Damian Hattingh, Partner in McKinsey’s Johannesburg office and Sidhika Ramlakan, Manager.
Two years into the COVID19 pandemic, South African consumers are still facing economic challenges. But they are willing to pay for what really matters to them. In this article, we explore the implications of changing consumer sentiment and behavior for retailers and consumer packaged goods (CPG) manufacturers in South Africa.
Consumer sentiment in South Africa was subdued even before the onset of the pandemic. In 2019, only 24 percent of South Africans were optimistic about the country’s economy.1 In the latest McKinsey Global Consumer Sentiment Survey, this number dropped to 21 percent (Exhibit 1). While this is a slight rebound from the all-time low of 17 percent recorded in mid-2020, it is below the values for other emerging economies like India (57 percent), China (48 percent), and Brazil (31 percent). Of those surveyed, only Japanese consumers are less optimistic (13 percent). South Africa also has the highest share of pessimistic consumers (29 percent), ahead of France (24 percent), and Japan (23 percent).
87% of South African consumers describe their current economic situation as stretched
In response to the economic hardship, which has been exacerbated by the pandemic, 61 percent of South African consumers say they are cutting back on spending. This is the highest among all countries surveyed, on par with Brazil, and well above the cut-back rates observed in India (48 percent), and China (45 percent). All income levels are affected. Even in the highest household income tier, the stated cut-back rate is still 51 percent. Seventy percent of respondents said they were paying more attention to prices. Sixty-nine percent of consumers are looking for sales and promotions. Sixty-one percent say they are delaying purchases. In all these cases, the figures have come down from highs observed during the COVID-19 crisis, but they are still well above prepandemic levels.
While the slight improvement from 2020 might indicate that the worst is over for South African consumers, household budgets remain constrained. As a result, 32 percent of shoppers in South Africa report substituting branded products with cheaper alternatives, such as more affordable brands or private labels (global average: 20 percent) (Exhibit 2). This represents an increase of 10 percentage points since the pandemic started. Conversely, very few South Africans (4 percent) report trading up. Only Brazil has a higher trade-down rate (40 percent) and a lower trade-up rate (3 percent) than South Africa.
32% of shoppers in South Africa report substituting branded products with cheaper alternatives
Trading down cuts across all categories, with household cleaning supplies at the top of the list (Exhibit 3). Respondents cite three main benefits of trading down. Fifty-four percent of consumers who trade down believe that private labels offer the same quality as branded products. Forty-two percent say that cheaper alternatives are good enough for everyday use, and 41 percent say that private label products provide a savings opportunity because they are often on promotion. According to a separate analysis by Nielsen HQ, private label products now represent 24 percent of total basket value in South Africa (up from 23 percent in 2019).2
42% say that cheaper alternatives are good enough for everyday use
While brick-and-mortar stores remain the key channel for shoppers in South Africa, online shopping has become much more popular over the course of the past two years. Online sales in South Africa have more than doubled since 2018 (2018: ZAR 14 billion; 2020: ZAR 30 billion, surpassing projected growth by ZAR 10 billion).3
Online shopping now represents 3 percent of total retail sales in South Africa, up from 1 percent in 2018. This trend is reflected in our survey.
Thirteen percent of consumers in South Africa say they have newly moved online since the pandemic started. The propensity to move online cuts across all income tiers (low tier: 12 percent; medium and high tiers: 14 percent). In addition, 38 percent of consumers say they now use online channels one to two times per month, an increase of 6 percentage points compared to pre-COVID-19 levels 55 percent shop online a few times a year (up from 48 percent).4
The online channel is particularly popular for purchases of non-perishable products, such as cosmetics, laundry supplies, and household cleaning supplies. The top reasons consumers give for online shopping are convenience (48 percent), easy price comparisons (38 percent), avoiding contact with people (33 percent), and lower prices (33 percent). The biggest barriers for ordering grocery and household products online include high cost (57 percent), worries about receiving faulty items (46 percent), and the concern that products may differ from how they appear online (43 percent).
38% of South African consumers use online channels one to two times times per month
Although they are under significant financial pressure, South African consumers have expressed a growing willingness to pay a premium for healthy eating and sustainability over the last two years. According to our survey, two-thirds of South Africans value companies that offer healthier choices, and they are prepared to pay a premium for healthier, more nutritious, and organic options. Fifty-one percent say they buy locally sourced products (up from 47 percent before COVID-19), and 41 percent claim to buy natural or organic products (up from 37 percent). While healthy eating is especially important to South African consumers, they also value companies that are purpose-driven and innovative (Exhibit 4).
51% of South Africans buy locally-sourced products
This trend is mainly driven by Millennials (born between 1981 and 1996) and Generation Z (born between 1997 and 2012) consumers. Thirty-four percent of South African Millennials, for example, want a diet that is rich in minerals and vitamins (South African average: 29 percent). Eighteen percent of Generation Z consumers look for vegetarian or vegan options when buying food or beverages (average: 13 percent) (Exhibit 5). In South Africa, 38 percent of consumers say they regularly make sustainable packaging choices. This number is 15 percentage points higher than the global average (23 percent) and is also higher than the numbers observed in developed countries, such as France (33 percent), Germany (31 percent), the US (30 percent), and the UK (24 percent). One explanation for these high numbers might be the fact that sustainable packaging is already relatively well-established in South Africa, for example, with returnable glass bottles being more common than in many other countries.
34% Significant variances by age cohort of South African Millennials want a diet that is rich in minerals and vitamins
The survey results demonstrate how South African shoppers are changing their behavior in response to high economic uncertainty, stretched household budgets, and the pandemic. And while it is hard to predict the future spread and severity of the COVID-19 pandemic, McKinsey’s “stickiness test” (see sidebar) suggests that certain behavior patterns formed during lockdown periods, such e-grocery shopping, are likely to persist (Exhibit 6). Most experts also agree that consumers will continue to care about health and sustainability, favoring companies that provide healthy options and commit themselves to sustainable practices.5 What could companies in South Africa consider in light of these persistent trends? In what follows, we will look at a few themes worth exploring.
Value is top of mind for South African consumers. South African companies can draw inspiration from how leading players use data and analytics to drive improved value perception without risking margin erosion. Some best practices to consider include:
For instance, a food company had previously communicated with suppliers only during commercial negotiations and new-product-development efforts. But during a DTV initiative, it held workshops with suppliers to discuss cost-reduction strategies and product enhancements. At one of these workshops, a potential supplier proposed new, lower-cost specifications for all meat products—specifications that would have no effect on the product features that consumers valued. The food company implemented the new specifications. Ultimately, the DTV effort generated a reduction in production costs that was four times higher than what the company had achieved through conventional cost-reduction methods the previous year.10
Digitization is a persistent trend, but not all retailers and CPG companies are taking full advantage of the opportunities it provides across functions. At the same time, many players are struggling with the operations and the economics of e-grocery. Examples of best practices to consider include:
A leading European grocer, for example, has successfully moved from one-size-fits-all marketing to personalized experiences. This shift began with research based on the retailer’s macro-segmentation; the company was then able to drill down a level further to create smaller segments based on factors such as location and time of day. From there, the grocer built a new transaction engine so it could target individual shoppers with tailored offers. For instance, the engine targets regular shoppers who buy coffee or lunch at the store every day with offers designed to grow their basket size, and it targets infrequent shoppers with offers designed to induce them to visit the store more frequently. This includes using the grocer’s smartphone app to provide offers to shoppers as they pass by a store.15
In another case, a food company realized that a number of its existing data sets had never been linked together, including information from its call centers and recipe websites. Marketing teams integrated this data into a “consumer 360” engine and added unique consumer IDs, enabling a deeper understanding of consumers and the targeting of microsegments. In an initial test, the company achieved a 40 percent improvement in its return on ad spending by using first-party data to model and target online audiences that looked like its known best consumers.16
For a long time, consumers seeking health and sustainability were a niche segment. Now, healthy eating and carbon consciousness are mainstream values, as indicated by the acquisition of Whole Foods by Amazon. Many companies have committed to ambitious environmental, social, and governance (ESG) goals, partly driven by regulation, investor expectations, and consumer demand.17 That said, while consumers in South Africa care about sustainable options, they don’t want to (and sometimes can’t afford to) increase their spend on them. For example, 46 percent of consumers are willing to pay “a bit more” for healthy options, but only 18 percent are prepared to pay “a lot more”. Best practices to balance sustainability with affordability could include:
A leading multinational grocer, for example, has made product traceability a priority. While most competitors don’t disclose the origins of their products, this company provides detailed information, e.g., on which country or region products come from. In many categories, such as dairy or meat, even the farm is mentioned on the packaging. Once established, this approach causes very little additional cost, but it adds a lot of value for shoppers who care about health and sustainability.18
In the CPG space, a global player recently launched laundry detergent in new packaging specifically designed for online orders. The detergent was reformulated to be more concentrated, and the packaging was redesigned to cut the use of plastic by 60 percent. The new packaging is also lighter than the original version, thereby reducing the emissions and the costs of transit. In another example, a consortium of leading brands, a logistics provider, and a recycler recently teamed up to promote returnable and reusable packaging.”19
Two years into the pandemic, the needs of South African consumers are partly conflicting. There are budget considerations, and they are often trading down. At the same time, they have high expectations when it comes to online shopping, healthy eating, and sustainable packaging. In this situation, retailers and CPG players not only need the right strategy, they also need people with the right capabilities to make it happen on the ground. Examples of best practices include:
For example, a multi-category retailer set an aspirational growth target that required a deep transformation of its business model, including the integration of e-commerce and new store formats. The company complemented this strategy by developing a workforce transformation across several levers: automation and digitization, new working models, and new roles, such as “Internet of Things” specialists and enterprise architects. The resulting three-year road map included an ambitious reskilling and recruiting plan and a set of bottom-up initiatives that identified opportunities to boost productivity by 20 percent. The resulting three-year road map included an ambitious reskilling and recruiting plan; the projected productivity improvement was in the magnitude of 20 percent.20
Challenging times are expected to continue for both retailers and CPG companies in South Africa, as many consumers will likely keep facing economic hardship. This means that good commercial housekeeping will remain a necessity. There are, however, also pockets of opportunity, such as healthy eating, sustainability, and ecommerce. Retailers and CPG players can enhance their resilience for the continued tough times that lie ahead by reviewing and refining their value propositions to take advantage of these opportunities.