How growth will be sustained by business SA despite a hostile  operating environment

Despite attempts to conceal the signs, South Africa is undeniably amid a slow-moving recession, one that is subtly but severely affecting both corporations and households. 

Indicators like Pick n Pay’s R3.2 billion loss for the 2024 financial year cannot solely be attributed to poor business strategy. The economic environment has become increasingly hostile, and the next three to five years will be crucial for the survival of both large and small enterprises across corporate South Africa. 

Multinational companies are also re-evaluating their presence on the continent. The narrative of Africa as the “next economic frontier” with South Africa positioned as a gateway to Southern, Central, and parts of East and West Africa, is losing traction. This is reflected in companies such as Nestlé and Unilever scaling down operations across South Africa and other African markets. Their future strategies involve distribution partnerships rather than maintaining a physical presence, signalling that these markets are no longer as profitable as they once were, particularly in light of rising operational costs. Businesses will need to adopt new strategies to survive, with cost reduction emerging as a key focus.

Cost-reduction priority

Across all sectors, cost reduction will become an urgent priority. Profitability through increased sales is becoming more difficult as disposable incomes shrink. Even essential expenditures are being scrutinised significantly before deployment. As a result, optimising operations to lower costs is becoming one of the key methods to staying profitable. 

But this is easier said than done, especially considering the costs associated with securing backup power and transitioning to cleaner energy. While load-shedding may have paused, corporations that export to markets like Europe and North America will still need to invest in greener energy to remain competitive globally. While cost-cutting will be essential, certain expenditures, particularly those linked to sustainability, will be unavoidable. 

Businesses will rather focus on reducing workforce sizes, trimming input and processing costs, downsizing offices and operational facilities, and cutting discretionary spending. In the current economic environment, operating a lean, efficient business will be critical for maintaining and growing profits.

Bargain sourcing will rise

Manufacturers and distributors alike will increasingly seek out the lowest-cost inputs, aligning with what cash-strapped customers are willing to pay for goods and services. A clear example of this trend is seen in South Africa’s automotive industry. 

Budget-conscious consumers are increasingly opting for more affordable Asian brands, particularly from China, at the expense of traditional European, Japanese, and American automakers. Brands like Chery, Suzuki, Haval, and GWM have seen strong sales growth, while domestic sales for brands like BMW and Mercedes-Benz have declined over the past three to five years.

This shift indicates that more inputs and finished goods will be sourced from regions like China, where lower production costs offer a competitive advantage. South African manufacturers relying heavily on locally sourced inputs, which tend to be more expensive due to rising utility and labour costs, will feel the pressure. Partnering with suppliers that offer competitive pricing for both inputs and finished goods will be essential for businesses navigating this challenging economic landscape.

Online sales channel will be prioritised

South Africa’s e-commerce market is projected to grow at a compound annual growth rate (CAGR) of more than 10% from 2024 to 2029, reaching nearly $11 billion by the end of the period. As the channel’s significance increases, understanding how to profitably leverage it will be critical for businesses across the country. 

But it’s not just about offering products online that should be prioritised. Companies must also understand how to optimise backend operations to ensure the offered online service meets customer expectations and delivers better returns. Debonairs Pizza and recently Checkers have successfully capitalised on their online offerings, becoming leaders within their respective categories. Their competitors, meanwhile, have experienced mixed results, probably because of not understanding the operational intricacies as well as the aforementioned to run a successful e-commerce platform. 

For businesses looking to enter or expand in the e-commerce space, thorough due diligence will be key. This may include forming partnerships with capable service providers to ensure the platform functions efficiently and delivers the desired results in terms of broadened reach and increased sales.

Technology investment will increase 

In alignment with cost-cutting efforts, businesses will ramp up investments in technology to improve efficiency, speed up processes, and enhance communication with both local and international partners. Data will become an increasingly valuable asset, as companies invest in solutions that generate, analyse, and offer insights to better serve customers. There will also be a growing push to replace outdated, high-maintenance technology systems. Newer technologies that are more intuitive, easier to update, and capable of enhancing user and customer experiences will help businesses reduce operating and service costs over time. 

These investments will, therefore, create opportunities for technology companies based in South Africa, including them needing to prioritise partnering with enterprises that will lean on these solutions and customising them with the longer-term in mind.  

To survive the next few years, remaining viable will be underpinned by cost reduction, strategic sourcing, and leveraging technology. E-commerce will also play an increasingly vital role in supporting growth and profitability, but success hinges on optimising backend operations and forming the right partnerships (technology and distribution). By adopting lean practices and embracing innovation, companies can weather the current economic storm and position themselves for longer-term, sustainable growth.

James Maposa is the managing director of Birguid.