our economic environment and CONSUMER TRENDS

Real incomes and consumer spending increased markedly as a result of the growing investment and productivity. Household consumer expenditure and formal retail sales rose steeply over the next 15 years, as South Africa experienced a period of pronounced economic expansion. By 2010, however, growth in the economy and employment began to slow. Consumption continued to be underpinned by unsecured credit which came to an end in 2013.

In 2014 the South African economy experienced a marked slowdown, impacted by a long and protracted strike in the mining sector. Inflation, electricity supply interruptions and depressed commodity markets had a negative impact on the economy and on market confidence. The retail sector felt the impact alongside other parts of the economy.

South African consumers have come under growing financial pressure over the past year. Living costs have increased, driven in particular by rising electricity bills and other regulatory administered prices, other inflation items and higher interest rates. The drought in the maize belt in South Africa further contributed to food inflation. Pressure on consumers will be exacerbated by the announced increases in personal income taxes and other levies, high levels of unemployment and the inflationary effects of a weaker currency.

The retail market in South Africa has been characterised by strong competition and strong levels of new space growth. Over the past two years, Pick n Pay has adopted a cautious approach to space growth compared to most of its peers, focusing only on that new space which it is certain will drive sustainable financial returns.

Pick n Pay has an extensive retail presence in southern Africa, with a strong and diverse portfolio of stores. We believe there is still significant opportunity for us to grow, notwithstanding the competitiveness of the market. Traditionally Pick n Pay has been positioned in the more urbanised areas of South Africa, with particularly strong advocacy from South Africa’s middle- to upper-income consumer. However, there are many communities across the country, across all demographics, where Pick n Pay is not well represented and we look forward to bringing our offer to these communities, whether they be in urban, peri-urban or more rural areas.

While the value of the South African food sector is estimated at some R600 billion, the informal sector is believed to be worth at least one-third of this amount – and growing. In recent years, strong retail growth has been recorded in the lower-income segment of the market, a space in which we believe our Boxer brand has yet to realise its full potential. All consumers, especially lower-income consumers, aspire to the value, variety and quality that have underpinned the Pick n Pay group for almost 50 years.

Within Pick n Pay’s traditional, urban middle-class heartland, customers are increasingly seeking out those retailers who provide convenience either in the form of smaller, more local stores, or online. To satisfy these expectations, we have improved our underlying operating model, driven by centralised systems, lower costs and improved effectiveness and efficiency, all of which enable us to open smaller, convenient stores while widening the pool of sites which Pick n Pay can operate profitably on both a company-owned and franchise basis.

The rest of southern Africa has by no means been spared the economic headwinds facing South Africa and much of the world but the growth of an urban middle class across the region represents, we believe, a second engine of growth for Pick n Pay.

South African and, indeed, southern African consumers are under considerable pressure to tighten their belts and they reward those retailers who provide the most compelling offer in terms of price, quality and value. We launched our Brand Match campaign during the year, an undertaking which matches the lowest price of 1 000 branded products across four of our competitors. Brand Match has built confidence in the competitiveness of Pick n Pay’s pricing and is convincing customers that they do not need to shop around for lower prices.

The outlook for 2015 remains challenging, compounded by the national electricity crisis and uncertainties in the global economy. However, Pick n Pay has delivered strong double-digit growth in earnings over the last two years, despite the economic climate, and we are confident that we will deliver on our substantial opportunities for growth in the future.