SA Apparel retail – Big fish in a small pond

We review the apparel market in South Africa to determine the long-term growth prospects for the listed retailers. We find that growth in the apparel sector over the past 14 years was driven by 1.5% p.a. population growth, 1.0% p.a. per capita volume expansion, and annual inflation averaging 4.5%.

Most of the market share gains by the listed retailers in recent years have been due to acquisitions, with their organic growth largely in line with the market. With eight retailers now accounting for 65% of the apparel market, we assess the market’s composition to gauge the remaining potential opportunities for growth. Excluding international chains operating locally and off-price retailers, which are not compelling opportunities, we find that the pool of local unlisted retailers is thinning out and the runway of remaining takeover opportunities is limited.

We evaluate the demographics of apparel spending and find that the 0-39 years age group accounts for 81% of clothing spending, but this segment is forecasted to remain flat in population by 2030. More concerning, the key 25-39 age segment, which offers higher per capita spending on apparel, is forecasted to shrink from 15.9m in 2020 to 14.6m by 2030 – a loss of 1.3m customers. This will pressure retailers to find ways to increase per capita clothing spending, which in a low-growth economic environment could be challenging. Apparel retailers are expanding their reach in other categories, but we think rising competition in these areas could limit margin growth.