceutical retailers that experienced bigger sales volumes pre-lockdown than the previous Black Friday, will continue to pressure suppliers for lower prices, landlords for lower rentals and seize the moment to increase profits given consumers’ reliance on them.
It will be interesting to watch smaller independent traders, closer to customers with a relevant offering for specific markets, take advantage of the changed consumer.
To be clear: There was already evidence of distress in the trade sector prior to lockdown at the end of March. We saw year-on-year reduced trading as a result of load shedding, increased electricity and fuel prices, growing costs of labour, inflated and escalating rentals and subdued demand, which all served to increase operational costs and reduce profitability.
These challenges will need to be addressed, with solutions such as renewables for power, local seasonal sourcing to reduce transport costs, efficient tech and systems to lessen people reliance and relevant value propositions to attract and retain customers.
Absa support through payment relief plans
Some industries will be impacted more severely and take longer to recover from the pandemic, but Absa’s learnings from the 2008 economic crisis has enabled us to proactively deliver support and relief to business customers.
Our advice is to engage openly with landlords, suppliers, staff, franchisors and banks, so that feasible finance solutions are structured to protect the business during and after COVID-19.
We have created extensive payment relief plans and customers who qualify, are able to negotiate a non-payment period to help ease their financial burdens.
Loan instalments, interest and fees accrue monthly and are capitalised to a loan account, but loan terms and repayments will be adjusted to help the business cope during this difficult period.
Absa’s approach is to tailor solutions for small and medium businesses according to their individual circumstances, that includes credit products, loans and overdraft facilities, mortgage-backed business loans and commercial property finance and commercial asset finance products.
Customers with merchant and cash solutions can also apply for assistance.
Our plans are aimed solely at helping our customers who are struggling with cashflow due to the pandemic.
If you require any further information, visit www.absa.co.za/personal/covid-19/ or speak to our industry specialists and relationship executives who are available to provide guidance support.
To find out more about our wholesale, retail and franchise industry, contact us at firstname.lastname@example.org.