Woolworths: Are low-income consumers the key to significant growth?

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In South Africa, the Woolworths brand is synonymous with both quality and expense. It’s a double-edged sword that has seen Woolworths become a mainstay among upper-class shoppers, but has prevented the brand from gaining traction in low-income areas. However, with the right growth strategy, Woolworths can make its mark across a wider spectrum of consumers.

Woolworths targets middle to upper-income South Africans, those who fall in the 8-10 bracket on the South African Living Standards Measure (LSM). Woolworths has entrenched itself as a leading brand among this group, with consistent growth in both its grocery and clothing divisions. Despite this growth, Woolworths holds just an 8% share of the grocery market in South Africa and just 7% of the clothing market.

The company’s limited target market means that their share of the overall market is unlikely to increase dramatically if they remain on their current course. In fact, growth could become stunted as high inflation continues to put increasing pressure on South African consumers.

Woolworths themselves predicted that in 2015 the 6-7 LSM would grow from 29% to 41% compared to growth of just five percent in the 8-10 LSM, Woolworths’ current target market. As such, Woolworths would have access to a much larger market if they were to broaden their view to target lower LSM groups in South Africa.

Woolworths forecast for growth by LSM group (http://www.woolworthsholdings.co.za/investor/annual_reports/ar2012/integrated/business/industry_trends.asp)
Woolworths forecast for growth by LSM group (http://www.woolworthsholdings.co.za/investor/annual_reports/ar2012/integrated/business/industry_trends.asp)

There are three different strategies that could be used to do this: endorsement, co-branding, and multi-branding.

An endorsement strategy would see Woolworths create a sub-category of its brand which would be leveraged off the strong standing of the Woolworths brand. As highlighted by Riezebos et al, the advantage of this approach is that it “can be used to stimulate acceptance of the brand and create fast sales.”

However, Woolworths would have to be mindful of two risks associated with this approach. Firstly, there is the risk that failure in the new market would negatively impact the Woolworths corporate brand, and secondly that the association of Woolworths as an upper-class brand could damage its prospects in this new market.

A co-branding strategy could mitigate these risks to some degree. Co-branding evolves two brands forming a tactical alliance in what can be a “highly effective way to build a business, boost brand awareness, and break into new markets.” Lindsay Kolowich, HubSpot (Follow Lindsay on Twitter: @lkolow)

Cravens et al put forward that “the logic behind co-branding is to gain the advantage of two strong brands whose product categories display a logical relationship.”

A brand such as Choppies could provide the perfect partner for co-branding. Choppies is a grocery and general merchandise retailer which first broke ground in Botswana. Choppies moved into the South African market in 2008, opening their first store in Zeerust in the North West province.

A Choppies store in South Africa http://www.mmegi.bw/)
A Choppies store in South Africa (http://www.mmegi.bw/)

Choppies now has 40 stories across South Africa, and has joined retailers like Shoprite Holdings, Pick ‘n Pay and Massmart Holdings in courting low-income shoppers.

“The large retail chains have recently shifted their focus to the poorer areas of South Africa. They are opening shops along taxi and bus stops in the hopes of gaining shoppers from this untapped market. Before this, many lower income shoppers struggled to make it to the large stores. They were too far away and not along bus routes,” explained Andrew Wildes of the Borgen Project.

“Catering to poor shoppers is a recent phenomenon for retailers selling food in South Africa, and it has to do with income inequality. The country is one of the most economically inequitable nations.”

Distribution of wealth in South Africa in 2015 Image cou
Distribution of wealth in South Africa (Image courtesy of Wikipedia)

Through this strategy, the Woolworths brand would still be associated with the venture, but would be using the inroads that Chappies have made in the low-cost market to mitigate perceptions that they are only a top-end brand.

A third strategy for Woolworths would be to adopt a multi-branding approach. In a multi-branding strategy, as put forward by Riezebos et, a product is introduced under a new brand name without any links to other brands.

Maximilian Claessens of the Marketing Insider states that one advantage of multi-branding is that it “offers a way to establish distinct features that appeal to different customer segments. Thereby, the company can capture a larger market share.”

The best way for Woolworths to implement this strategy is through brand acquisition. If they were to buy Chappies’ South African operation they would already have an established foothold in the market from which to develop, and it would be one that is not associated directly with the Woolworths name.

As David Annis and Gary Schine wrote in their book Strategic Acquisition: A Smarter Way To Grow A Company: “Growth through acquisition is a quicker, cheaper, and far less risky proposition than the tried and true methods of expanded marketing and sales efforts.”

Woolworths continues to show growth in the South African market, but that growth is likely to slow due to economic pressures. Delving into the lower income market may seem contrary to the Woolworths brand, but if an effective growth strategy is adopted then low-income consumers could prove to be a vehicle for great success.

Bibliography:

Annis, D. &. S. G., 2016. Acquisition is a Better Way to Grow. [Online]
Available at: http://www.strategic-acquisitions.com/assay.html
[Accessed 10 December 2016].

Choppies, 2016. About Choppies. [Online]
Available at: http://choppies.co.bw/
[Accessed 10 November 2016].

Cravens, D.W., Piercy, N.F & Prentice, A. 2000. Developing market-driven product strategies.Journal of Product & Brand Management, 9(6):369-388.

Finance24, 2016. Woolworths continues to show strong growth. [Online]
Available at: http://www.fin24.com/Companies/Retail/woolworths-continues-to-show-strong-growth-20160211
[Accessed 10 December 2016].

Kolowich, L., 2016. 8 Examples of Successful Co-Branding Partnerships (And Why They’re So Great). [Online]
Available at: https://blog.hubspot.com/marketing/best-cobranding-partnerships#sm.000013z4hd78wpdk7tptx0bexoka1
[Accessed 10 December 2016].

Riezebos, R., Kist, B. & Kootstra, G. 2003. Brand Management: A theoretical and practical approach. Essex: Pearson Education Limited.

Reuters, 2016. South Africa interest rates to rise again in November despite weak economy. [Online]
Available at: http://www.reuters.com/article/us-safrica-economy-poll-idUSKCN10N0PR
[Accessed 10 December 2016].

South African Audience Research Foundation, 2016. Living Standards Measure. [Online]
Available at: http://www.saarf.co.za/lsm/lsms.asp
[Accessed 10 December 2016].

Veneto Promozione, 2013. Overview of the South African retail market. October, s.n.
Wildes, A., 2016. Retailers Offer Affordable Food in South Africa. [Online]
Available at: http://www.borgenmagazine.com/affordable-food-in-south-africa/
[Accessed 10 December 2016].

Woolworths, 2012. Trends influencing our strategy. [Online]
Available at: http://www.woolworthsholdings.co.za/investor/annual_reports/ar2012/integrated/business/industry_trends.asp
[Accessed 10 December 2016].

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