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Gary Davids

Investment Analyst

A depressed consumer environment in South Africa has resulted in clothing retail shares trading sideways since 2014 and underperforming the market – at Sanlam Private Wealth, we’ve been highly selective in our exposure to the sector in our houseview portfolio over the past decade. However, more palatable valuations have resulted in some clothing retail shares now starting to look attractive. While we certainly won’t be taking an aggressive stance, we may consider adding to the sector. Our preferred names are Pepkor, which we already own, and The Foschini Group (TFG).

Over the past two decades, the ‘big 5’ listed South African clothing retailers – Woolworths, Truworths, Mr Price, TFG and Pepkor – have dominated the sector, capturing a greater share of apparel retail sales every year. Accounting for nearly 70% of South African apparel and footwear sales, these groups have – over the long term – boasted high margins and healthy profits as they’ve penetrated the informal market, consolidated smaller outfits and grown space at a rapid rate.

The South African clothing retail industry is a traditionally tough space in which to operate. Over the past few years, competition within the sector has been muted, exacerbated by the closure of local stalwarts Stuttafords and Edcon in 2017 and 2020 respectively. The main winners after the latter’s demise were TFG, Mr Price and Pepkor. In recent years we’ve seen Pick n Pay Clothing and UNIQ (a division of Shoprite) enter the market to challenge the incumbents.

At the same time the entry of international fashion retailers into South Africa has had a significant impact. The likes of H&M, Zara and Cotton On have found good early traction on our shores. While these foreign retailers have thus far failed to steal significant market share, the growing presence of international retailers shouldn’t be ignored.

The major bane for South African retailers is consumers’ declining disposable income, aggravated by the weak rand, which has materially increased the selling prices of imported clothing. This, together with our large income inequality and high unemployment rate, has resulted in poor volume growth in terms of clothing units sold over the past few years. In analysing household consumption patterns, it’s clear that consumers are having to make trade-offs in their monthly spending, reallocating spend towards segments like transport and electricity.


Changing consumer behaviour poses another challenge. Most retailers swear by the maxim ‘the customer is always right’ – and a combination of trends, disruptions and shifting behaviours is currently enabling consumers to influence the sector. The expectations of Gen Z and millennial shoppers are vastly different from those of previous generations, and then we have the digital natives, Gen Alpha, who were raised in an online world.

As consumer expectations evolve, retailers in the clothing sector are under more pressure than ever before to remain relevant as their connected, sophisticated and well-informed customers seek enhanced experiences, increased transparency, choice and sustainability, as well as a greater focus on convenience. They want discount pricing and fast shipping, but they are also willing to pay more for fashion brands they identify with.


Traditionally, the success of the clothing retailers was premised on being able to bring the product to their customers through store expansion. As internet and smartphone penetration increases, this operating model is coming under threat as barriers to entry in the sector decrease, while years of market consolidation have left fewer assets available to buy, limiting growth via acquisitions.

Since the outbreak of the Covid-19 pandemic in 2020, online shopping has gained in popularity, as evidenced by the success of retailers such as Checkers Sixty60 and Chinese e-commerce giant Shein, and the recent announcement that Amazon would enter our market in 2024. While these businesses don’t all form part of the clothing retail sector, their rise does point to a few challenges for the industry.

One of these is that the route to market for clothing retailers is no longer hindered by the ability to access capital to expand their store base or, indeed, the need for physical space to sell product. The emergence of the likes of Shein and Superbalist (part of the Naspers-owned Takealot Group) indicates a strong appetite for an alternative method of shopping to traditional stores.


Online shopping has led to increased competition in terms of accessing consumers’ disposable income, not only for international players but also for small businesses and manufacturers to sell their products directly to consumers. Furthermore, it has created price discovery within the market and increased promotional activity, putting pressure on margins.

Online sales have also brought about a change in the way retailers trade, from both the back end and their physical stores. Optimising inventory management and efficient delivery now require more sophisticated IT systems as stores are used to fulfil online orders. We expect higher-end retailers to move towards fewer, but fancier stores, providing consumers with a more sensory overall shopping experience.

While we haven’t delved into the cost of online shopping from a business perspective, and while the pace of online sales growth will be dictated by consumers, it does bring about economies of scale for clothing retailers. An online platform can accommodate significant growth in revenue without the incremental capital expenditure required in traditional store roll-out. Retailers can also showcase their full product range in a single place for the convenience of shoppers.


From an investment point of view, clothing retail shares are now starting to look more interesting – they are pricing for a poor operating environment to continue, led by loadshedding and pressure on consumer disposable income, resulting in depressed valuations.

We are, however, of the view that investors should remain highly selective within the sector and look to identify market share gainers over time. We like the business model of TFG. It operates in South Africa, the UK and Australia, as well as across the low-, middle- and upper-income segments, and has integrated manufacturing capabilities that enable it to meet changing consumer trends faster.

An exciting development in the world of TFG was the launch in February this year of its Bash online platform – a highly proactive move relative to competitors. Given that developed markets currently enjoy a higher percentage of revenue from online sales than South Africa, TFG is in our view building this capability ahead of the need in this country, ensuring it is well positioned to compete in the evolving local retail landscape.

We will continue to keep a close eye on the TFG valuation, looking for the correct entry point to add to client portfolios.

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