Retail industry barriers limit growth of small manufacturers in South Africa

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Competing in the FMCG space is a survival of the fittest and the fittest are often the established giants of the manufacturing world who have oodles of cash flow to back supply and demand needs. Historically, manufacturing is an industry that has supplied employment opportunities as well as contributing to the economic growth of a country. It is a well-known fact that the majority of employment opportunities in South Africa arise through the growth of small to medium enterprises.

Research shows nearly 90% of future jobs will be created by small and expanding firms. Presently, SMMEs account for 68% of private employment. This is a great incentive for larger retailers and manufactures to support SMMEs because in a cyclical manner it encourages consumer spending. People who are unemployed don’t buy products, but that’s not the only opportunity for big retailers to support small business.

Smaller local brand manufacturers, while they may have a great product, battle to break the barriers that exist in the retail industry today. Without larger firms helping to break ground for SMMEs in the retail and manufacturing space, our market faces stagnation.

The barriers facing small manufacturers:

You have to pay to play – smaller manufacturers need to come to grips with the complex system that makes up South Africa’s retail market. There’s supply and demand expectation at a retail level; smaller companies need to stock timeously and achieve a 95% delivery target. This becomes complicated because distribution is either at a regional level or at a national level, SMMEs cannot simply supply the odd store here and there. Secondly there are rebates or listing fees which need to be paid in order to compete in the specific market category. Once you are actually on the shelf competing for elbow room, SMMEs then have to pay for their own in-store and out of store marketing activities.

Marketing the product – the risk is even higher if a product does not move off shelves fast enough; getting noticed by the consumer is key. A good relationship with the retailers in question and a dedicated team to ensure the product is getting all of the in-store visibility and assistance necessary is critical to the products success in the retail space. SMMEs need to be crystal clear on who their market is and how they are going to reach them. What is their strategy? Broadcast advertising is expensive, so what is the next best alternative? Does the product lend itself to in-store promotions? If so, can these promotions be rolled out on a national level? These are examples of just a few of the considerations SMMEs have to engage on.

Cash flow management is tricky – cash-on-delivery is a nice to have not a reality, so seeking investment partners is wise. Most major retailers’ payment systems run on a 60 to 90 day cycle. Credit terms are also critical and SMMEs must factor this into cash flow planning. Without clever liquidity management to keep them afloat, the business is at risk. The industry is very competitive, so much so that a missed stock delivery could mean that the product will be booted off the shelf – which is a dire situation for a local manufacturer to be in.

Persistence is key – SMMEs need to realise that when it comes to the retail space they are in it for the long haul to get the long term goals. They should never lose faith in their product, it just won’t happen as quickly as they may like. Some mass marketers, like Massmart, offer development funds to local producers. However, there is a significant waiting time while an SMME and its product are screened through an extensive due diligence programme. Another aspect a small manufacturer can consider is approaching owner operated franchises that are still part of a formal chain. This gives local manufactures an in, at the store level.

Let’s not forget the little guy or the fact that opportunity comes in all shapes and sizes

While our local manufacturing market does face challenges, nothing is impossible. Working through partnership with retailers will only benefit both parties in the long run. For small and large enterprises alike, a good business model is their magic bullet for success.

Retailers can access the innovation and creativity that local manufacturers bring into the marketplace; innovation prevents stagnation and keeps retailers in touch with their consumer base. For example, a recent article by the UK Telegraph, revealed that it’s been 45 years since a new product was introduced into the FMCG sanitation market. Frankly that’s a clear indication of how just boring product lines have become.

Consumers are now more informed than ever and use various information sources such as social media to not only find value for money offerings but the “something” new that catches their interest. Big players need to remember that innovative thinking must be driven by what the consumer wants and not what we think competition dictates. Something SMMEs are very aware of. Giving SMMEs the boost they need does not have to be a complicated process either.

Big business must never become complacent and realise that there is an opportunity within our local market to not only improve offerings to shoppers, but to also stimulate the economy through job creation because of the support given to local manufactures and SMMEs.

Michael Wood is founder and director of Aperio, and Sane Mdlalose an associate consultant at Aperio, a business consulting company focused on accelerating growth of FMCG brands in sub-Saharan Africa.