With unemployment rising above the 40 per cent mark, South Africa’s economic state can sometimes be a hostile and challenging environment for the OP industry
Confusing. It’s a fair way to describe the South African economy. The strengthening of the Rand has had a marked impact on the export industry while a huge influx of imported goods has driven down margins on locally produced goods. The consumers are smiling but the industry is not. And as the South African Rand continues to strengthen, exports are becoming less competitive and providing importers with an opportunity to compete with local manufacturers.
Peter Worthington from Credit Suisse First Boston (CSFB) says: "Inflation readings have so far this year surprised on the downside, but we expect the year-on-year CPIX inflation rate to rise in the coming months, especially due to the recent petrol price hikes. However, we feel confident that there is little evidence of a broad-based inflation momentum."
What’s more, local consumers are enjoying the lowest interest rates in almost 20 years at 11 per cent. Therefore, there is a concern that the negatively affected industries are laying off thousands of workers as demand for their products slows down and as they attempt to cut expenses to make themselves more competitive. This is a vicious circle for unemployment.
More than 40 per cent of the South African workforce is without a job and nearly 60 percent of those who are jobless have never worked. How therefore can the country prosper under such seemingly dismal economic circumstances? And how in particular can the OP industry survive?
With unemployment reaching such high levels, there are obviously many unfortunate consequences, the least of which is the high crime rate. Government social reform policies, although positive, have been slow in addressing these issues that go hand in hand. Legislated procurement practices have put pressure on business to encourage equity participation by historically disadvantaged individuals and procurement from black enterprise. But is this enough and how does this affect OP players?
John Farrell from Waltons says: "Crime and corruption not only affect our personal safety but also have an impact on our ability to trade effectively, with continuous break-ins where high value stock (e.g. printer cartridges) and assets in the form of computers are targeted."
This affects in particular the computer consumables sector of OP companies, all of whom carry a selected range of consumables, some more limited than others. Hans Servas from Statmark estimates: "Computer consumables represent around 30 per cent if not more of the South African OP business."
Farrell continues: "Waltons carries the full range of consumables which represents some 25 per cent of our business. But the problem with consumables is that being a high value product, it is very susceptible to pilferage. There are times when whole consignments of stock are hijacked and these products, along with some counterfeit stock, will always get back into the market."
the here and now
Indeed this is bad news for the OP industry, especially as price has definitely become a major factor in the market. Although there is still a demand for branded products, the prices of the branded products are being dragged down by the increasing presence of grey and copy products in the local market. This is becoming an area of concern for the official distributors of the brands.
Farrell comments: "The local OP industry has found itself trading in a deflationary environment for the last two years, and has been affected by the parallel import of branded products, the importation of generic substitutes and a marked decrease in consumable prices. Although inflation has declined, operating costs have continued to increase, albeit at a lower level, while revenue lines have remained static despite an increase in volumes sold. The overall effect is a tightening of net margins and pressure on cash flow." These are challenging times for the South African OP industry to say the least.
The market comprises of contract stationers as well as chain stores that all carry a fair range of office products, estimated to be valued at around R4 billion (US$ 530 million). There are in the region of 2,500 players in the market of whom the majority are small independent dealers. The majority of government parastatal organisations will only deal with black-owned companies, which has brought a lot of small players into the field.
Waltons is the largest single operator and the only truly national stationer with a physical presence in all provinces. No other single leading firm in the market is as highly diversified as Waltons, which continues to focus on the contract/commercial part of the business, with its superstores accountable for roughly 15 per cent of its overall revenue. The largest alternative sales channel to Waltons is the mass discounters and chain stores such as Carrefour and individual office suppliers.
Interestingly, distribution does not seem to pose a problem in South Africa as the main commercial centres for office products and all other major businesses are situated near or around the main cities. This centralisation has proved to be a big advantage for the South African OP industry, and if neighbouring countries were offering exciting expansion prospects the possibilities would be endless.
But of course this is not the case, as Farrell explains: "When we see the turnover numbers of some of the big players in the American and European OP industry, we realise just how small our market is. If there were potential in any of the neighbouring countries, we would already have a presence in some of them, but most of the countries are still very third world in their infrastructures." This lack of foreign investment dramatically reduces and confines the South African OP industry to national players rather than international.
Servas adds: "In my view, South Africa is not attractive to major US or European resellers because of the size and composition of the market, as well as the dominance of local key players. Economies of scale simply won’t work for them here."
However on a more positive note, the South African OP industry has still managed to ensure a successful market. Farrell attributes this success to some key factors. He says: "The larger and more established businesses stick to an unwritten code of ethics and corporate responsibility. The new generation of traders are out to make a quick buck and will import anything from anybody and flood the market with cheap alternatives. It simply doesn’t work that way. They have no brand or product loyalty and are merely interested in taking advantage of favourable exchange rates and customs loop-holes for as long as these opportunities last, which is usually not that long at all."
Indeed, although the main threat to the industry has been described as "a market over-traded with cheap imports", the government has been leading certain policies to make all industries fairer and more equal.
Farrell says: "Government regulation on business has been relentless since 1994, with at least five new pieces of legislation passed by government, with all of them showing marginal empathy for business. Firstly, the new LRA (labour relations act) was legislated in 1995. However, despite its efforts to balance the power relationship between employer and employee, it appears to be somewhat lopsided in favour of the employee.
Secondly, the basic conditions of employment act is constantly seeking to reduce work hours and sectoral wage determinations are always seeking to increase wages, once again having a negative impact on the labour per unit costs.
Thirdly, there is the employment equity act that, while it may have certain merit, forces us back into a scenario of seeing people in categories of colour and gender.
And lastly, the very recent skills development act with its noble intentions has demanded onerous training and development needs from companies, almost to the extent where training departments have to be organised at the same level as tertiary institutions."
This may not paint a pretty picture for the South African OP industry. And although the government is trying to improve the situation, it appears to be backfiring. Farrell adds: "The government policies and legislation have regulated our industry so much so that we are forced to focus on adhering to legislation rather than doing what the business of business should be doing."
Servas believes the difficulties experienced in South Africa stem from the mix of first and third world economies and he insists that, in the long term, "political stability in other African countries should lead to more dynamic economic growth opportunities".
How the South African OP industry will develop in the next decade may well depend on how the South African government deals with such issues as well as the perennial problem of unemployment.