We’re not lovin’ it: Why global brands don’t thrive in SA

Business

We’re not lovin’ it: Why global brands don’t thrive in SA

International companies come up against local tastes and fail to understand the local market sufficiently

Tim Cohen

Many international brands such as Swedish clothing retailer H&M and pizza maker Domino’s are soaring in the international markets but are struggling in South Africa. It has led local brand managers to modify their long-held belief that SA’s local brands will ultimately crumble in the face of the colossal might of their international relatives. 
SA has seen over the past decade the introduction of a host of international brands, some of which have thrived while others have struggled – but the resilience of some local brands is forcing local companies to become more sceptical about the value that big international brands bring with them.The most obvious example is the current travails of Taste Holdings, which has coffee shop Starbucks and Domino’s under its wing – yet neither have brought with them a hoped-for gold strike. In its results for the year ended February, Taste’s revenues were down 5% to R1.04-billion while operating losses reached a staggering  R228-million.
But other examples abound. Until changing course a few years ago, clothing store Edgars pinned its hopes of importing international brands such as jeans brand Diesel and clothing brand Mango. Local brands  Penny C, Charter Club and Kelso were sidelined. (Significantly, Edgars is gradually bringing back the local brands, notably Kelso.)
The notion then was that millennials and SA’s rising black middle class were totally enamoured of international brands. Some international brands have done extremely well in SA, notably Spanish clothing company Zara, but for unusual reasons. Independent analyst Chris Gilmour says Zara has hit a niche in SA with high-end fashion, even though the brand is more well known internationally as a mid-market brand.The other surprise success, he said, is Australian brand Cotton On, which tapped into a lucrative space for comfortable, fashionable clothes with a “natural” aura.
Some international brands have persevered in SA and are technically successful. But Gilmore questions whether they are where they initially hoped they would be at this stage. 
The best example is fast food company McDonald’s, which has developed a solid network in SA and is moderately well received. But the brand has 245 outlets in SA, less than a third of market leader KFC, and less than local fast food company Nando’s. “That is not great progress for a company that has existed in SA for 25 years now,” says Gilmore.
Why are international brands on average struggling in SA? The executive director of Brand Finance Africa, Jeremy Sampson, points to the economy as one factor.“The economy is tightening, and when that happens, people tend to trade down.” Often that means sacrificing the more expensive international brand for the cheaper local brand.  There are also economic incentives built into the process since a lot of international brands come with very limited flexibility and high royalties.
Sampson said McDonald’s is perhaps a good example of international companies coming up against local tastes and failing to understand the local market sufficiently. The protein of choice in SA is chicken rather than beef.
“KFC is absolutely flying”, he says, and the other fast food franchises have found they have to adapt their menus. 
Some fast-moving consumer goods, such as Kellogg’s cereals, have sustained themselves, but many others come up against a whole range of South African staples such as rusks and chutney. The flavouring is different, and “you know, we are very happy with what we have got”, says Sampson.What should the international players be doing? Sampson says the good brand managers have managed to make their brands seem as though they are local brands. They don’t play up their international heritage, and “they almost seem to embed themselves in the local community”.
It’s worth noting, he says, that some international brands are present in SA in almost a disguised form. Vodacom is actually part of British company Vodafone, but it is presented as a local brand.
Another problem with international brands is the price point, Sampson says. Some big international brands were available in SA, such as The Gap in Stuttafords, but they were very expensive. 
Gilmore points to an additional problem when it comes to the big fashion houses: the difficulty in getting prime sites. With the construction of malls slowing down, the availability of powerful store space within malls is declining which puts companies such as H&M and to a lesser extent Zara at a disadvantage to the incumbent stores.Generally, he says, retailers are rediscovering the utility of “in-store” brands. One example is Country Road and Studio W within Woolworths stores, but many others are developing the same concept. 
Gilmore says getting brand traction has always been a problem for many international brands because their decision to stay out of SA during the apartheid years put them at a disadvantage to the local groups. 
A good example is a comparison between KFC, which was present in SA on a franchise basis during the apartheid era, compared to McDonald’s which was not. Even though KFC is the market leader in SA, internationally the roles are reversed. 
A good thermometer of local acceptance of international brands is Burger King, owned locally by Grand Parade Investments, which is one of the most recently introduced international brands. The company has stiff targets set by the US owners, and the investment in the brand has been huge. It appears to be holding its own, but, as acknowledged by its management, it’s a good thing they have a set of casinos to help fund their expansion. That’s something Taste sadly lacks.​

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