Why it's not all plain sailing for top international brands in SA

LOCAL MARKET

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Jeremy Sampson iSTOCK 

 

Tim Cohen

Many international brands like clothing retailer H&M and pizza maker Domino’s are soaring in the international markets but are struggling in SA, leading local brand managers to modify their long-held belief that SA’s local brands will ultimately crumble in the face of the colossal might of their international relatives.

SA has over the past decade seen the introduction of a host of international brands, some of which have thrived while others have struggled. But the resilience so far of at least some local brands is forcing local firms to become more sceptical about the brand value that big global brands bring with them.
The most obvious example is the travails of Taste Holdings, which has coffee shop Starbucks and Domino’s Pizza under its wing. But neither have brought with them a hoped-for gold strike, and in its results for the year ended February, Taste’s revenues were down 5% to R1.04bn, while operating losses reached a staggering R228.3m.
Other examples abound. Until changing course a few years ago, clothing store Edgars pinned its hopes on importing international brands like jeans brand Diesel and clothing brand Mango. Local brands Penny C, Charter Club and Kelso were sidelined. Significantly, Edgars is gradually bringing back the local brands, notably Kelso.

The notion then was that millennials and SA’s rising black middle class were totally enamoured of global brands.
Some international brands have done extremely well in SA, notably Spanish clothing company Zara, but for unusual reasons. Independent analyst Chris Gilmour says Zara has hit a niche in SA with high-end fashion, even though the brand is more well known internationally as a mid-market brand. The other surprise success, he says, is Australian brand Cotton On, which tapped into a lucrative space for comfortable, fashionable clothes with a "natural" aura.
Some international brands have persevered in SA and are technically successful.
But Gilmour questions whether they are where they initially hoped they would be at this stage.
The best example is fast food company McDonald’s, which has developed a solid network in SA and is moderately well received. But the brand has 245 outlets in SA, less than a third of market leader KFC and less than local fast food company Nando’s. "In all honesty, that [is] not great progress for a company that has existed in SA for 25 years," says Gilmour.
Why are international brands on average struggling in SA?
Executive director Brand Finance Africa Jeremy Sampson points to the economy as one factor. "The economy is tightening, and when that happens, people tend to trade down". Often that means sacrificing the more expensive international brand for the cheaper local brand.
There are also economic incentives built into the process, since a lot of international brands come with very limited flexibility and high royalties.
Sampson says McDonald’s is perhaps a good example of international companies coming up against local tastes and failing to understand the local market sufficiently. The protein of choice in SA is chicken rather than beef. "KFC is absolutely flying", he says, and the other fast food franchises have found they have to adapt their menus.

The economy is tightening, and when that happens, people tend to trade down

Some fast-moving consumer goods, like Kellogg’s cereals, have sustained themselves, but many others come up against a whole range of South African staples, like rusks and chutney. The flavouring is different, and "you know, we are very happy with what we have got".
What should the international players be doing?
Sampson says the good brand managers have managed to make their brands seem as though they are local brands. They don’t play up their international heritage and "they almost seem to embed themselves in the local community". It’s worth noting, he says, that some international brands are present in SA in almost a disguised form.
Vodacom is actually part of British company Vodafone, but it is presented as a local brand.
Another problem with international brands is the price point, Sampson says.
Some big international brands were available in SA, like The Gap in Stuttafords, but they were very expensive.
Gilmour points to an additional problem when it comes to the big fashion houses: the difficulty in getting prime sites. With the construction of shopping centres slowing down, the availability of powerful store space within malls is declining, which puts companies like Swedish group H&M and to a lesser extent Zara at a disadvantage to the incumbent stores.
Generally, he says, clothing retailers are rediscovering the utility of "in-store" brands.
One example is Country Road and Studio W within the Woolworths stores, but many others are developing the same concept
Gilmour says getting brand traction has always been a problem for many global brands because their decision to stay out of SA during the apartheid years put them at a disadvantage to local groups.
A good example is a comparison between KFC, which was present in SA on a franchise basis during the apartheid era, compared with McDonald’s which was not. Even though KFC is the market leader in SA, internationally the roles are reversed.
A good thermometer of local acceptance of international brands is Burger King, owned locally by Grand Parade Investments, which is one of the most recently introduced international brands. The firm has stiff targets set by the US owners and the investment in the brand has been huge.
It appears to be holding its own, but as acknowledged by its management, it’s a good thing they have a set of casinos to help fund their expansion.
That’s something Taste lacks.