Our operating environment

Our operating environment continues to be impacted by high levels of geopolitical uncertainty globally, as well as profound socio-economic challenges in South Africa and across our African markets.

Global

• This year, the global economy is projected to grow steadily at 3,2%, with the advanced economies anticipated to achieve 1,7% growth and emerging markets around 4,2% growth. The US and European economies are both forecast to see a slight slow-down – to 1,4% and 1,2% respectively – while China's growth is projected to moderate to 4,7% amid various global and domestic headwinds. Globally, there has been a steady decline in inflation, from 6,8% in 2023 to a forecast 5,9% for 2024, reflecting an easing on supply constraints and labour shortages, and a fall in energy prices.
• Despite some positive economic signals, there remains significant uncertainty in the broader geopolitical environment, with the escalating conflict in the Middle East, the ongoing war in Ukraine, and the intensifying rivalry between the US and China, all posing risks to global energy supplies and trade routes and contributing to increased shortages and price volatility in essential commodities. The availability and pricing of raw materials has also been impacted by the increasing incidence and severity of extreme weather events.
• This general uncertainty is compounded by evidence of increasing economic fragmentation – characterised by rising populism and a growing trend towards protectionism that is leading to trade and investment flows being redirected along geopolitical lines.

South Africa

• South Africa’s GDP growth is projected to be 1,2% for 2024, reflecting a recovery in growth on the prior year. Local markets have responded positively to the formation of a Government of National Unity in June 2024, with the strengthening of the rand against the dollar and an increase in foreign direct investment amid expectations of economic reform and market-friendly policies. This positive sentiment has been boosted by the cessation of loadshedding, and a sharp decline in inflation, with the Reserve Bank confident that it will hit its targets this fiscal year, and with some observers hoping that South Africa will exit the Financial Action Task Force grey list in 2025.
• Consumer disposable income remains under pressure, reflecting consumers’ concerns with the rising cost of living, job insecurity and high debt levels. Around 18,2 million South Africans live in extreme poverty, and the country has among the highest unemployment rates globally, officially recorded as 33,5% in Q2 2024. Although food price inflation has eased from its 14% peak in March 2023 – driven largely by Russia’s invasion of Ukraine, a major grain producer – to around 4,5% at financial year end, there are concerns this may pick up due to expected declines in certain food commodities following extreme weather events and a declining exchange rate.
• Despite these challenges, latest data shows that the performance of the South African retail sector is beating expectations, pointing to some recovery in consumer confidence. Retail trade sales increased by 4,1% year-on-year in June, up from 1,1% in May and 0,7% in April, and ahead of economists’ forecasts of between 0,9% and 1,1%.
• The country’s short-term economic outlook remains uncertain. Although some economists see the recent structural reforms gaining momentum, prompting a decisive shift upwards in growth rate, others are more cautious given the country’s deep structural challenges, including its infrastructure and logistics bottlenecks, high unemployment, persistent crime and corruption, and challenges at local municipalities.

Regional

• Our markets across sub-Saharan Africa are expected to show moderate economic improvement this year, with average GDP growth rising from around 3,6% in 2024 to around 4,2% in 2025. While inflation rates have generally eased across the region, food price inflation remains a concern, reflecting climate-related and global supply chain disruptions. These markets continue to face some significant macro-economic challenges – including growing youth unemployment, high levels of income disparity and continuing political instability – with the political landscape undermined in many countries by mismanagement, corruption, political intolerance and popular protests.
• The economic outlook for the region remains fragile, with risks including geopolitical instability, climate change impacts, high public debt levels and the potential for renewed food insecurity, all of which could undermine growth prospects.

We are seeing ongoing changes in consumer purchasing patterns, reflecting challenging market conditions, growing digitisation, busier lifestyles and changing aspirations relating to healthier affordable eating and ethical sourcing.

Economic strain heightens price sensitivity: In the context of a constrained economic environment – characterised by higher interest rates, input cost inflation, low wage growth and reduced disposable income – consumers are typically shopping less frequently, across fewer categories and at fewer retailers for bigger baskets, with growth biased towards essential categories, and demanding more in terms of affordability, convenience and quality. Although consumer confidence recently received a boost, aided by lower inflation, many are still struggling to cope with the high cost of living, switching to cheaper value offerings, and showing a heightened reliance on promotional pricing and a growing shift to private label, with brand-loyal customers reverting to smaller pack sizes. With heightened price competition, volumes and margins are threatened, and cost recovery ahead of inflation remains a strategic priority. Tighter budgets are driving growth in the informal market, emphasising a need to drive affordability and grow a presence in the general trade segment.

Weakening brand loyalty and the rise of private label: We are continuing to see aggressive competitor pricing, as well as increasing sophistication in private label penetration by leading retailers, which is placing increasing pressure on branded product volumes and margins. In 2023, South Africa had the highest rate of trading down by consumers, leading to private label growth, with lower income consumers trading down at two times the rate of high-income consumers. Private label now captures roughly 25% of total sales value in the local food and beverage sector, growing this year at an estimated 12%, against branded product growth of 6% (see here on the growth of private label).

Growth in e-commerce: Driven initially by the Covid-19 pandemic, there has been a substantial shift, globally and locally, to e-commerce and online grocery shopping, with digitally savvy consumers increasingly expecting a seamless omnichannel experience. A recent study found that in 2024, online sales grew by 29% in South Africa, while traditional retail sales declined in the same period. This is reflected in the significant uptake of bricks and clicks grocery e-tailers (such as Checkers’ Sixty60 and Pick n Pay’s ASAP), as well as non-grocery platforms (such as Mr D) offering grocery deliveries. There has also been continued growth in Pure Play e-commerce initiatives such as Takealot and the recent arrival of foreign online retailers such as Amazon, Shein and Temu. The e-commerce sector is expanding rapidly, with local revenue predicted to reach the US$7,9 billion mark by 2027. With speed and convenience key competitive advantages in FMCG e-commerce, companies are exploring rapid delivery options, increasingly aided by big data analytics and AI that enable predictive analytics, enhance app-based shopping and streamline distribution. The rise in flexible digital payment solutions is enabling growth across channels and providing an opportunity for integrated loyalty programmes.

Changing consumer preferences: South African consumers are prioritising health and nutrition, however, with six in 10 households being food insecure, affordability is becoming increasingly important. Many consumers also have clear preferences rooted in cultural identity, highlighting the value in having product offerings that are localised to the specific market context. Some consumers – mainly in the more affluent segment – are demanding more sustainable products and practices, preferring to buy from brands that are transparent about their supply chains, use sustainable materials and minimise environmental impact. There also continues to be a shift towards smaller, convenient ready-to-eat snacks or mini-meals, often replacing traditional sit-down meals, influenced by busy lifestyles and changing eating habits. A recent report on the state of snacking in South Africa found that while 78% of consumers are feeling the impact of higher food prices, they are still setting money aside for snacks and treats.

Source: National Food and Nutrition Report February 2024; Stats SA Non-communicable diseases report in South Africa 2023; University of Pretoria “Diabetes is an escalating public health crisis in South Africa” Aug 2024; PMB Household Affordability Index report 2024 July
*	Food insecure = Moderate to high challenges to access food
**	19,2% of households have medium to low food diversity
***	Amount of money that an individual will need to afford the minimum required daily energy intake

We are operating in an increasingly dynamic competitor and customer environment that is heightening the imperative of a consumer-centric mindset, ensuring cost leadership and maintaining a superior channel presence.

New market entrants: With Africa having one of the fastest growing populations globally, and with an increasingly young and urbanising population, the region presents an exciting opportunity for new market entrants. This includes the arrival of global food companies and online retail players, such as Amazon, Shein and Temu, as well as the emergence and growth of local and regional food producers and retailers.

Shifting competition among retailers: The rapidly changing consumer dynamics (reviewed here) has intensified competition across the food sector, with food producers, retailers and wholesalers looking to defend and grow market share by being more precise and deliberate in their consumer engagement strategies. Retailers are strengthening their analysis of shopper behaviour and leveraging improved data on consumer spend (accessed for example through loyalty programmes), enabling more accurate personalisation and targeted value offerings at scale.

Rise of private label: With consumers under pressure, retailers are actively promoting private label goods with the aim of further differentiating themselves, increasing customer loyalty and ensuring greater control over pricing and positioning. In doing so, some retailers are diversifying their private label from entry-level offerings to a new generation of premium products with both quality and value, competing head on with traditional premium-priced brand offerings. Private label now captures roughly 21% of total sales value in the South African food and beverage sector, growing this year at an estimated 12%, against branded product growth of 6%. In developed economies, private label has attained a larger share across the majority of categories, indicating room for additional private label penetration in South Africa.

Shift to e-commerce: There has been a continued rise in e-commerce, with online retail sales doubling in the country in roughly two years, boosted by the recent entry of global online retail players. This is requiring companies to revise their omnichannel strategies and further strengthen customer engagement and service levels, including through integrated loyalty programmes.

Changes in route-to-market: At the same time, driven in part by reduced consumer disposable income, we are seeing some shifts in route-to-market, with supermarkets facing strong competition from mixed and wholesale retailers, emerging informal players, and convenience retail solutions such as forecourts and e-commerce. Although the formal retail channel remains the largest contributor to the South African FMCG sector, at roughly 61% of the estimated R827 billion market, wholesalers and distributors – including informal independent traders such as spaza shops and superettes – have until recently been gaining momentum and market share (see here).

Climate change and the impact on sustainable agricultural sourcing, as well as other sustainability-related pressures, are having an increasingly material impact on companies in the foods sector.

• The recent increase in the frequency and severity of extreme weather events has highlighted the impact of climate-related risks on the availability, quality and pricing of essential raw materials, as well as on the resilience of our distribution and supply chains. Civil unrests in South Africa have arguably also sharpened business and investor appreciation of the commercial impacts associated with sustainability-related risks such as poverty, inequality and joblessness.
• The changes in climate and weather patterns are reducing crop yields, squeezing supplies and driving up prices, with a recent study by the European Central Bank suggesting that global annual food inflation rates could rise by up to 3,2 percentage points per year within the next decade or so as a result of higher temperatures. This year, a shortage of cocoa beans in West Africa linked to El Niño has seen the price of the commodity surge four-fold in the past 12 months.
• The growing visibility of social and environmental pressures is prompting greater regulatory intervention – including new and/or strengthened regulation on food labelling, greenhouse gas emissions, plastic packaging, wage level disclosure, supplier due diligence, and taxes on sugar and carbon – all of which has a material impact on our business activities.
• At a global level, there have been significant developments relating to corporate transparency on sustainability impacts, risks and opportunities, such as the IFRS Sustainability Disclosure Standards, the EU’s Corporate Sustainability Reporting Directive (CSRD) and the recommendations of the Taskforce on Nature-related Financial Disclosure (TNFD). Despite a recent investor backlash on environmental, social and governance (ESG) issues and growing politicisation of the issue, investor engagement on ESG performance and disclosure remains strong, albeit at a slower pace.
• In some market segments we are seeing growing demand for brands-with-purpose, sustainable and local products, plant-based proteins, ethical marketing and front-of-pack nutrition labels. Globally there is an increasing preference for local ingredients given these products are often perceived as healthier, and more sustainable, trustworthy and authentic.